(1) CIRO CITTERIO MENSWEAR PLC (in administration) v (2) GURPAL SINGH JOHAL [2002] EWHC 662 (Ch)

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
[2002] EWHC 662 (Ch)Case No Claim No: 5784 of 2001
Between
(1) CIRO CITTERIO MENSWEAR PLC (in administration)(2) GURPAL SINGH JOHAL(3) SIMON VINCENT FREAKLEYApplicants(1) NILESH RASIK THAKRAR(2) SURBHI THAKRAR(3) KIRIT LALJI THAKRAR(4) RICHARD JOHN HILL(the trustee in bankruptcy of Nilesh Rasik Thakrar & Rasik Lalji Thakrar)(5) RASIK LALJI THAKRAR(6) VINOD LALJI THAKRARDefendants
Before
Anthony Mann QCsitting as a deputy High Court judgeIN THE MATTER OF CIRO CITTERIO MENSWEARPLCAND IN THE MATTER OF THE INSOLVENCY ACT 1986BetweenDate 27 February 2002
[1]This is an application brought by the administrators of Ciro Citterio Menswear plc ("the Company") claiming relief in respect of company funds which were applied in and towards the purchase of a property known as 39 Farquhar Road, Edbaston, Birmingham ("Farquhar Road"). The property was purchased by (or at least in the name of) the first respondent Nilesh Thakrar ("Nilesh") in a transaction completed on 15 th October 1999. The purchase price was about £562,000 - the precise figure does not matter. Of that sum, £250,000 was borrowed from Cheltenham & Gloucester Building Society and secured by a mortgage. The balance, together with the costs and stamp duty involved, came from funds paid over by the Company and reflected in debit entries on the ledger for Nilesh's directors account with the company. The administrators on behalf of the Company claim an interest in the property based on that application of the money. In summary they say that the application of the money was a misapplication of company money; alternatively it was an improper loan to a director (Nilesh was a director at the time, as will appear below); in the further alternative it was a transaction at an undervalue entitling the company to follow the money into the company; in the yet further alternative they say that the process involved a wrongful preference of another director which again gives rise to relief involving the following of the money into the property. Background[2]The background to the application is as follows. The Company was at the time a menswear company with over 150 retail branches. The shareholders at the material time were members of the Thakrar family - using their first names they were Rasik, Vinod, Kirit (all brothers) and Nilesh (the son of Rasik). They were all directors, and there were a couple of non-Thakrar directors as well. In 1999 relations became strained as between Kirit on the one hand and his brothers on the other. He claimed to have been excluded from the company in February 1999 and this led him to bring section 459 proceedings against his brothers and Nilesh. These proceedings were compromised by an order dated 20 th January 2000 on terms that the respondents to the proceedings, including the Company, would purchase Kirit's shareholding at a price to be determined under a mechanism involving valuations by accountants. Unfortunately that mechanism broke down and the parties returned to court for the valuation to be carried out. Having ordered an interim payment of £500,000 on 5 th September 2000, on 17th October 2000 HH Judge Boggis QC sitting in the High Court in Birmingham valued the shareholding at £6.14m, and on 13th November 2000 he ordered that £3.5m of that sum be paid to Kirit by 29th December 2000.[3]What happened then involved the obtaining of charging orders by Kirit which in turn will bring me to some of the issues in this application. However, in order to show how one arrives there it is necessary to step back in time and deal with the history of the acquisition of Farquhar Road. At the beginning of 1999 Nilesh was living in Canada. It is said that his father required him to take more of an active role in the Company and so he decided to buy a house here. Farquhar Road was chosen. On 24 th September 1999 the sum of £56,250 was transferred from Company funds to the solicitors acting for Nilesh in the purchase (Messrs Martyn Amey & Co) to be applied as the deposit for the purchase. On 15th October 1999 the Company transferred a further sum of £256,250 to Martyn Amey and Co for the purpose of its being applied towards the balance of the purchase price. The remainder of the purchase price was, as I have said above, raised by way of mortgage from the Cheltenham & Gloucester Building Society. Lastly, on 12th November 1999 the Company drew a cheque payable to Martyn Amey and Co in the amount of £20,636.52 for the stamp duty and professional fees due in relation to the house purchase. In this manner was the Property purchased; it was at all times held in the name of Nilesh and the entirety of the funds used to acquire it, other than those borrowed from the building society, came from the Company.[4]The order in which Judge Boggis fixed the value of the shares incorporated undertakings given by the individual defendants (i.e. Rasik, Vinod and Nilesh) to make disclosure of their assets. In those affidavits they made reference to loans made to Nilesh which, as a matter of evidence, are highly germane to the issues which I have to decide. I shall return to those affidavits in due course but I shall, for the time being, continue the basic chronology. As appears from the story so far, by the time that Kirit obtained his order quantifying the amount to be paid for his shares, Nilesh owned Farquhar Road. The company also owned a number of properties, and Kirit set about obtaining charging orders over all those properties (ie the Company properties) in order to obtain payment for his shares. On 13th December 2000 Judge Boggis made charging orders nisi over 33 properties owned by the Company. Those orders were made absolute on 22nd December 2000. The orders secured the sums hitherto ordered to be paid by Judge Boggis. On 7th February 2001 Judge Boggis ordered that completion of the acquisition of Kirit's shares should take place on 16th March 2001, at which date payment of the balance of the purchase price, not hitherto ordered by the judge, should take place. On 14th February 2001 the judge made charging orders nisi over the 33 Company properties, and this time over properties owned by the individual respondents, to secure the sums due and payable on completion. One of those properties was Farquhar Road. Those orders were made absolute on 26th February 2001. No sums have been paid under the judge's orders other than the interim payment of £500,000. It is as chargee under a charging order that Kirit is interested in these proceedings, and it is in that capacity that he has been joined.[5]Surbhi Thakrar, the second respondent, is the wife of Nilesh. On 19 th April 2001 Kirit started proceedings pursuant to his charging order seeking an order for sale of Farquhar Road. Surbhi claimed an interest in that property and was joined as a party to those proceedings by an order made by Judge Boggis on 14th May 2001. There was a trial of those proceedings on 26th and 27th June 2001, at the end of which Judge Boggis found that Surbhi was entitled to 22% of the equity in Farquhar Road, and he made an order for sale. Meanwhile, on 12th March 2001 the company had gone into administration. Having come to the conclusion that the circumstances of the purchase of Farquhar Road might entitle the company to claim an interest in Farquhar Road, the administrators sought to intervene in the order for sale proceedings, but on 10th September 2001 Judge Boggis refused to allow them to intervene on the basis that they could and should have intervened before if they were going to do so. It has not been suggested that that in any way prevented them from commencing their own proceedings, and that is what they have done in this application.