Re Glam and Tan Ltd

The liquidator brought claims under the Insolvency Act 1986 s.212 (misfeasance / breach of fiduciary duty) and alternative causes of action seeking repayment of monies paid out of the company. The court examined whether payments from the company were business expenses, loans, unlawful distributions or misapplied company property and applied the Companies Act 2006 duties (including ss.171–175) and relevant authorities on unlawful dividends and the liquidator's statutory powers under s.212.

The judge found that some payments were bona fide business expenses but that other payments (including unauthorised extra drawings treated as salary/dividends, cash takings retained, and an insurance receipt) represented breaches of duty for which the respondent was accountable. The court also found that several payments to the respondent's husband and associates were made under compulsion of violence and were therefore beyond the respondent's free will; those sums were not ordered to be repaid. Applying s.212(3) the court exercised its discretion to require the respondent to restore sums totalling £70,705.82 with interest at 1% above base, rather than make her personally liable for the larger aggregate claimed by the liquidator.

Background and parties: Glam and Tan Limited, trading as a beauty salon, entered creditors' voluntary liquidation in July 2017. The applicants were the liquidator, Mr Barnett, and the company; the respondent was the sole de jure director, Mrs Litras.

Nature of the application: The liquidator sought repayment to the company of £143,358.47 (later increased by £14,700 by amendment) and declarations under heads of misfeasance, transaction at undervalue and preference; alternatively restitution or contribution under s.212 Insolvency Act 1986.

Key factual matters: The company had poor books and records; last accounts were to 30 June 2016. The liquidator identified a schedule of impugned payments comprising (i) payments to third parties (including the director's husband and family), (ii) payments to the director personally including amounts above recorded salary, and (iii) unbanked cash withdrawals alleged to have been retained by the director. The respondent asserted that many payments were for business purposes, some were loans, some records were lost in a flood and certain transfers were made under coercion by her estranged husband.

Issues framed: (i) Whether the respondent breached directors' duties under the Companies Act 2006 (ss.171–175) and/or misapplied company property; (ii) whether impugned payments were lawful distributions or unlawful (and therefore recoverable); (iii) the effect of missing records and the shifting burden of proof; (iv) whether duress by the respondent's husband absolved her; and (v) the appropriate remedy and exercise of the court's discretion under s.212(3).

Court's reasoning: The court reviewed authorities on delegation and directors' duties (Re Barings plc (No 5)), the requirement for dividends to be properly declared (BM Electrical Solutions Ltd; Bond v Barrow Hematite Steel Co.), the duomatic principle and distributions (TMG Brokers Ltd), and the scope of relief under s.212 (Re Loquitur Ltd; Paycheck Services 3 Ltd (Re Holland)). Given the paucity of contemporaneous records, the court applied the established principle that a director in control bears the burden of explaining transactions. The judge accepted that some payments were genuine business expenses and that certain transfers to third parties were made under compulsion by the respondent's husband. However, the respondent could not establish lawful declarations of dividends, or adequate documentation to justify extra drawings or unbanked cash withdrawals. The insurance proceeds were payable to the liquidator. Balancing these matters, the court exercised its s.212(3) discretion and required the respondent to account for and restore specified sums totalling £70,705.82 with interest at 1% above base to judgment.

First instance: The claimant's case succeeded in part. The court found that the respondent had breached directors' duties and misapplied company assets in respect of certain payments and ordered her to contribute and account for specified sums totalling £70,705.82 with interest at 1% above base. The judge declined to require repayment of sums which were found to have been extracted under compulsion by the respondent's husband and therefore beyond her free will, and made a discretionary reduction in the extent of liability under s.212(3) Insolvency Act 1986.