Argyle UAE Limited (in liquidation) v Robert McKellar & Anor

A director breaches fiduciary and statutory duties by causing a company to make a payment for which it has no legal obligation, particularly where the payment confers no benefit on the company or secures another person's interests. The court must assess the director's good faith by reference to the director's state of mind where the issue was considered, or objectively by asking what an intelligent and honest director could reasonably have believed.

Insolvency or a real and imminent risk of insolvency requires regard to creditors' interests. For knowing receipt, the relevant question remains whether the recipient's knowledge made retention unconscionable. A recipient who reasonably believes that payment is due, and lacks knowledge of the breach or the source of the funds, is not liable.

The company, acting through its joint liquidators, claimed that Robert McKellar, its sole director and shareholder, breached his duties by causing the company to pay £525,000 to Sean Verity. The claim alleged misapplication of company assets, breach of the duty to promote the company's success, breach of the duty to avoid conflicts, and failure to have regard to creditors' interests.

The liquidators also claimed that Mr Verity was liable in knowing receipt. The central issues were whether the company had any legal obligation to make the payment, whether the payment was for the company's benefit, whether pre-incorporation work had been adopted or novated, and whether Mr Verity had sufficient knowledge to make retention unconscionable.

1. Claim against Mr McKellar. The claim succeeded. The company had no legal obligation to make the payment. The alleged arrangement for payment of pre-incorporation work had not been novated or replaced by a binding agreement after incorporation. The payment was also intended, at least in part, to secure future work for Arcturus as well as the company, and was therefore not a genuine payment made in the company's interests.
2. Mr McKellar misapplied the company's funds and breached his duty under section 172 of the Companies Act 2006. If he had considered the company's interests, he could not reasonably have concluded that the payment was in good faith, rational or commercially beneficial. Objectively, no intelligent and honest director in his position could have justified it.
3. The company had received funds subject to obligations under the Trade and Profit Share Agreement and was not able to meet those obligations. There was at least a real and imminent risk of insolvency. Mr McKellar should therefore have considered the interests of creditors, but the payment and other dispersals increased the company's exposure and were inconsistent with those interests.
4. Mr McKellar also breached section 175 of the Companies Act 2006. His personal interests and those of Arcturus conflicted with the company's interests. He could not rely on section 1157 because he had not acted honestly and reasonably, and the relevant assessment had to be made at the time of the payment.
5. Claim against Mr Verity. The knowing receipt claim failed. Although the payment was made from company funds and was received by Mr Verity, he reasonably believed that he was entitled to payment under the contingent arrangement reached with Mr McKellar. Mr McKellar had misled him about the company's progress, and Mr Verity did not know the source of the funds or that the payment was made in breach of duty. His retention was therefore not unconscionable.
6. The liquidators were entitled to equitable compensation against Mr McKellar. Consequential directions were reserved for a consequentials hearing.