[6]Thus we arrived at the present application. The claimants are the two joint administrators (namely Mr Gurpal Johal and Mr Simon Freakley) and the Company. The respondents are, in this order, Nilesh, Surbhi, Kirit, Richard John Hill, Rasik and Vinod. Mr Hill is the trustee in bankruptcy of Nilesh and Rasik; Rasik was bankrupted on his own petition on 11 th May 2001 and Nilesh on his petition on 22nd May 2001. The only one of the respondents to have played any active part in these proceedings is Kirit who defends the claim of the administrators by asserting the title of Nilesh to Farquhar Road and relying on his own charging order. Surbhi sent a letter to the court, received on 14th February 2002 (that is to say very shortly before the hearing commenced), ostensibly written from Canada to where she says she has moved permanently, explaining that she does not have funds to represent herself and setting out her version of the background to the purchase of Farquhar Road. I should say that I do not rely on this letter as being evidence before me for the purposes of this case. The principal effect of the letter, so far as I am concerned, is to confirm that she has been properly served with these proceedings and is properly joined.[7]For the sake of completeness I should add that, as if the proceedings described above were not enough, there have been at least three further set of proceedings brought by Kirit under section 423 of the Insolvency Act 1986 against various members of the Thakrar family and their wives. In relation to those I need say no more than that they are irrelevant to these proceedings other than to confirm (if confirmation were necessary) that there has been a very comprehensive falling-out between Kirit on the one hand and the other members of the family on the other. That goes to explain, in part, the paucity of the oral evidence which I received in this case. The claims made in these proceedings.[8]In these proceedings the administrators put their case in a number of ways: 1. They say that the application of company moneys in the purchase of Farquhar Road was a straight misapplication of company funds by the directors which leads to a constructive trust of the money and of the property brought with it so that Nilesh holds Farquhar Road on trust for the company (subject, of course, to the building society mortgage). They say that that interest is not caught or defeated by the charging order obtained by Kirit; nor does Surbhi's interest beat it. 2. In the alternative, if, as alleged by Kirit on one analysis of the facts, the true analysis of the transaction between Nilesh and the company was that there was a loan by the company to Nilesh, that loan was unlawful pursuant to section 330 of the Companies Act 1985 and that unlawfulness again gives rise to a constructive trusteeship of the property which beats both Kirit and Surbhi. 3. In the alternative the administrators say that any gift or loan of the moneys to Kirit (if either is the true analysis of what took place) was a transaction at an undervalue which, they say, entitles the court to make an order following the money into the property under Insolvency Act 1986 section 241(l)(b). 4. In the yet further alternative, they say that if the analysis is as Kirit says it is, namely that the transaction involves a repayment of Rasik's own director's account followed by a loan of the relevant moneys by Rasik to Nilesh, then the repayment of Rasik was a voidable preference under Insolvency Act 1986 section 239 which again entitles the court make an order following the money into the property under section 241(1)(b). 5. In the application further relief is claimed against Rasik and Vinod (though now abandoned against the latter) claiming the money which the administrators say was misapplied by one or both of them in the purchase of Farquhar Road. I should record that the leave of the court was given for the bringing of these proceedings against the bankrupt respondents. The application of the moneys -- evidence. 9. Obviously the correct analysis of the transaction, and the answers to the issues raised by these claims, depends on an analysis of what happened at the time as a matter of law, which in turn depends on a fuller consideration of the facts. I therefore turn to that. 10. There is no dispute that the three sums of money that I have referred to moved from the Company, out of Company funds, to the solicitors acting for Nilesh. The movement itself is clearly documented. However, the documentation relating to how the matter was dealt with as between Nilesh and the Company, and as between Nilesh and the other directors, is extremely thin. There is, in effect, just one document. It is a print of part of the Company's computerised nominal ledger produced, according to its "run date" on 29th December 1999. It is headed "Account 243301 Directors Account NRT". It shows the three contributions made towards the purchase of the Property as three debit items but not entered on their proper dates - they were entered after the actual dates, and not in the correct order. The entries are made under seven columns, namely period, date, reference, type, debit, credit and comment. In respect of the three items the entries in those columns are, taking the items in the order in which they are entered on the ledger, as follows: Period Date Reference Type Debit Credit Comment 9/99 06/11/99 PAYMETS CASH BOOK 256250 PYMT OCT 99 10/99 4/12/99 CASH BK CASH BOOK 20636.52 PAYMTS NOV 99 11/99 31/12/99 PAYEMTS CASH BOOK 56250 ADD DEC' 99 PAY (The transcriptions are literal; the mis-typings are in the ledger).[11]No live witness was produced by either side to explain how those entries came to be made or who directed them. There are a number of other debit and credit entries on that ledgor before, after and between those entries; the provenance of many of those other entries is obscure. However, for present purposes it is significant to note that at the date of each of the entries there was no credit balance on this ledger so the payments cannot be viewed as repayments by the Company of sums owing to Nilesh.[12]It is around this central document that much of the case of the administrators hinges. They say that the document shows that when Nilesh took, or was provided with, the money he was at best receiving an unlawful loan or at worst involving himself in a misappropriation of the money of the company. Kirit, however, does not accept this. He has not adduced any evidence of the participants in the form of witness statements produced for the purposes of these proceedings which explain what happened, and in the light of the history of litigation between him on the one side and the rest of his family on the other that is not at all surprising. However, he has relied on various statements made by Nilesh, Rasik Subhi and Vinod in other litigious contexts which, he says, explain the matter in a way which demonstrates that the transaction was entirely proper. What he relies on is an arrangement between principally Nilesh and Rasik which enabled Nilesh to have the benefit of substantial credit balances which existed on Rasik's account with the Company. In summary, it is said that the directors on this occasion were doing what they had done in the past, which is effectively to give a director without a credit balance on his account with the Company the benefit of the credit balances on other directors' accounts if those others agreed. What happened in other contexts, and ultimately in this, was that the director without a credit balance (here Nilesh) was allowed to draw against the credit balances of others and the matter was put right by appropriate entries in the latter's accounts at the end of the financial year when the audited accounts were being drawn. In this case it was Rasik who had the credit balance. The strict analysis of the transaction was, it is said by Mr John Randall QC who appeared for Kirit, that the company repaid Rasik the debt it owed him, in the amount of the money used by Nilesh in the purchase of the house, and that amount was lent by Rasik to Nilesh.