Queensway Systems Ltd & Ors v Walker & Anor [2006] EWHC 2496 (Ch)

Case No 7349/2004

[2006] EWHC 2496 (Ch)

Date 28 th September 2006

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Before

P. Girolami QC

IN THE MATTER OF THE COMPANIES ACT 1985

AND IN THE MATTER OF THE INSOLVENCY ACT 1986

AND IN THE MATTER OF QUEENSWAY SYSTEMS LIMITED (IN LIQUIDATION)

B E T W E E N:

Between

QUEENSWAY SYSTEMS LIMITEDClaimant

(IN LIQUIDATION)Claimant

GARY PETTITClaimant

PETER WINDATTClaimant

(As joint liquidators of Queensway Systems Limited (in liquidation))Claimant

DAVID WALKERDefendant

HELEN WALKERDefendant

JUDGMENT

Introduction

[1]Queensway Systems Limited (“the Company”) went into creditors voluntary liquidation on the 12 October 2001. By these proceedings the Company and its two liquidators, Mr Gary Pettit and Mr Peter Windatt, seek to recover from the two Defendants, directors of the Company, sums said to have been paid to them or for their benefit between the 3 April 2000 and 12 October 2001, on the grounds that such payments were made in contravention of section 330 of the Companies Act 1985, or alternatively were a misapplication of the Company’s funds in breach of duty.

[2]The two Defendants were at all relevant times the only directors of the Company, and they were also the only shareholders, each of them being the registered holder of one of the two issued shares. Until the final breakdown of their relationship in May 2001, the Defendants had lived together as man and wife for approximately 15 years; and although they had never married, the Second Defendant, Helen, took the First Defendant’s surname. I shall refer to the First Defendant as “Mr Walker” and, since the Second Defendant was with her consent referred to during the hearing as “Mrs Walker”, I shall refer to her in the same way in this Judgment. Until the 24 April 2006 Mr Walker was represented in these proceedings by Nicholsons solicitors; but on that day he gave notice that thenceforth he would be acting for himself, and he appeared before me in person. Mrs Walker appeared before me by solicitors and Counsel.

[3]The claim against Mr and Mrs Walker, as amended pursuant to the order of Mr Registrar Simmonds of 21 July 2005, was for repayment of the sum of £304,091.73 plus interest, or such other sum as the Court might determine; but the amount in issue (excluding interest) has subsequently been agreed at £147,208.76 between an accountant Mr Lomas on behalf of the Claimants, and Mr Pocock, who acted as the Company’s accountant during 2001 before it went into liquidation; and that agreement is recorded in a joint statement from them made on 8 May 2006. Each of the parties confirmed to me at the hearing their agreement to that figure.

[4]Part of the Defendants’ answer to the claim is that, they say, on or about 27 March 2001 a dividend in the sum of £190,000 was declared which extinguished, or should be treated as extinguishing, any liability which otherwise might be owed by them to the Company. And part of the relief sought by the Claimants in the action is directed to establishing that Mr and Mrs Walker cannot rely upon that dividend.

[5]If unable to rely upon the dividend, both Defendants accepted in principle that the sum of £147,208.76 should be repaid to the Company, but it was in issue what proportion of that liability should fall upon each of them. The Claimants contended that Mr and Mrs Walker should be jointly and severally liable for the entirety of the sum (plus interest). Mr Walker contended that if he were to be found liable at all, then there should be excluded from his liability to the Company any sums which were paid to or for the benefit of Mrs Walker. Mrs Walker’s primary case was that she should have no liability to the Company; but if any liability were to be found against her, it should be limited to those sums which were shown to have been paid to or for her benefit.

[6]In addition, in circumstances to which I shall return below, Mr Walker appears to have directed that from the £190,000 dividend which he and Mrs Walker say was declared, £40,000 should be applied in partial discharge of a debt of approximately £43,000 owed to the Company by Westfield Estates Limited (“Westfield”), a company of which Mr Walker was a director and shareholder. It was not in issue that at the time of the declaration (or purported declaration) of the dividend Westfield owed at least £40,000 to the Company, and nothing turns on precisely how much more than that sum Westfield owed. In the event that the dividend is invalid, the Claimants also seek to recover from Mr and Mrs Walker a further £40,000 referable to the application of the dividend in partial discharge of Westfield’s debt (which further claim for £40,000 I shall refer to as “the Westfield £40,000”).

[7]Accordingly five main issues arose before me, as follows:-(1) Whether the dividend of £190,000 relied upon by Mr and Mrs Walker was validly declared.

(2) If so, whether the declaration of the dividend and/or its application against the £147,208.76 which would otherwise be repayable to the Company was (or would have been) either a wrongful preference contrary to section 239 Insolvency Act 1986 or otherwise a breach of duty by Mr and Mrs Walker to the Company. A claim that the declaration of the dividend and/or its application against the £147,208.76 was a transaction at an undervalue within section 238 Insolvency Act 1986 was not pursued before me.

(3) If Mr and Mrs Walker cannot rely upon the dividend, what were their respective liabilities to repay the sum of £147,208.76.

(4) If Mr and Mrs Walker cannot rely upon the dividend, whether one or both of them are also liable for the Westfield £40,000.

(5) Whether either or both of Mr and Mrs Walker should be relieved under section 727 of the Companies Act 1985 from any liability which they otherwise might have.

[8]In addition, each of Mr and Mrs Walker has issued a Part 20 claim against the other of them, seeking contribution in respect of any liability which he or she may be found to have to the Claimants; and those contribution claims also came before me.

