Northern Powerhouse Developments Limited & Ors v Gavin Lee Woodhouse

A director may borrow from a company without necessarily breaching fiduciary duty, but the transaction must be assessed against the company’s purpose, financial position and creditors’ interests. Where company funds are required as working capital and the company is insolvent or facing probable insolvency, diverting them to the director or associated companies on uncommercial terms is an improper purpose and may breach sections 171 and 172 of the Companies Act 2006. The court may treat the same withdrawals as both a debt and loss arising from breach of duty. Dishonesty is assessed by applying the Ivey test to the director’s actual knowledge and conduct.

Four insolvent companies sued their sole director for repayment of overdrawn directors’ loan accounts and for breach of directors’ duties. The third and fourth claims were admitted. The principal disputes concerned the sums due under the first and second loan accounts, the effect of a credit arising from a share transfer, and whether withdrawals and related transfers breached duties owed to the companies.

The court considered the companies’ business models, inter-company transfers, insolvency, the use of investor funds, and the director’s personal withdrawals. It also considered whether the claims required determination of alleged breaches concerning unregulated collective investment schemes. The central issues were whether the withdrawals and transfers were made for proper purposes and promoted the success of the relevant companies having regard to creditors’ interests.

The court entered judgment for the claimants. The defendant owed £1,497,244.57 to the First Claimant, £798,963.17 to the Second Claimant, and £20,000 each to the Third and Fourth Claimants. The first two sums were recoverable both as simple debts and, alternatively, as sums arising from breach of fiduciary duty.

1. Loan-account evidence. The defendant accepted that the accounts were overdrawn. He therefore bore the burden of proving that challenged entries were incorrect or that claimed credits should be allowed. Unsupported guesswork did not discharge that burden. Contemporaneous accounting records and invoices were preferred to his oral evidence.
2. First Claimant. Inter-company transfers outside the hotel business did not further the First Claimant’s proper purpose and deprived the hotels of working capital. The defendant breached section 171 of the Companies Act 2006. The same conduct breached section 172 because the creditor duty was engaged and an objective assessment showed that the transfers did not promote the company’s success.
3. The directors’ loan account was operated to make uncommercial loans to the defendant when the money was required for the hotels and the company was insolvent or facing probable insolvency. That was an improper purpose and a breach of sections 171 and 172. The £963,000 credit relating to the Smithy Bridge shares was reversed because the valuation was unsupported, materially overstated and known by the defendant to lack a proper factual basis.
4. Second Claimant. Although formed to hold family investments, it remained a separate company to which the defendant owed statutory and fiduciary duties. Withdrawals for his personal benefit, while the company owed money to the First Claimant and the SPVs and was balance-sheet insolvent, were not for a proper purpose and did not promote the company’s success having regard to creditors’ interests.
5. Defences and unregulated schemes. Sections 180, 239 and 1157 did not assist the defendant. The court declined to determine the FSMA issue because it was unnecessary to the outcome, the pleaded case lacked clarity, and no causal link had been shown between any regulatory breach and the loan-account withdrawals.
6. Dishonesty. Applying the Ivey test, the defendant’s conduct concerning both companies’ breaches was objectively dishonest in light of his knowledge that funds represented to the public as ringfenced were diverted for personal and associated-company purposes.

The parties were invited to agree the order and costs. Otherwise those matters, including the form of order, were adjourned to 6 February 2024.

First-instance decision. The judgment records no prior appellate decision.