[13]It is necessary to examine the evidence relied on by Mr Randall QC to see what that evidence establishes, and then to consider the effect in law of my findings of fact.[14]First, it is clear on the evidence that Rasik did, at that time, have sufficient sums owing to him on his account with the company to match the sums drawn by Nilesh for the purchase of Farquhar Road. It is not necessary for me to go through the calculations carried out by Mr Randall to prove that; at the end of the day I do not think that Mr Moverley-Smith, who appeared for the administrators and for the Company, disputed it. More problematic, however, is establishing what the arrangement between the parties was and what its legal effect was. The evidence relied on by Mr Randall was as follows: 1. The three director respondents filed witness statements and affidavits disclosing their means in the post-judgment proceedings in the section 459 petition. In his witness statement of 16th October 2000 Rasik said "Nilesh Thakrar has a property worth £562,000 subject to borrowings of £250,000 (including £200,000 borrowed from myself)." Mr Randall relies on that as supporting the case of a loan by Rasik while accepting that the statement of its amount is inaccurate. 2. In a further disclosure affidavit sworn on 27 th October 2000, Rasik said "whilst I have a director's loan account showing some of £438,653.81 at the end of September 2000, I have allowed Nilesh to draw these funds from the Company against my director's loan account without payment of interest." An exhibit to that affidavit describes his loan account as being "subject to loan in full to Nilesh". 3. In a disclosure affidavit sworn on 27th October 2000, Nilesh said:
"as at end September 2000 I had drawn from the Company a total of £485,459.18 against the Directors Loan Accounts for Rasik and Vinod. I have used these funds to acquire the family home in Birmingham and to pay for living expenses. No interest is payable by me to the company or by the company to Rasik and Vinod in respect of their loan accounts." 4. In a similar affidavit, sworn on the same date, Vinod disclosed a schedule of his assets in which he described his "
Directors Loan Account" in the company as being "£59,538.89. Against this amount I allowed [Nilesh] to borrow £46,805.37 from the Company as at end September 2000, with no interest payable." 5. In an affidavit sworn by her in order to support her claim to a share in the equity of Farquhar Road, and to resist the application by Kirit for an order for sale, Surbhi said:
"As on all previous occasions the deposit for the property was paid out of the Company against the money deposited by Rasik Thakrar into the Company." 6. In his witness statement filed in these proceedings, Kirit said it will not have been unusual for Rasik and Vinod to have made a loan to Nilesh from a repayment to them of money they had lent to the company. He said that if, during the period of his involvement with the Company, he needed funds he asked for authorisation from Rasik to withdraw funds from his director's loan account. If the withdrawal resulted in his account becoming overdrawn, Rasik, or Nilesh, or Vinod would lend to him from their loan accounts to ensure that his account remained in credit. This, he says, occurred on a number of occasions and involved a number of directors. He was not challenged on that in cross-examination. 7. Kirit produced several documents which tended to indicate, or were consistent with, a process by which what would otherwise be debit balances on directors' loan accounts at the end of a year were cancelled out by debits to other accounts of other directors which were at that time in credit. These documents were accountants' summaries, accountants' working figures or, in one case, figures prepared by the finance director of the Company (who was not a member of the Thakrar family) which, when compared with other available figures, showed a general netting-off process of this nature. Kirit frankly admits that he had no knowledge of how these transactions were actually written up into the books of the company, but says that he was told by two sets of auditors that the inter-account loans, as he describes them, were written-up at the end of the financial year in the manner just referred to. 8. During the course of the hearing, Kirit served a Civil Evidence Act notice relying on a transcript of the oral evidence given by Nilesh in the hearing before Judge Boggis in the order for sale proceedings. Mr Moverley-Smith did not oppose the introduction of that evidence; nor did he seek to cross-examination Nilesh as he might have done under CPR 33.4 (though since there is a possibility that Nilesh has moved to Canada it may be that that failure was of no practical significance). During the course of that evidence Nilesh gave positive evidence of a conversation between himself and Rasik in which Rasik expressly permitted Nilesh to "borrow against"
Rasik's credit balance in the company. 9. Mr Randall also relied on findings made by HHJ Boggis QC when he made the order for sale over the Property. In his judgment Judge Boggis said "[the balance of the purchase monies] appears to have been drawn out of directors' loan accounts, certainly in the name of Rasik and possibly in the name of one of the other Thakrars as well." I should say at this stage that I am not assisted by that finding. As I understand it, the precise basis on which money was drawn from the Company was not the issue before him, and the sort of points that have to be debated as between the Company on the one hand and its directors on the other in relation to the propriety of the transaction, and its true analysis, simply did not arise in his proceedings. Furthermore, a finding such as that would not in any event binds the Company or the administrators.[15]Mr Moverley-Smith invited me to reject the evidence as to what the members of the Thakrar family said was happening at the time. He points out that it is hearsay and says that no good reason has been advanced for not calling the relevant deponents. In addition, he relies on inconsistencies of expression as to what the basis of the application of the monies was, and a statement of affairs prepared by Nilesh which does not refer to an outstanding loan to Rasik. At its highest his case involves my looking at little more than the ledger entries showing the payment of the monies from the company, debited to Nilesh's account, and saying that since there was no justification for the payment of the money in the purchase of Farquhar Road then the application was inevitably a misapplication of Company monies. The facts -- my findings[16]The evidence in this case is in an unsatisfactory state. While it is perfectly understandable that Kirit himself would not know what happened at the time (because it happened during the period of his exclusion from the affairs of the Company), there are three other directors who would have some knowledge (although one of them, namely Nilesh, may now be in Canada). They have spoken only through their evidence given in other proceedings where the focus was different. Each side had its reasons for not calling them. Presumably Kirit was concerned at the prospect of calling as witnesses those against whom he has been conducting bitter litigation, even though the mechanism of witness summonses was available to him and even though he had in good solid form the evidence in chief that he would expect (and want) them to give. For their part the administrators were presumably wary of calling directors who might simply be concerned to exculpate themselves, and in any event the evidence given by them before would not be a promising start for the administrators. In those circumstances I face obvious difficulties in coming to conclusions as to what the agreed basis was, if any, for the application of the monies in the purchase of the house.