[9]Before turning to deal with the issues which I have identified and with the contribution proceedings, I must however explain the background in more detail, which, insofar as there was any dispute, I find to have been as follows.

The background

[10]The Company was incorporated on 20 October 1993 and from and after April 1995 it traded as an importer into the United Kingdom of vacuum cleaners from the United States. It imported the vacuum cleaners from a company called Filter Queen Inc. a Delaware company (which the notes to the Company’s audited financial statements for the year to 31 March 1999 record as being wholly controlled by Mr and Mrs Walker). The vacuum cleaners so imported were then sold by the Company on a wholesale basis within the United Kingdom (to “agents” as Mr Walker described them, or franchisees as Mr Pettit described them). The Company’s main income consisted of the proceeds of those sales and for commission received in relation to finance arrangements entered into by customers of the “agents” for the acquisition of the vacuum cleaners concerned.

[11]Apart from wages of £300 per week which Mrs Walker was paid by the Company from February 2001 (for which Mrs Walker frankly accepted in oral evidence she did no work for the Company) neither Mr Walker nor Mrs Walker were paid any remuneration by the Company either in the form of wages or salary, or as directors’ fees. Instead, the evidence from Mr Pettit in paragraphs 10 and 11 of his witness statement dated 10 November 2004, which was not materially challenged by the Defendants, is that throughout the Company’s trading history it paid out very significant sums during each financial year, which were treated in the Company’s accounts as loans made jointly to Mr and Mrs Walker. In many but not all years, a dividend was declared following the end of the financial year which was set off against the then outstanding amount of the loan. Mr Walker accepted that this was the practice (both orally and in his witness statement of 8 February 2005). He confirmed in cross-examination that the Company’s money was drawn on to pay his and Mrs Walker’s private living expenditure, either by payments to him, to Mrs Walker (which he described as rare) or by payments being made direct out of the Company’s account to suppliers of goods and services. Examples of payments to third parties which he gave to me were payments made to the gardener, and in respect of holidays. Mrs Walker did not, as I understood her position, challenge that the Company’s money was used in this way to pay for Mr Walker’s and her living expenditure, but she disputed how much she knew about it and how much of the Company’s money was paid to her or for her benefit (points to which I shall return).

[12]The first set of the Company’s accounts in evidence are those for the year ended 31 March 1999. They are audited and signed by the Company’s auditors Sexty & Co. and are also signed by Mr Walker as having been approved by the board on 28 January 2000. The notes to those accounts record that during that financial year interest free loans to the directors jointly were made totalling £171,443, leaving a balance due to the Company from the directors at the 31 March 1999 of £434,349. The notes reveal that the outstanding amount in 1998 had been £395,523. The same accounts also indicate that for that financial year a dividend of £650,000 was declared after the year end and was applied in extinguishing the sums due from the directors at 31 March 1999. There was no suggestion before me that that dividend, or any previous dividends, were not validly declared.

[13]Accounts, or draft accounts, for the year ended 31 March 2000 are also in evidence, exhibited to Mr Pettit’s witness statement dated 10 November 2004. The copy in evidence bears an auditors’ report which is dated 23 October 2000 but not signed (page 37 of the bundle). The accounts are also dated as having been approved by the Board on 23 October 2000 (page 39), but are unsigned on behalf of the Board. It was not established during the hearing whether accounts in the form exhibited were ever finalised but no dividend for the year to 31 March 2000 was declared (see paragraph 8 of Mr Walker’s witness statement of 8 February 2005) and it was not suggested before me that the accounts as so exhibited were inaccurate in any relevant way. They record (trial bundle page 43) firstly that during the year to 31 March 2000 the Company made further interest free loans to the directors jointly totalling £241,253; secondly that those further loans were repaid during the year from the dividend of £650,000 to which I have referred in paragraph 13 above; and thirdly that after allowing for payments of £108,065 made by the directors on behalf of the Company, there was a resultant balance due to Mr and Mrs Walker from the Company as at 31 March 2000 of £51,902. It has been agreed by Mr Lomas and Mr Pocock, and by the parties, that that sum of £51,902 was due to Mr and Mrs Walker as at that date and it has been taken into account in calculating the £147,208.76 agreed amount of the Claimants’ claim.

[14]It is not in dispute that after the 31 March 2000 payments continued to be made out of the Company’s money to or for the benefit of Mr and Mrs Walker in the same way as had occurred previously. As advanced by the Claimants they are broken down into 6 broad categories as follows:(a) payments made direct to Mr Walker;

(b) payments made for Mr Walker’s benefit;

(d) payments to Mrs Walker;

(e) payments made to the Inland Revenue on behalf of Mr and Mrs Walker or by way of loan to meet an Inland Revenue tax liability; and

(f) miscellaneous payments set out in a schedule to the witness statement of Mr Bates dated 18 July 2005.

[15]The total claims advanced under those headings amounted, as I have mentioned, to £304,091.73. They have been reduced to the agreed figure of £147,208.76 after taking into account not only the sum of £51,902, but also other adjustments including credit for payments which were made for the benefit of the Company or which were not in fact made out of the Company’s money; but the way in which the agreed figure has been arrived at, as I follow it, does not make it possible without more to identify precisely of what sums the resultant £147,208.76 is composed, nor even what proportions of it fall into which of the 6 categories I have identified in the preceding paragraph.

