Gary Paul Shankland & Ors v Iain Urquhart McKeand (Re Lion House Portfolio Ltd (in liquidation))

A director’s duty to consider creditors’ interests arises when the company is knowingly insolvent. The director must give creditors’ interests appropriate weight and balance them against shareholders’ interests where they conflict.

A director who causes an insolvent company to make advances to connected entities must genuinely consider whether the transactions can generate sufficient returns to meet the company’s obligations. Treating companies as one economic entity, relying on creditor forbearance or expecting fresh investment is insufficient.

A director receiving company money bears responsibility to account for it. Inadequate records do not avoid liability, although the wider evidence must still be considered. Relief under Companies Act 2006, s 1157 is discretionary and was unavailable where the transactions were self-serving and the director lacked candour.

The joint liquidators of Lion House Portfolio Ltd applied under s 212 of the Insolvency Act 1986 against its former director, Iain McKeand. They alleged misfeasance through the receipt of a payment intended for Lion House, advances to connected companies, acquisition of shares in Now Technologies, and the transfer or misapplication of Lion House’s interest in shares in Fruehauf Ltd.

The application was issued on 25 March 2022 and tried in December 2023. The principal issues were whether the creditor duty had arisen, whether the impugned transactions breached the director’s duties, whether McKeand was accountable for the CorpAcq payment, and whether the Fruehauf shares remained an asset of Lion House.

1. Liability. McKeand was liable to account for £149,861.65 used to acquire shares in Now Technologies. He was also liable to account for receiving the £1,757,168 CorpAcq payment. Liability was established for post-28 November 2013 advances to Mac Capital, Mac1 Sports, Country Park Landscapes and Accrued Equities.

2. Creditor duty. Applying BTI 2014 LLC v Sequana SA [2022] UKSC 25, the duty arose by 28 November 2013 because Lion House was knowingly balance-sheet insolvent. Its continuing solvency depended on speculative future lending, creditor forbearance and new investment. The relevant insolvency analysis was informed by BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] UKSC 28.

3. Directors’ duties and connected lending. The duty under s 172 of the Companies Act 2006 is subjective, but where there is no evidence of actual consideration of the company’s interests the objective fallback test stated in Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), following Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62, applies. McKeand’s failure to distinguish Lion House from the borrower companies, and his failure to identify a commercial prospect of meeting Lion House’s interest and capital obligations, established breach.

4. Accountability. A director receiving company money as fiduciary recipient must account for it. The principles in Re Idessa (UK) Ltd [2011] EWHC 804 (Ch) and Toone v Robbins [2018] EWHC 569 (Ch) applied. Under Re Mumtaz Properties Ltd [2011] EWCA Civ 610, failure to maintain proper records did not avoid liability, although the court had to consider the wider evidence.

   The exact compensation remained subject to an inquiry because bank-account movements might not equal Lion House’s loss. The Fruehauf trust deed made McKeand beneficial owner from 26 September 2011, so Lion House lost no value when the shares were transferred. No claim therefore lay regarding those shares or benefits received from Fruehauf. Duomatic did not apply, and s 1157 relief was refused.