[17]Mr Moverley-Smith has urged on me that I should not accept the principal evidence relied on by Mr Randall because it is hearsay and because Mr Randall did not called the witnesses. For his part, Mr Randall has said that I should not make a finding which effectively brands the directors as dishonest (if I were to find that the descriptions of arrangements in their various witness statements were factually untrue) without their having been cross-examined. I have to say that my sympathies lie more with Mr Randall than with Mr Moverley-Smith. Mr Moverley-Smith took no point on the hearsay presentation of the witness statements of the other members of the Thakrar family -- the statements were exhibited to a witness statement of Kirit in these proceedings. It would have been open to Mr Moverley-Smith to have sought to call those witnesses for cross-examination under CPR 33.4, at least so far as those still within in the jurisdiction are concerned (Rasik and Vinod - query Nilesh). Furthermore,Vinod attended on the first day of this hearing, representing himself. I was told that an agreement had been reached with him and that he would withdraw unless he was required to give evidence. I think there was some sort of implicit invitation for me to consider whether I thought he should give evidence; for obvious reasons I declined the invitation. Neither Mr Randall nor Mr Moverley-Smith said they wished him to remain to give evidence, and in the circumstances he withdrew. Questions were then raised by Mr Randall as to the terms of the compromise between Vinod and the administrators, and it transpired that the terms were that the claim against him would not be proceeded with, that neither party would seek costs against the other, and (most significantly for these purposes) he would attend to give evidence if required. Accordingly, it seems to me that he was not only a witness who was theoretically available to the administrators, he was a witness who was actually available to them. Yet they made no attempt to call him. In those circumstances I am not prepared to disregard his evidence or the evidence of his brother Rasik and nephew Nilesh.[18]In those circumstances, and in the light of their evidence (and the evidence of Kirit) I find that there was some sort of casual understanding between Nilesh and Rasik, which took place against the background of prior dealings between the directors which had, in previous years, involved one director to whom the company did not owe money drawing money from the company with a balancing transaction being carried out in other directors' accounts (those in credit) at the end of the company's financial year. From one or two other documents we have, it is reasonably clear that that had happened in the past. Against that background I think it is likely, and I am prepared to find, that there was a similar arrangement, albeit very casual, between Nilesh and Rasik when Nilesh bought his house. In other words, Nilesh was permitted to draw the monies from the Company because Rasik, and perhaps Vinod, had credit balances which could be adjusted in due course to put Nilesh's account back in credit.[19]As to the implementation of that arrangement, I also find that no balancing entries were in fact passed in the other directors' accounts before the Company's year-end (5th February 2000), after the year-end or indeed at any time before the administration intervened. No documentation has been produced to suggest that they were entered, and there is some positive evidence that they were not. The ledger balance for Rasik's account as at 29th December 1999 shows a credit balance of £361,653.81. I have a print-out for the company's year 2001 to 2002 which shows an opening balance for that year of the same amount. There are no entries in his account which would be necessary to achieve the loans and transfers contemplated by the informal arrangements between the directors. It is true that there are documents, relied on by Mr Randall, which assume some sort of netting-off. For example, the finance director produced a manuscript document showing what he thought the balances on the accounts of Rasik, Vinod and Nilesh were in September 2000 , presumably for the purposes of enabling them to give details to Judge Boggis, and that document probably assumes some sort of netting-off. The figures given by the directors, or some of them, to Judge Boggis assume the same thing. On 18th January 2001 the auditors of the company, Messrs Harben Barker, produced draft accounts for the period ended 5th February 2000, and Mr Randall pointed out, correctly, that in accordance with previous years the figure for directors accounts was an overall netted figure, encompassing all accounts. Mr Randall relies on this as further support for his case that there was an implemented arrangement for making appropriate debits to Rasik's account (and if necessary Vinod's account, though on the figures it would not have been necessary to have resort to his) to balance the drawings by Nilesh. However, the impact of this submission in relation to the draft accounts is very much diminished by the manuscript on the first page which reads "VERY DRAFT, FIRST COMPUTER RUN, NOTES TO BE SORTED OUT". All in all I do not consider that the evidence relied on by Mr Randall justifies a finding that the Company actually did what it was planned it would do after the year end. The legal effect of those findings[20]I now turn to deal with some of the legal consequences of these findings. Mr Moverley-Smith says that all that has happened, in the light of my findings, is that Nilesh drew the money, but any steps needed to "legitimise" (my word) those drawings did not take place because there were no entries in the relevant ledgers and whatever netting-off process ought to have taken place did not take place. This means that there was an appropriation of Company moneys without any legal justification; alternatively he says that the Company in effect gave the money to Nilesh; alternatively there was a loan by the Company to Nilesh. Mr Randall urges on me that there was in substance and in law an agreement by Rasik to make the relevant loans straight away (on drawdown by Nilesh from the company) so that all that happened was that there was a failure to record that. On this analysis any entry at the year end would be merely a formal record of that which had already taken place, so that there could be no question of any misappropriation of company money or an unlawful loan to Nilesh. I should find for that analysis, he says, because that is a fair overall reading of what the parties were saying they agreed; it would be wrong to make a finding which involved a potential criminal offence (an unlawful loan to a director) if there was another explanation; that I should apply the maxim omnia praesumuntur rite esse acta (if I am allowed to, given that it is Latin); and that is what Judge Boggis found.