[16]This is again a matter to which I return below. But in the meantime during 1999 the Inland Revenue commenced a tax investigation into the affairs of the Company, the details of which were not explored in the evidence and are not directly material to the issues which arise in this case. Two firms of accountants were employed by the Company to assist in relation to that tax investigation, KPMG and the Company’s auditors Sexty & Co. The result of those investigations was that additional tax liabilities were imposed upon the Company and upon each of Mr and Mrs Walker. A further result of the investigation was that the Company was prompted to make voluntary disclosure to HM Customs and Excise (“Customs”) of facts which resulted in assessments on the Company by Customs in January 2001 for additional VAT totalling just over £38,000. The assessments related to VAT quarters going back to the Company’s VAT quarter 1 November 1997 to 31 January 1998.

[17]In the meantime, according to Mr Walker, the Company’ business suffered during 2000 partly as a result of the considerable costs of the Inland Revenue investigations and partly as a result of difficulties with the supply of vacuum cleaners from the United States. Mr Walker says that during the course of 2000 he decided to change the Company’s business and to commence the sale of security systems rather than vacuum cleaners. As a result it sold back the majority of its stock to its United States supplier and this may in part explain why, when the Company went into liquidation, it had had little or no valuable stock. It is clear that following that change of business the Company was not as successful as it had previously been.

[18]In March 2001 management accounts in evidence suggest that the Company made a monthly loss of a little over £26,000. By that time it is clear that the Company had not paid any of the VAT assessment raised on it by Customs in January 2001. The first payment made to Customs was on or about May 2001, when Mr Walker caused the Company to pay £10,260.04 and enter into an instalment arrangement under which the Company proposed to pay Customs £10,000 a month for the succeeding three months. A further payment of £10,000 was made on 26 June 2001 which Customs appear to have regarded as a breach of the instalment arrangement, and in the meantime, according to Customs at least, further sums had fallen due from the Company. Mr Walker does not accept either that the January 2001 assessments or additional sums which Customs claimed to be due thereafter were necessarily correct. But he accepted during his oral evidence that no appeals were made nor any other steps taken to challenge the amounts claimed by Customs; nor even that any intimation was given to Customs that the amounts which they claimed were not accepted. Mr Walker said in his written evidence that he let the matter drift whilst he changed accountants from Sexty & Co. to Mr Pocock. What is not in dispute is that the only payments made by the Company to Customs during 2001 were the two which I have mentioned in this paragraph. According to Mr Pettit, Customs’ total claim in the liquidation exceeds £100,000. Over £73,000 appears to have been acknowledged by Mr Walker to have been due to Customs in the Company’s Statement of Affairs as at 12 October 2001 which he signed.

[19]Meanwhile on 27 March 2001 Mr Walker signed a document written on the Company’s headed notepaper recording, or purporting to record, a board meeting held on that day. The meeting is said to have taken place at Unit J Jarrold Way Bowthorpe Industrial Estate Norwich, the Company’s premises, and Mr Walker alone is recorded as having been present. The document continues:- “It was resolved: At the year end the Directors declared an interim dividend of £190,000 to be paid on 31 March 2001 from profits and distributable reserves. Mr Walker instructed that £40,000 of that dividend was to be used to discharge the debt owed to the Company by Westfield Estates Limited”.

[20]In May 2001 the relationship between Mr and Mrs Walker, which had been in difficulties since about February 2001, came to an end. Shortly thereafter Mr Walker went for a holiday to the Maldives with someone else, and sums attributable to that holiday were paid out of the Company and debited to the directors’ loan account in the Company’s books. Whilst Mr Walker was away Mrs Walker went into the Company’s premises and drew a cheque on the Company’s bank account for £2,000. She says that she needed to do so in order to pay for the housekeeping and the maintenance of her children.

[21]According to Mr Walker, during July 2001 Mr Pocock started to prepare accounts for the Company’s financial year to 31 March 2001 but these were never finished; no auditors’ report was signed and they were never approved by the Board. Instead, Mr Walker says, in July and August 2001 the Company’s performance deteriorated, not least because of the difficulties which he was experiencing with Mrs Walker, and it became apparent that the Company could not continue to trade. Advice having been received from Mr Pocock and from Mr Pettit, the Company ceased trading in August 2001 and was formally put into creditors voluntary liquidation on 12 October 2001.

[22]The evidence from the liquidators is that there are total creditors in the liquidation of £173,251 (of which £37,874 had not yet proved as of November 2004). The total realisations in the liquidation by 19 May 2003 appear to have been less than £5,000 (see the exhibit to Mr Pettit’s witness statement of 10 November 2004, at page 92 of the trial bundle).

The dividend of £190,000

[23]In seeking to establish the declaration of a dividend of £190,000, Mr Walker does not rely exclusively on the document of 27 March 2001 to which I have referred in paragraph 19 above. He also relies upon a meeting or discussion which he says occurred between himself and Mrs Walker shortly beforehand. In paragraph 9 of his witness statement dated 8 February 2005 he says that he remembers discussing the question of declaring a dividend with Mrs Walker in the kitchen. He also says that the discussion was not a detailed one, but rather it was a matter of his telling Mrs Walker what he proposed to do and her assenting to it. He then, he says, asked his secretary Jane Edwards to prepare a board resolution which he signed. It was clear from his oral evidence that the resolution to which he was referring in this passage of his witness statement is the document of 27 March 2001 to which I have referred at paragraph 19 above. Mr Walker said under cross-examination that he spoke to the Company’s accountants, who advised him what to do, before discussing the matter with Mrs Walker and signing the document of 27 March 2001. He also said that the intention of the discussion which he had with Mrs Walker and of the document of 27 March 2001 was to declare a dividend by reference to the distributable profits and reserves available at the end of the year to 31 March 2001.

