Anthony Davidson and Andrew McTear (acting as Joint Liquidators of Kieran Looney & Co Ltd) v Kieran Joseph Looney

A director who causes company money to be paid to himself or for his benefit must explain and justify the payments once the liquidator proves the transfers. Payments unsupported by a contemporaneous intention to create loans, and made without a proper company purpose, breach the director’s duties and may be unlawful returns of capital.

The duty under section 172 may be assessed objectively where the director gave no thought to the company’s interests. Once the company is commercially insolvent, the director must also consider creditors’ interests. Unlawful returns of capital, and wrongdoing in insolvency-related circumstances, cannot be ratified by a sole member. A director who misappropriates company property is not protected by the ordinary limitation period.

The joint liquidators and the company sought relief for misfeasance under Insolvency Act 1986 section 212 against its sole director and shareholder. They alleged that he caused payments totalling more than £2.16 million to be made to himself or to third parties for his benefit. Alternatively, they claimed repayment of an overdrawn director’s loan account.

The director contended that the payments were loans and that he was a creditor of the company. He also relied on alleged personal expenditure on the company’s behalf, including legal costs connected with litigation against Trafigura and the purchase of a yacht. The court had to determine the nature and propriety of the payments, ratification, limitation, relief from liability, and the loan-account balance.

1. Judgment for the liquidators. The director had not shown that the payments were loans. There was no evidence of a contemporaneous agreement or intention to repay. The accounts which first recorded the payments as loan-account items were prepared after liquidation during the liquidators’ investigation.

2. Once the liquidators proved that company money had been paid to the director or for his benefit, the evidential burden lay on him to establish that the payments were proper. He failed to do so. The payments were made for his own benefit, not to promote the company’s interests or discharge its liabilities. Payments to him or for his benefit were unlawful returns of capital because they were made without consideration and outside the statutory exceptions. Payments directly to family members were not distributions to him as shareholder, but remained improper.

3. He breached his duties under Companies Act 2006 sections 171(b), 172(1) and 175(1). As he had not considered the company’s interests when taking money as needed, the objective section 172 test applied. The company was cash-flow insolvent from 31 January 2014. From then, he was also required to consider creditors’ interests.

4. The breaches were not ratified. There was no informed resolution or unanimous informal consent. Unlawful returns of capital were incapable of ratification, as were the relevant breaches after insolvency. The misappropriation claim was not statute-barred under section 21(1)(b) of the Limitation Act 1980. Relief under section 1157(1) was refused because the director had not acted reasonably.

5. For the alternative loan-account calculation, the court credited the director with the £930,000 yacht purchase but debited him with its unaccounted £800,000 sale proceeds. He failed to prove the claimed legal, professional and miscellaneous credits. On the evidence, he was debtor to the company for £1,583,502. The court would hear further submissions on the monetary order under section 212.

not stated in the judgment.