[21]Despite Mr Randall's cogent submissions, I do not think his analysis is right. It is quite true that the parties could have carried out the transaction by the Company repaying Rasik and Rasik lending on to Nilesh. Had they done so the company's ledgers would have shown no entry at all in Nilesh's account, and it would have shown debits in Rasik's. But the books do not show those entries. Of course, that is not determinative, because errors can be made, but there was no evidence that the entries that were made were mistakes. The failure to write them up in Rasik's account at the time was actually deliberate. There was no arrangement to make an immediate loan. There was an arrangement to pass entries at the end of the year to make sure that there was no outstanding debit balance on Nilesh's account. Since other entries could be anticipated (the ledger shows that there were others, and the whole arrangement between the directors, as I have found it to be, lends itself to fluidity in the accounts with various debits and credits during the course of the year) the debit entries to be passed on Rasik's account at the end of the year might or might not correspond to the debit entries passed on Nilesh's in connection with the house purchase, or the debit balance on his account that resulted from those entries. Whether there was an exact correspondence or not would or might depend on what other entries occurred in the meanwhile to affect the balance.[22]I therefore think that the arrangement between the parties was different from an immediate loan by Rasik to Nilesh. It was an arrangement to pass entries so as to give rise to loans at the end of the year so as to make sure that there were no debit balances on Nilesh's account. That may or may not amount to a binding contract to make a future loan; but it certainly does not amount to an immediate contract of loan. Mr Randall described the difference between this analysis and the analysis of immediate loan as being a fine or technical one. I do not think it is. Directors have an important responsibility in relation to the funds under their control. That responsibility is hedged around with legal obligations and criminal offences. If one director has no credit on his account with a company he (and the other directors) cannot simply treat the credit balance of another director as something against which he can draw and rely on the matter being put right at the end of the year. If the directors agree that the one in credit will provide his credit for the benefit of the other so as to create a loan then that is permissible and easily achieved, but it does require some sort of agreement that that is what should happen, and it requires real transactions to take place and to be documented. The company has a right to expect that such matters are properly documented and that the transaction is properly carried out. The directors are not entitled to deal with matters informally and sort it out later. If they do that they are at risk, as this case demonstrates, of being found to have failed to have carried out the transaction in a permissible manner, thereby leaving themselves exposed to the possibility of their having carried it out in an impermissible manner. In this context the omnia praesumuntur maxim does not apply. There is no reason to presume regularity in favour of someone who fails to take the opportunity to carry out a transaction in a regular fashion.[23]I therefore find that on the facts of this case the moneys applied in the purchase were company moneys which passed to Nilesh and not Rasik's moneys lent to Nilesh. It is therefore necessary to go on to consider what the nature of that drawing was. Was it a straight misapplication of company money, that is to say a director helping himself to company money in an impermissible way, was it a gift (which amounts to the same thing) or was it in the nature of a loan by the company to Nilesh? On this question may turn the relief to which the company is entitled. Mr Moverley-Smith's case is as follows: a) The transaction was simply a misapplication which gives the company a right to trace into the property at common law or alternatively in equity via a constructive trusteeship that would arise by virtue of the misapplication. b) If it was not a simple misapplication then it was a loan. Being a loan to a director it was an unlawful loan under section 330 of the 1985 Act, and if that is right then it is again a misapplication. As a result of that, the moneys were held by Nilesh as constructive trustee and via that route the moneys can again be traced into Farquhar Road so that Nilesh holds it (subject to the building society mortgage) as constructive trustee. (3) In each case, the interest taken by Kirit under his charging order was not an acquisition of an interest for value, so that the company's interest beats Kirit's interest. c) In each case, the interest taken by Kirit under his charging order was not an acquisition of an interest for value, so that the Company's interest beats Kirit's interest.[24]In response to this Mr Randall makes the following points: a) If (as I have found) the transaction is not treated as a loan by Rasik then it was a loan by the company to Nilesh. Even though that loan was made unlawful by section 330, that still did not give rise to any constructive trusteeship, so that Nilesh (and Surbhi) owned the beneficial interest in the house and Kirit's charge still had an interest to bite on. The Company has no competing interest. b) As a concomitant of that he denies that there was a straight misapplication, but if there were then he would say that there was no right to trace at common law. He would, I think, accept that a straight misapplication would give rise to constructive trusteeship. However, he questions whether the court should enforce it when in the present circumstances a combination of a secured bank debt, the realisations to date and Kirit's right of marshalling would mean that enforcement makes absolutely no difference to the Company in money terms because if the Company takes this property then Kirit gets the same value elsewhere by virtue of marshalling.[25]It is therefore necessary to consider what the effect of the arrangement as to the drawing of the moneys was.[26]I have already found that the moneys were taken as a result of an express adoption by Nilesh and Rasik of the arrangement that had operated in previous years of allowing one director to draw moneys from the company in anticipation of an adjustment from the accounts of other directors at or after the year end. It is pertinent to examine the situation immediately after the money was drawn. Nilesh had no intention of keeping Company money for his own purposes with no mechanism for repayment. It was not an out and out misappropriation in the nature of theft. The money would not have been taken if there had not been other money available to, in effect, replace it. It, or any outstanding balance after any intervening transactions had been taken into account, would be replaced by the adjustments involving other directors' accounts. That nature of such an arrangement is, I think, an informal loan, with repayment coming at or shortly after the year end. The directors did not in terms agree that the moneys should be treated as loans, but that is not the point. The question is, what is the nature of the transaction that did occur, looked at objectively. Subject to questions of authority and consensuality, I think that they should be characterised as loans.[27]Mr Moverley-Smith says that they should not be treated as loans because the necessary element of consensuality was missing. There was no loan agreement, no board resolution and no agreement by the board, or a director with authority, to make such a loan. It is true that there was no documentation, and that there was no formal board minute. However, in relation to this company, I do not think that that is necessarily determinative. The evidence, thin though it was, tended to show that what happened on this occasion was part of a historical pattern, and there was no suggestion that previous instances of the same sort of thing had been dealt with formally by the board. At the end of the year the balances were sorted out with the assistance of the auditors. That suggests, and I find, that Thakrar directors were informally authorised to give effect to these sort of arrangements, so that Rasik and Nilesh (in this case) had sufficient authority to give rise to this particular loan. The sort of casual disposal of company finances that went on in this case is not to be encouraged, but that does not mean that the relevant consensual element was lacking. I find it to have been present; and I therefore find that what technically happened in this case was a loan, or a transaction in the nature of a loan, to Nilesh by the company.