[24]In paragraph 14 of his witness statement dated 8 February 2005 Mr Walker also says, in response to a claim by Mr Pettit that Mrs Walker never knew of the proposal to declare a dividend, that she knew about it, approved it and knew why it was necessary.

[25]Mr Maxwell Lewis on behalf of Mrs Walker did not seek to suggest that any valid dividend (interim or final) was declared by the document of 27 March 2001. Instead he submitted that if I was to find that a meeting had in fact taken place to discuss the dividend between Mr and Mrs Walker, then that was tantamount to a valid declaration of a dividend by the Company in general meeting, in accordance with the principle in ReDuomatic

[1969] 1All ER 161

[26]As Mr Maxwell Lewis recognised, that submission was to an extent inconsistent with Mrs Walker’s own evidence. For, during the course of these proceedings Mrs Walker has prepared and signed three witness statements; and although they do not all deal with the declaration of the dividend in the same way, none of them provide any solid support for a Duomatic meetinghaving occurred before 27 March 2001, and two of them are positively against it. The first dated 3 March 2005 was drafted by the Claimants’ solicitors during a short period when Mrs Walker had ceased to be represented in the proceedings by solicitors Leathes Prior and before she came to be represented by Fosters on 17 March 2005. That witness statement was not however served either by Mrs Walker or by the Claimants at the time. The second witness statement, dated 11 May 2005, was prepared and signed by Mrs Walker whilst she was represented by Fosters, and was served shortly afterwards. The third witness statement dated 8 February 2006 was prepared and served whilst Mrs Walker was represented by her current solicitors, Clapham & Collinge. Having received Mrs Walker’s third witness statement, the Claimants applied to introduce a witness statement from Mr Kings explaining the circumstances of the production of the first witness statement of Mrs Walker, and exhibiting attendance notes and the first witness statement of Mrs Walker itself, which it was said were inconsistent with Mrs Walker’s third statement. The introduction of that witness statement from Mr Kings was not opposed by either of the Defendants.

[27]In respect of Mr Walker’s claim that he discussed a dividend with her in March 2001, Mrs Walker says in paragraph 6 of her second witness statement, dated 11 May 2005, that Mr Walker never discussed a dividend with her nor did she consent to it. In the same paragraph, she also refers to an undated letter from Mr Walker which she received suggesting that unless she made a statement saying that she remembers discussing a dividend with him then the dividend would become invalid. But she says that she is not prepared to lie. All this is consistent with paragraph 5 of Mrs Walker’s first witness statement, which is in similar terms.

[28]Mrs Walker’s third witness of 8 February 2006 however is expressed more benignly. She says at paragraph 10 that she cannot expressly recall the discussion with Mr Walker in March 2001, but “it is entirely likely” that Mr Walker would have raised the matter of dividends with her, as he had done in the past. In cross-examination Mrs Walker reverted, it seemed to me, to a more definite position that no discussion had occurred.

[29]Mr Burden on behalf of the Claimants made a number of detailed submissions (partly at my invitation in order to assist Mr Walker as to the case he had to meet) as to what was required in order for there to have been a valid declaration of an interim or a final dividend of £190,000. It is sufficient to refer to four of Mr Burden’s submissions.

[30]First he submitted that I should find that there was no discussion at all between Mr and Mrs Walker in March 2001 relating to the £190,000 dividend, alternatively if their was any communication between them, it was insufficient to amount to a directors’ meeting or a shareholders’ meeting at which the declaration of a dividend was resolved upon. In relation to shareholders’ meetings he drew my attention to In reDuomatic

[1969] 1All ER 161

itself, and in particular to the passage at 168B to C in the judgment of Buckley J., for the proposition that before the assent of shareholders to a matter can be treated as a resolution of a general meeting it is necessary for the shareholders to have applied their minds to whether or not they should assent to the matter in question. He also referred me to the decision of Neuberger J. in EIC Services v Phipps

[2004] BCLC 589

and in particular to the passage in the judgment dealing with Duomatic starting at paragraph 121. Paragraph 135 of the judgment contains the following:

“Before the Duomatic principle can be satisfied, the shareholders who are to be said to have assented … must have the appropriate or “full” knowledge. If a shareholder is not even aware that his “assent” is being sought to the matter, let alone that the obtaining of his consent is at least a significant factor in relation to the matter, he cannot, in my view, have the necessary “full knowledge” to enable him to “assent”, quite apart from the fact that I do not think he can be said to “assent” to the matter if he is merely told of it.”

The decision of Neuberger J. in EIC was appealed in part, but the portion of the judgment dealing with Duomatic and in particular paragraph 135 are unaffected by the Court of Appeal’s decision.

[31]Secondly Mr Burden submitted that the requirements for the valid exercise of a Company’s power to pay dividends, and in particular the requirements of section 270 and the following sections of the Companies Act 1985, were mandatory and strict and were not be treated as technicalities whose non-observance could overcome by the application of the Duomatic principle: Bairstow v Queen’s Moat House

[2001] BCLC 531

. The £190,000 dividend purportedly declared was a dividend by reference to distributable profits available at the end of the year to 31 March 2006 and no accounts for that period had been prepared so as to comply with the requirements of section 270ff. of the Companies Act 1985.

