liability for directors' loans: the net widens
In the recent case of
Re Mumtaz Properties Ltd; Wetton v Ahmed, the Court of
Appeal considered that a trial judge was entitled to hold a person
who acts as a director, but who is not formally appointed as such
(generally referred to as a "de facto director"), jointly and
severally liable to repay directors' loans. In reaching this
conclusion, the judge was entitled to rely on a lack of
contemporaneous documentation supporting the defence.
The company in this case was family run and
owned a property development and letting business. After the
company went into liquidation, the liquidator sought repayment of
directors' loan accounts by means of proceedings under section 212
Insolvency Act 1986; which section provides a summary remedy
against "delinquent directors". However the liquidator not only
claimed against the formally appointed directors, but also two
other family members who the liquidator considered to have acted as
de facto directors. This raised the question of whether these
individuals were to be regarded as directors for the purposes of
section 212.
One of the de facto directors appealed saying
he was not a director as he was not shown at Companies House as a
director and there was no evidence that he had ever held himself
out as a director, or called himself a director. In response
the liquidator pointed out that the individual in question had
drawn against a directors' loan account, had dealt with suppliers
and entered into contracts with local authorities; and in his tax
return had claimed to be a "director or employee".
In deciding that the individual in question
was liable as a director, the Court of Appeal relied on the earlier
decision of the Supreme Court in
HMRC v Holland noting that all relevant factors have to be
taken into account as a whole, including whether the person had
assumed the duties of a director. Whilst there is no single
test to identify the functions which are the sole responsibility of
a de facto director, that person will not be treated as a director
unless he is part of the corporate governance structure of the
company.
However, this gave the liquidator a problem
since in establishing whether a person is involved in corporate
governance the starting point is inevitably the company's books and
records and in this case these had not been provided.
Unsurprisingly, the Court of Appeal considered that it was
not possible to escape liability by saying that if the books and
records had been available they would have supported the alleged
director's case. Contemporaneous documentation is of the very
greatest importance in assessing credibility and can be significant
not only when it is present, and all the evidence can be checked
against it, but also where written documentation is absent.
For example, if a judge is satisfied that documentation is
likely to have existed were the oral evidence correct and that the
party giving the oral evidence is responsible for its non
production then he may well be able to draw adverse inferences from
its absence.
As a separate matter, two of the persons named
as directors also appealed on the basis that they should not be
jointly and severally liable for directors' loan accounts operated
by others. In this respect, the question for consideration
was whether, the directors, in breach of their fiduciary duties as
such, had permitted others to use the accounts. In this
respect, the Court of Appeal considered that the trial judge was
entitled to rely on the fact that one of these directors had
permitted others to use company credit cards for personal use and
that the other director, by taking no active role in the company's
affairs failed to give any attention to the accounts of the company
and allowed others to run the company unchecked and unhindered.
Consequently, the Court of Appeal agreed with the trial judge
that all but one of the directors should be liable for the total
amount of the overdrawn accounts and not just simply for their own
individual account.
This case is a timely reminder that a person
may be held liable as a de facto director where the evidence as a
whole suggests that person assumed the powers and functions of a
director, even if that person does not hold him or herself out to
be a director. In essence, the Court will want to be satisfied that
the party in question is "one of the nerve centres from which the
activities of the company radiated". The case also shows that
joint and several liability can arise where directors, including de
facto directors, permit each other to use the company's money for
their own ends and it is insufficient to rely on a lack of
knowledge of any wrongdoing where more stringent checks should have
been undertaken. Since a judge is entitled to assess the
credibility of the evidence by reference to both the existence and
absence of contemporaneous documents, directors cannot rely on a
lack of contemporaneous documentation to support their position,
particularly where the directors are responsible for that lack of
documentation and the affairs of the company are run with a high
degree of informality.