[28]That being the case, it is necessary to consider the legal consequencs. The loan is rendered unlawful by section 330 of the Companies Act 1985. That section provides: 330(2) A company shall not- make a loan to a director of the company or of its holding company; enter into any guarantee or provide any security in connection with a loan made by any person to such a director. CA 1985, s. 330(3) 330(3) A relevant company shall not- make a quasi-loan to a director of the company or of its holding company; make a loan or a quasi-loan to a person connected with such a director; enter into a guarantee or provide any security in connection with a loan or quasi-loan made by any other person for such a director or a person so connected.[29]The expression "quasi-loan' is defined in section 331 - 331(3) A quasi-loan is a transaction under which one party ("the creditor") agrees to pay, or pays otherwise than in pursuance of an agreement, a sum for another ("the borrower") or agrees to reimburse, or reimburses otherwise than in pursuance of an agreement, expenditure incurred by another party for another ("the borrower")(a) on terms that the borrower (or a person on his behalf) will reimburse the creditor; or(b) in circumstances giving rise to a liability on the borrower to reimburse the creditor. (The transaction in this case may be said to fall more naturally within that description than the concept of loan, but that does not matter for these purposes.)[30]There are various exceptions to the bar, none of which applies in this case. Section 341 deals with remedies: 341(1) If a company enters into a transaction or arrangement in contravention of section 330, the transaction or arrangement is voidable at the instance of the company unless- restitution of any money or any other asset which is the subject matter of the arrangement or transaction is no longer possible, or the company has been indemnified in pursuance of subsection (2)(b) below for the loss or damage suffered by it, or any rights acquired bona fide for value and without actual notice of the contravention by a person other than the person for whom the transaction or arrangement was made would be affected by its avoidance. 341(2) Where an arrangement or transaction is made by a company for a director of the company or its holding company or a person connected with such a director in contravention of section 330, that director and the person so connected and any other director of the company who authorised the transaction or arrangement (whether or not it has been avoided in pursuance of subsection (1)) is liable-(a) to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction; and(b) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.[31]Mr Moverley-Smith puts his case on loan in two ways. First, he says, it is a misfeasance which gives rise to a tracing remedy. Second, if that was not true when the loan was made, then it occurs when the loan is avoided under section 341, so that a constructive trust arises at that point. He says that avoidance occurred in this case on the service of the present proceedings on Nilesh. Mr Randall, on the other hand, disputes that any breach of section 330 gives rise to constructive trusteeship. He says the loan is a voidable transaction, not a void one, and it stands until avoidance, at which point money is payable but no constructive trust arises. In this case there has not even been any avoidance on the facts.[32]The principal question in this part of this case is whether an unlawful loan gives rise to constructive trusteeship at any stage. I take as a starting point that a loan to a director is not of itself the sort of transaction that is inevitably a misapplication of company moneys. There is nothing inherently wrong with such a transaction in the abstract. It may or may not be a misapplication on any particular set of facts, but it is not, as such, a breach by a director of his trusteeship of company assets. Statute did not intervene until the Companies Act 1929, when the predecessor of section 330 made its first appearance. The bar was repeated in the Companies Act 1948, but without the civil consequences of the bar being spelled out. It was not until 1985 that statute specified civil consequences.[33]The civil consequences are specified as being that the loan is voidable. That is of obvious significance to this part of the case. If a loan is voidable, it stands until avoided. That means that property in the money paid under the loan passes to the borrower. In my view that concept is inimical to the existence of a constructive trusteeship, or any form of tracing claim, at least in the absence of special circumstances. That view is supported by the speech of Lord Goff in Guinness plc v Saunders [1990] 2 AC 663 at 698. Lord Goff was considering a breach by a Guinness director of the disclosure rules in Companies Act 1985 section 317. The consequences of that breach were that the contract in question, under which the director took considerable financial benefits, was voidable, not void. The Court of Appeal had held that the director therefore became a constructive trustee of the moneys he had received under that contract and had to pay them back. Lord Goff, with whom Lord Griffiths agreed, held that this part of the analysis could not be sustained. A voidable contract stood until avoided. At page 698 he considered an argument by counsel for Guiness to the effect that the director:
"... having received the money as constructive trustee, must pay it back. This appears to have formed, in part at least, the basis of the decision of the Court of Appeal. But the insuperable difficulty in the way of this proposition is again that the money was on.this approach paid not under a void, but under a voidable, contract. Under such a contract the property in the money would have vested in Mr Ward (who, I repeat, was ex hypothesi acting in good faith); and Guinness cannot short circuit an unrescinded contract simply be alleging a constructive trust. "
[34]In my view that reasoning applies in this case. Until any avoidance by the Company the loan stood, and there was no constructive trust. In the case of section 330 that conclusion is reinforced by the terms of 341. That sets out the civil consequences, and it seems to me that in the absence of special facts making the loan a breach of fiduciary duty they leave no room for constructive trusteeship. Section 341(2)(a) seems to pre-suppose the absence of constructive trusteeship, because it expressly provides for what would otherwise be one of the consequences of constructive trusteeship, namely an obligation to account for gains made.[35]That is the position looking at the Act and Guinness v Saunders. However, Mr Moverley-Smith relies on two cases which he says are binding on me and which require the conclusion that a breach of section 330, in the case of a loan to a director, makes the receiving director a constructive trustee. The first is Wallersteiner v Moir (No 2) [1974] 1 WLR 991. At page 1015 Lord Denning referred to a breach of section 190 of the 1948 Act (the predecessor of section 330 of the 1985 Act) and said:
"The loans would be unlawful under section 190. He [the director] would be guilty of a misfeasance and liable to indemnifying [sic] the company against any loss arising therefrom."