[32]Thirdly Mr Burden said that the document of 27 March 2001 did not evidence any meeting of the board at all held on 27 May 2001. Mrs Walker had not been given any notice or opportunity to attend any meeting and none in truth occurred. In those circumstances Mr Walker’s signature of the document could not in itself create a meeting of the directors or constitute a valid resolution of the board.

[33]Fourthly Mr Burden said that in any event the Company’s Articles of Association (which were before me in the trial bundle) applied Article 89 of the Table A in the Companies (Tables A-F) Regulations 1985; and Article 89 provided that the quorum necessary for the transaction of business by the directors was two, unless the directors had fixed a different quorum. There was no evidence that any quorum other than two had been fixed by the directors. Accordingly, if the document of 27 March 2001 could be said to reflect any directors’ meeting at all, the meeting was inquorate and the purported resolution invalid.

[34]I do not accept that there was any discussion between Mr Walker and Mrs Walker relating to the declaration of the £190,000 dividend and I do not consider that Mr and Mrs Walker, either as directors or as shareholders, agreed to declare any such dividend. Mr Walker in cross-examination suggested, as I understood him, that the discussion which he claimed occurred was if anything more substantial that his witness statement evidence suggested, but I was un-persuaded either by what he said orally or by his written evidence on this topic. His evidence was that the document of 27 March 2001 was prepared after, and apparently in consequence of, the discussion which he said occurred with Mrs Walker. But the document does not record what he says occurred between himself and Mrs Walker at home; it records (or purports to record) a resolution of the board at a different time and in a different place at which only he was present. He was unable to explain to me satisfactorily why, if he thought that he and Mrs Walker had agreed, either as shareholders or directors, to the payment of a dividend, he signed a document which appeared to record something else. He told me that this is what he was told he should do by the Company’s accountants.

[35]I also accept Mr Burdens’ submissions in relation to the document of 27 March 2001. There was no suggestion from Mr Walker that he had given any notice to Mrs Walker of, or otherwise sought to convene with her, the meeting which the document purports to record. It was, in my view, simply a document which Mr Walker unilaterally caused to be prepared and signed. In any case, there was no suggestion from Mr or Mrs Walker that a quorum other than two had been fixed by them, and I do not consider that Mr Walker acting alone could validly pass a directors’ resolution.

[36]In my judgment therefore there was no valid declaration of a £190,000 dividend of any kind.

Wrongful preference and breach of duty

[37]Mr Burden submitted to me in summary that, in the event that I found that a dividend of £190,000 had been validly declared, then its declaration and/or its application against the £147,208.76 which would otherwise be repayable to the Company was, or would have been, a wrongful preference contrary to section 239 Insolvency Act 1986, because:-(1) In and after March 2001 the Company was unable to pay Customs the VAT it owed and was unable to pay its debts as they fell due; the period from the declaration of the dividend onwards was therefore a relevant time for the purposes of section 240 Insolvency Act 1986;

(2) The setting-off of the £147,208.76 against the dividend had the effect of putting Mr and Mrs Walker in a better position than they would otherwise have been in the event of winding up, since in the winding up the dividend entitlement and the obligation to repay the £147,208.76 would not be set off against each other under rule 4.90 of the Insolvency Rules 1986. I was referred to Manson v Smith

[1997] 2 BCLC 161

and Re a company (No 1641 of 2003)

[2004] BCLC 210

(3) The Company was presumed, unless the contrary was shown, to have been influenced by an intention to prefer under section 239(6) Insolvency Act 1986; and Mr and Mrs Walker could not show the contrary.

[38]Mr Burden further submitted that even if the declaration and/or its application against the £147,208.76 was not a wrongful preference, then, given that the Company was insolvent, it was in any case a breach of duty by Mr and Mrs Walker as directors of the Company; and he referred me to West Mercia v Dodd

[1988] BCLC 250

[39]It seems to me that the wrongful preference claim is not without its difficulties. But since the conclusion which I have reached is that there was no valid declaration of a dividend, the issues of wrongful preference and the alternative claim of breach of duty do not arise, and I do not propose to explore them. I do however record briefly two findings of fact which I make, since they were explored before me in the evidence.

[40]First I consider that in and from March 2001 onwards the Company was unable to pay its debts. Nothing was put forward which to my mind cast any doubt on the correctness of Customs’ assessments which had been notified to the Company in January 2001, and which were, as I have recorded, based on the Company’s own voluntary disclosure. Nor was anything put forward which cast any doubt on the correctness of the sums which Customs subsequently claimed to be due. Nothing was put forward which persuaded me that there was any reason why the Company did not pay Customs, other than it could not do so. Mr Walker accepted in cross-examination that at the time of the purported declaration of the dividend at the end of March 2001 the sums standing to the credit of the Company’s bank accounts were insufficient by some margin to pay the amount of Customs’ January assessments. It is significant to my mind that when asked during cross-examination how the assessments would have been paid if the Company had wanted to do so, he suggested (as he had suggested in paragraph 20 of his witness statement of 8 February 2005) that funds with which to do so would not have come not from the Company but from elsewhere. In fact no such funds were obtained and the debts were not paid.

[41]Secondly, Mr Walker in effect said that the timing and manner of the declaration of the dividend were not related to any difficulties of the Company (which he did not accept that the Company had in any event) but represented the declaration of a dividend at the year end in the same manner as had occurred in the past. I do not accept that. In my judgment Mr Walker caused the 27 March 2001 document to be prepared and he signed it at a time when he was aware the Company was unable to pay its debts and with a view to extinguishing the debt owed to the Company by himself and Mrs Walker.

The liability of Mr and Mrs Walker to repay the £147,208.76

[42]As I have mentioned at the beginning of this judgment, the claim against Mr and Mrs Walker to recover the £147,208.76 is advanced either on the grounds that the relevant payments were made in contravention of section 330 of the Companies Act 1985, or alternatively were misapplications of the Company’s funds in breach of duty. Mr Burden submitted that Mr and Mrs Walker should be made jointly and severally liable for the entirety of the £147,208.76 on the grounds that:(1) The sums in question had been paid out to or for the benefit of Mr and Mrs Walker in accordance with the practice which had prevailed throughout the Company’s trading history; in the past, sums so paid out were treated in the Company’s annual accounts as joint loans; and the sums making up the £147,208.76 were recorded in a single joint directors’ loan account in the Company’s books. The fact that they were so recorded should therefore lead to the conclusion that the Mr and Mrs Walker were jointly liable for the entirety of the £147,208.76.

(2) In the alternative, Mr and Mrs Walker should otherwise be treated as jointly and severally liable under section 341 Companies Act 1985 for the contravention of section 330 Companies Act 1985.

(3) In the further alternative Mr and Mrs Walker should both be treated as responsible for breaches of their duties as directors in the misapplication of the Company’s funds and should be held jointly and severally liable accordingly.

[43]As I have recorded, the argument proceeded before me on the common ground that, if the dividend was invalid, the appropriate remedy in principle was to order repayment of the £147,208.76 and no arguments were addressed to me that that remedy should be any different depending upon which of the Claimants’ 3 alternative grounds liability was established.

[44]Against that background I deal first with the question of Mr Walker’s liability and then with the question of Mrs Walker’s liability.

[45]So far as concerns Mr Walker, the evidence was that, with one exception, all of the payments made out of the Company’s funds to or for the benefit of Mr or Mrs Walker after 3 April 2000 were in fact made or arranged by Mr Walker. Under the terms of the Company’s bank mandate, cheques could be signed either by Mr Walker or Mrs Walker acting alone; and the payments made by Mr Walker were often made by his drawing and signing a cheque on the Company’s current account. Others were made by some form of bank transfer or Direct Debit which he arranged. Under Mr Walker’s supervision a record of the amount so paid was then made by Jane Edwards, who acted as the Company’s book-keeper. Most of the payments were posted to the directors’ loan account in the Company’s computerised Sage records, but not all of them were. Some for example appear to be recorded simply as entries in a manual cash book. The one relevant payment which was not made or arranged by Mr Walker was the £2,000 cheque, to which I refer to in paragraph 20 above, drawn by Mrs Walker whilst Mr Walker was in the Maldives.

[46]Subsection 341(2) Companies Act 1985, so far as material, provides that where an arrangement or transaction is made by a company for a director in contravention of section 330, that director and any other director of the company who authorised the transaction or arrangement is liable(a) to account to the company for any gain made; and

(b) jointly and severally with any other person to indemnify the company for any loss or damage resulting from the arrangement or transaction.

[47]Under subsection 341(5) Companies Act 1985, any such other director as is mentioned in subsection 341(2) is not liable if he shows that, at the time the arrangement or transaction was entered into, he did not know the relevant circumstances relating to the transaction.

[48]In paragraph 15 of his witness statement of 8 February 2005 Mr Walker takes the point that he does not accept that relevant payments made to third parties (as opposed to directly to himself or Mrs Walker) constitute unlawful loans contrary to section 330 Companies Act 1985. But it is unnecessary in my view to explore that point, because as against him the result is in my judgment the same whether the payments are treated as unlawful loans contrary to section 330 or misapplications of the Company’s money and thus a breach of duty by him. Putting on one side for the moment the £2,000 payment made by Mrs Walker, there can be no doubt in my judgment that he is liable in respect of all the other relevant payments which he made or arranged, insofar as they are to be treated as loans in contravention of section 330. For the purposes of subsection 341(2) Companies Act 1985, the payments were either arrangements or transactions for Mr Walker himself in which case he is liable accordingly; or they were arrangements or transactions for Mrs Walker, in which case it is clear that he authorised them. Subsection 341(5) Companies Act 1985 cannot apply on the facts. Insofar as the relevant payments are not properly to be regarded as loans in contravention of section 330, then it is plain that they were misapplications by Mr Walker of the Company’s money.

[49]In relation to the £2,000 cheque written by Mrs Walker, there is no evidence that Mr Walker knew in advance that she was going to draw the cheque. It is clear however that he became aware of it subsequently, and Mrs Walker told me that he was not happy with what she had done and regarded her as having stolen the money. But there was no suggestion that Mr Walker tried to get it back and it appears to have been entered in the Company’s accounting records in the same way as other payments were. It is not clear whether that £2,000 is included in the agreed figure of £147,208.76; but it seems to me that it does not matter whether it is or not. It appears that the relevant payment of £2,000 may have been entered into the Company’s records as a dividend payment to Mrs Walker to be set off against her share of the outstanding dividend balance due from the Company as at 31 March 2000 of £51,902; and if that is right it cannot form part of the agreed £147,208.76. If it does form part of the £147,208.76 that can only be because it was treated as a loan to Mrs Walker, and that must have been a treatment adopted by Mr Walker. Mr Walker’s so treating the payment is, it seems to me, in itself either an arrangement or transaction authorised by him within subsection 341(2) Companies Act 1985 or a misapplication of the Company’s property.