[36]Lord Denning clearly says nothing there about constructive trusteeship, but Mr Moverley-Smith says that the fact that there is a misfeasance means that such liability must arise. I do not agree. There may be many misfeasances which give rise to constructive trusteeship, but I do not think that all misfeasance has that consequence. Lord Denning specified the remedy he saw as applicable to that case, namely an indemnity against losses arising. That is a different remedy from constructive trust.[37]The second case is at first sight closer to the point. Mr Randall, in answer to a question that I had posed about the consequences of a breach of section 330, had very properly drawn my attention to a case reported only on Lexis even though that case might be taken as being against him. That case is A F Budge (Contractors) Ltd v Budge CA, 17th July 1995, which I have since been told is reported in 1997 BPIR 366. In that case a company served a statutory demand on a former director in respect of moneys owing on what the report describes as his "loan account". The demand was not set aside by the district judge, or the judge (Jonathan Parker J) on appeal, and the matter arrived in the Court of Appeal as an application for leave to appeal. Apparently the director had habitually drawn moneys from the company in anticipation of dividends declared in his favour by the holding company. At some point there arose, and remained, a balance owing by the director of over £1 m, and it was in respect of that that the statutory demand was served. The facts do not appear in any great detail, but it appears that at least part of the indebtedness arose because the company paid interest and other payments that were otherwise the liability of the director. Various points were debated, and the point that Mr Randall drew to my attention, and that is relied on by Mr Moverley-Smith, is the last of them. The director argued that certain payments were made by the company in breach of the relevant bank mandate because more than one signature was required and the payment authorisations only had one (presumably that of the director in question). He seems to have made the brave submission that instead of suing him, the company ought to sue the bank for breach of the mandate so he should not be held liable. That submission was rejected for two reasons. The first was a ratification point, which does not arise in the present case. Then Peter Gibson LJ set out the reasoning of Jonathan Parker J below, who had said this:
"In the second place, even if breaches of mandate occurred which were not ratified, given that the payments in question were admittedly for the benefit of Mr Budge, as a director of Contractors [ie the company] he was and remains a constructive trustee of such moneys and under an obligation to repay them to Contractors. Mr Budge, as a director of Contractors, cannot be heard to say that instead of requiring him to repay moneys wrongly applied for his benefit, Contractors should sue Barclays for the money, leaving it to Barclays to join him as third party."
And then Peter Gibson LJ himself said as follows:
"[Counsel for the director] was unable to advance any argument to suggest that the judge was wrong on that point. Indeed, it seems to me that he was plainly right and on this point as well there is, in truth, no defence to the claim made by Contractors."
[38]That, Mr Moverley-Smith says, shows that a director who wrongfully takes a loan in contravention of section 330, holds the money as constructive trustee.[39]That part of that decision obviously gives one pause for thought, but I do not think it compels me to change the view at which I arrived as a result of considering the statute and Guiness plc v Saunders. It is impossible to see what the full facts were from the judgment. It may well be that the consensual element which I have found to be present in this case was lacking in that one, so although the case was described as a claim on a directors loan account it was in truth a claim based on improper drawings which could not be properly described as a loan. One gets the impression that that was a case of a principal director just helping himself without much reference to anyone else, an impression which is strengthened by the "breach of mandate" point (on the assumption that he, by himself, effected those particular drawings). The official receiver apparently treated the case as involving section 330 (part of his report in disqualification proceedings is set out in the Lexis report) but it does not follow that that was necessarily the correct analysis. The difference between constructive trusteeship and requiring the return of moneys does not seem to have been focussed on in the report, since on any footing the director owed or was liable for the money. For whatever reason the judge below had concluded that the moneys were "wrongly applied for his benefit"; that smacks to me much more of a case which goes beyond straight breaches of section 330 and gets into the territory of straightforward misappropriation. It may even be that Jonathan Parker J had in mind that the director could not blow hot and cold - if there was a breach of mandate then he (the director) was not entitled to the money either because the drawing was not properly authorised as a matter of the company's internal authorities. That would give rise to constructive trusteeship if it were the case. All in all, therefore, I do not consider that this authority binds me to say that in every section 330 case where a director receives the loan (or quasi-loan) there is constructive trusteeship. There may be accompanying facts which justify adding that, but the present is not, in my view, such a case.[40]My reasoning and conclusion applies whether or not the loan contract has been avoided. It is therefore not necessary to consider the rival submissions as to whether, and if so when, it was.[41]I therefore conclude that the Company and the administrators are not entitled to claim the equity in the property on the footing that Nilesh was a constructive trustee or by virtue of any other form of tracing. Transaction at an undervalue 42. That does not end Mr Moverley-Smith's case. He has another weapon in his armoury. In the event that the transaction is found to have been a loan he says it was a transaction at an undervalue under Insolvency Act 1986 section 239, and the relief to be granted should be an order under section 241(1)(b) requiring Farquhar Road to be vested in the Company as representing in Nilesh's hands the application of moneys transferred pursuant to the transaction.[43]The first question is whether the transaction was indeed at an undervalue. Part of the case on undervalue does not arise. Mr Moverley-Smith argued that the transaction amounted to a gift to Nilesh but in the light of my findings above there was no gift, so that limb of section 238 does not arise. The second limb, however, probably does. Under section 238(4) "a company enters into a transaction with a person at an undervalue if (b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company." Mr Moverley-Smith's case is that the company lent £100,000, and in exchange got a covenant which is worth less than £100,000, and no provision to pay interest, so that on both counts there was an undervalue. I dismiss the first of those as the basis of undervalue. There was no evidence as to the value of Nilesh's covenant, and it is far from obvious that it was not worth £100,000. The second, however, is more material. On my findings there was no agreement for interest. There was no evidence that anyone ever paid interest under the casual drawing arrangements the directors had, and I find that no interest was contractually payable. To that extent I think that the transaction falls within the definition and was a transaction at an undervalue - the company lent £100,000 on which it could have obtained interest to someone who was not going to pay interest on it. The considerations do not match, and undervalue is proved.