[50]In those circumstances I cannot accede to Mr Walker’s submission that if he is to be liable to the Claimants at all, then that liability should exclude sums which were paid to or for the benefit of Mrs Walker; and I find Mr Walker liable to the Company for the £147,208.76.

[51]So far as concerns Mrs Walker, it was not suggested by Mr Burden that she was aware of each of the individual payments in question which Mr Walker made or arranged after 3 April 2000. Nor was it suggested by Mr Burden that she was aware of, still less that she assented to, the way in which each of those payments was treated in the management accounts of the Company. In those circumstances in seeking to make Mrs Walker liable, as Mr Burden does, for the entirety of the £147,208.76, including for sums paid to or for the benefit of Mr Walker, two questions arise. Firstly whether, and if so how, for the purposes of subsection 341(2) Companies Act 1985 it can be said that Mrs Walker so authorised one or more arrangements or transactions such that she is liable even for those sums paid to or for the benefit of Mr Walker rather than herself. Secondly, insofar as the payments to or for the benefit of Mr Walker are not properly to be regarded as loans in contravention of section 330, whether and if so how she is liable for breach of her duty as a director for the misapplication of the Company’s money.

[52]The first of those questions was considered by the Court of Appeal in Neville v Kirkorian

[2006] EWHC Civ 943

. The judgment is dated 4 July 2006 and I was referred to it by Mr Walker late in the hearing. I gave the other parties liberty to lodge written submissions following the hearing, but they chose not to do so.

[53]In Neville v Kirkorian, Mr Avo Krikorian appealed against summary judgment which had been entered against him by the judge not only in respect of his own loan account which had been operated in breach of section 330 of the Companies Act 1985, but also in respect of the loan account, also operated in breach of section 330, of his fellow director, his son Krikor. The judge had held that Avo should be jointly and severally liable with Krikor in respect of Krikor’s loan account. It was not established that Avo knew the detail of the operation of Krikor’s loan account or of the individual transactions in relation to it; and the question was whether the judge was right therefore to hold Avo liable for Krikor’s loan account. The judgment of Chadwick LJ., with whom Dyson LJ. and Sir Martin Nourse agreed, contains the following passage at paragraphs 49 and 50:

“49. The complaint in paragraph 4.1 of the originating application …goes beyond a complaint that individual payments were made to directors by way of loan. Properly understood it is a complaint that the Krikorians allowed a practice to arise and continue under which lending by the company to the directors was treated as acceptable. And, to my mind, it can properly be said that a director who knowingly allows a practice to continue under which lending by the company to his co-director is treated as acceptable has authorised the individual payments which are made in accordance with that practice, notwithstanding that he did not have actual knowledge of each individual payment at the time that it was made. “50. I would accept that it has not been established … that Avo Krikorian had actual knowledge of each individual payment made to his son at the time that the payment was made … But, as it seems to me, there can be no doubt that … Avo Krikorian did know of the practice, that he took no steps to bring it to an end, and (in particular) that he took no steps to cause the company to call in the outstanding loan. In that context it is relevant to have in mind (i) that the loans were described in the accounts as repayable on demand (and there is no reason to think they were not); and (ii) that Avo Krikorian controlled the company.”

[54]The way in which the Claimants put their claim against Mr and Mrs Walker, which emphasised the practice of payments being made over the years to or for the benefit of the Defendants, is wide enough to admit a claim against Mrs Walker made on the basis of her having knowingly allowed that practice to continue.

[55]In relation to the second question which I identify in paragraph 51 above, I was referred to paragraph 15[18] of Gore Brown on Companies which contains the following passage “…a director will be liable if he has failed to supervise the activities of a guilty director or officer in circumstances in which his duty of care … placed him under an obligation to do so, or where with knowledge he has participated to some degree in, or has given his sanction to, the conduct which constitutes the breach of duty.” I was referred to Joint Stock Discount v Brown (1869) LR 8 Eq 381, of which the most relevant passage in the judgment of the Vice-Chancellor appears to be that contained in the first paragraph starting on page 403. Mr Maxwell Lewis on behalf of Mrs Walker also emphasised to me by reference in particular to footnote 11 of paragraph 15[18] of Gore-Brown that even if a breach of duty by Mrs Walker were found, it was still necessary to find a causal connection between that breach and the loss for which it was sought to make her liable.

[56]Mr Maxwell Lewis urged me that Mrs Walker had very little involvement in the Company’s affairs, the running of the Company was a matter for Mr Walker, and she deferred to his decisions in relation it. I accept that was so. He drew my attention to the disqualification questionnaire completed by Mrs Walker. In that questionnaire she was asked what office she held in relation to the Company and what were her principal duties; and she replied “Did not hold office. I stayed home, with children and entertained the business people.” Mr Maxwell Lewis submitted that answer was plainly true. It may be that Mrs Walker misunderstood the meaning of “office” but I do not accept that she was not an officer of the Company; but I accept that the principal part of her time was spent at home with the children.

[57]Mr Maxwell Lewis urged me that Mrs Walker had no relevant knowledge such that she should be liable to the Claimants, as they claim, for the whole of the £147,208.76. Moreover he said, it was wholly unrealistic for someone in Mrs Walker’s position to have been expected to exert any control over Mr Walker or seek to prevent what he was doing. Given her knowledge and her position she could do nothing but be acquiescent.