[44]However, the transaction is only one in respect of which relief can be granted if it was carried out at a relevant time within the meaning of the statute. Section 240 contains 2 elements in this respect - a time element and an insolvency element. The time requirement is fulfilled – the transaction was within 2 years of the administration. In relation to solvency, section 240(2) provides that if the transaction is with a connected person (which it was - Nilesh was a director and that makes him connected for these purposes under section 249) then it is to be presumed that the company was unable to pay its debts at the time or became unable to do so as a result of the transaction. The next question therefore becomes whether Kirit (who claims through Nilesh) has rebutted that presumption.[45]The evidence in relation to solvency in this case might be described as rather thin. Had I found that the transaction had taken effect as a repayment by the company to Rasik and a loan by Rasik to Nilesh then the administrators would have sought to say that the repayment of Rasik was a voidable preference under section 239. That would have required them to prove that the company was insolvent at the time. There was no real evidence of that. There was no attempt by them to draw a balance sheet to show balance sheet insolvency, and there was none of the familiar evidence of unpaid bills, pressing creditors and recent writs that one so often sees in preference cases as demonstrating creditor pressure. I am prepared to infer from the absence of that sort of evidence in that context (ie in the context of a claim in which the administrators would have been expected to have produced that sort of evidence if it had existed) that the evidence did not exist - in other words, to assume and find that creditors were being paid on time. No-one has ever suggested they were not. I am confident that in any event, even in the absence of the voidable preference claim the administrators would have disclosed the evidence had it existed. On balance sheet solvency, the audited accounts as at 6th February 1999 showed a balance sheet surplus of over £13m, and a trading profit after tax but before dividends of £1.72m. That is evidence of balance sheet solvency at that date. The accounts were signed off on 27th August 1999, and no post-balance sheet event of solvency-affecting proportions is disclosed in the accounts to that date. No later accounts were audited but no draft accounts have been produced suggesting insolvency. During the course of 1999 and 2000 the Thakrars were litigating the section 459 petition over the question of the price to be paid to Nilesh for his shares. In December 1999 the respondents to those proceedings offered him over £2m for his shares during the course of those proceedings, which he turned down. Judge Boggis ordered that he should receive over £6m, after having heard evidence which was obviously detailed, and which involved him hearing evidence on various accounts. I have not seen that evidence, though I have seen a draft profit and loss account produced by the auditors on lst September 2000 showing a profit for the 12 months to 5 th February 2000 of £1.09m. Nothing in Judge Boggis's judgment suggests insolvency in either of the statutory senses or even the existence of evidence pointing that way; it all points the other way. While it is true that by the time of the administration petition the company was said to be insolvent, it is impossible to work out from the 2.2 report by what mechanism and when that occurred. The 2.2 report annexes a balance sheet which still shows a £9m surplus. Mr Moverley-Smith, who admittedly did not have the burden in this respect, was not really able to point to any evidence of insolvency. He did point out that the company was insolvent when it went into administration; but that does not help much in relation to October 1999. He also pointed out that the draft accounts of 18th January 2001 showed the company making serious losses; but again that does not help in relation to October 1999. And he relied on the fact that in the intervening period the directors had themselves made further loans to the company; but that does not demonstrate insolvency any more than taking any other loan does. In the light of all the evidence I consider that Kirit (who shoulders Nilesh's burden for these purposes, since he claims through Nilesh) has satisfied me that the Company was able to pay its debts as they arose within the meaning of the statute. In those circumstances the loan cannot be challenged as a payment at an undervalue.[46]That means that I do not have to consider whether it would be appropriate to order the relief sought by Mr Moverley-Smith, namely an order for the vesting in the company of Farquhar Road under section 241(1)(b). However, I should say that I am far from convinced that such an order would have been appropriate bearing in mind that the purpose of the order is "for restoring the position to what it would have been if the company had not entered into that transaction" (section 238(3)). Depending on its value, to make such an order might well have resulted in doing more than that, even if as part of the transaction one cancelled the loan (a point which was not canvassed in argument).[47]In the circumstances I find against the administrators on the claim based on transaction at an undervalue. Other matters[48]The application in this case adds claims for repayment from Rasik and Vinod of the equivalent of the moneys advanced to Nilesh insofar as they "co-operated in the disbursement of the Company's money". The claim against Vinod has been settled and I am not asked to make any order against him. That leaves a potential claim against Rasik. The application is framed so as to suggest that the claim against Rasik is based on a wrongful misappropriation by Nilesh in which he (Rasik) participated. I have found that not to be the analysis so on that footing that particular claim against Rasik fails. However, I have found that there was an unlawful loan, and under Companies Act 1985 section 341(2)(b) Rasik, whom I find to have participated and authorised it, would be liable to indemnify the Company. During the course of the proceedings I allowed an amendment so that the section 330 point could be taken against Nilesh/Kirit (up to that point it was referred to in the evidence but not pleaded) but the amendment does not make reference to Rasik. It may be that in the light of Rasik's bankruptcy the Company would not be particularly interested in a judgment on the point; or it may be that his trustee in bankruptcy would not dispute it in the light of my findings. I invite the claimants and the trustee to consider what should happen about this.[49]This application, whose central facts (that is to say the application of moneys in the autumn of 1999) are relatively simple, has raised a great number of claims, defences and other points. The course and contents of this judgment means that I have not dealt with them all because I have not had to. My failure to do so should not be taken as any sort of indication that I have not considered them to the extent that was appropriate. It is right, however, that I should refer to one of them. If my findings had been otherwise in relation to the beneficial ownership of Farquhar Road then the question might have arisen as to whether or not Kirit, under his charging order, took for value so as to beat the interest of the company. Mr Randall accepted that the case of Hosack v Robins (No 2) [1918] 2 Ch 339 seemed to determine the case against him, but had an argument that it was decided per incuriam. He indicated to me that he did not intend to advance that point at this level but would effectively want it kept live in case this case went further. I think it is right that I should record that in case it should matter in the future. Anthony Mann QC

Cited in 3 later judgments