[58]I do not accept, however, that Mrs Walker was as ignorant of matters as Mr Maxwell Lewis submitted or parts of her evidence tended to suggest. Thus for example:(1) She accepted under cross-examination that she was aware that Company moneys were being used to fund the life-style of herself and Mr Walker. In my judgment it was clear to her that that life-style was not simply funded by the random lump sums which she received for housekeeping.

(2) She accepted in cross-examination that she knew that those lump sums she received from Mr Walker to pay household expenses were drawn on the company’s account.

(3) Although in parts of her evidence she denied being consulted about or even knowing about dividend declarations, she accepted under cross-examination, and I find, that she knew about the £650,000 dividend declaration.

(4) She also accepted under cross-examination that she met with KPMG together with Mr Walker to discuss the tax investigation and that at that meeting it was explained to her why additional tax had become due. In my judgment Mrs Walker was aware of the practice which had obtained throughout the trading history of the Company of moneys being paid out to or for the benefit of herself and Mr Walker, and that much of it was being applied to fund their joint life-style. For so long as the relationship lasted she was in my judgment content for that to occur. Although she says in paragraph 10 of her witness statement dated 11 May 2005 (in relation to house-keeping lump sum payments to her) that if the money had come from the Company “I would have thought” Mr Walker “would have complied with any legal requirements to ensure that payment was properly made”, Mrs Walker did not in my judgment apply her mind at all to the question of whether there was any justification either for the payments which she was receiving or which she was aware were otherwise being paid.

[59]I do not find that Mrs Walker knew that the relevant payments from 3 April 2000 were being posted to a loan account being operated by Mr Walker; nor that she knew of all the payments being made; but I find she knew that payments to or for the benefit herself and Mr Walker were being made in as they had been made in the past; and if she had applied her mind at all to the question what payments were being made whether there was any justification for them, as it seems to me it was her obligation to do, she could and would have discovered immediately that there was no justification. It does not seem to me that, given what she knew, she should be able to escape liability simply because she did not address her mind to that question or to the general question whether there was any justification for the practice which had obtained throughout the trading history of the Company of moneys being paid out to or for the benefit of herself and Mr Walker.

[60]If Mrs Walker had applied herself to the matter and had wished to do so, she was in a position in a real sense to have prevented what was occurring. I would not have accepted a submission, if made, that one of two directors who is also a 50% shareholder, is unable to take steps against the other director and 50% shareholder for breaches of section 330 or misapplication of company money. Nor do I accept that Mrs Walker herself could not in practice have opposed Mr Walker. The impression she gave me was that she was a capable person of some character, and quite up to opposing Mr Walker’s will if she had wished and felt that she should do so; and I do not consider that any such opposition would have been ineffective and overborne by Mr Walker. I bear in mind in that connection that after the relationship with Mr Walker broke down, she commenced proceedings against him to establish her entitlement to a proportion of Manor Ridge, the home they had shared; to an apparently quite valuable Mercedes SL motor car; and to other assets.

[61]In my judgment therefore by allowing to continue without demur the practice which had obtained throughout the trading history of the Company of moneys being paid out to or for the benefit of herself and Mr Walker, she was authorising it as an arrangement or transaction for the purposes of subsection 341(2). In my judgment she was also sufficiently participating in or giving her sanction to the practice and the payments which occurred after 3 April 2000, alternatively sufficiently failing in her duty of care, that she is liable for breach of her duty as a director.

[62]Accordingly I find Mr and Mrs Walker jointly and severally liable to the Claimants for £147,208.76.

The Westfield £40,000

[63]Mr Burden on behalf of the Claimants submitted to me that, in the event that the £190,000 dividend was invalid, I should find Mr and Mrs Walker liable in respect of the Westfield £40,000 on the grounds, as I understood him, either(a) that the £40,000 in question was a further advance to one or both of them or

(b) that it was in substance a further payment made in breach of fiduciary duty. He did not say that the £40,000 should in some way be treated as added to the directors’ loan account, but he submitted that the consequence of the dividend being invalid was that the debt owed by Westfield had been cancelled to the extent of £40,000 when it should not have been; and, he said, it was not possible to pursue Westfield for the money.

[64]By the relevant part of the “directors’ resolution” in the document of 27 March 2001 signed by Mr Walker, as I interpret it, Mr Walker was providing that £40,000 from his half share of the £190,000 dividend which he had purportedly declared should be applied in extinguishing pro tanto Westfield’s debt to the Company. Beyond that there was no further advance or payment. The dividend being invalid, as I have held, Westfield’s debt to the Company does not fall to be reduced as Mr Walker had intended.

[65]It is difficult to see on what basis Mrs Walker could be said to have any liability at all. But even as against Mr Walker any claim that he should be personally liable for this further £40,000 is in truth quite a different a case which seeks to fix him with responsibility for the apparent irrecoverability of £40,000 of the debt owed by Westfield, based upon his application of £40,000 from the purported £190,000 dividend towards the discharge of Westfield’s debt. It is certainly not clear that there is any connection between the two; but not merely is the evidence lacking on the point, no such case has ever been advanced in these proceedings against Mr (or Mrs) Walker. Accordingly I reject the claim against both of them.

Section 727 Companies Act 1985

[66]Section 727(1) Companies Act 1985 provides so far as material as follows:- “If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company … it appear to the court hearing the case that that officer … is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including the circumstances of his appointment) he ought fairly to be excused … that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.”

[67]Mr Maxwell Lewis submitted that, insofar as I found that Mrs Walker had any liability to the Company, she should be relieved of that liability pursuant to the sub-section. It was not suggested to me in argument that section 727 is not available to relieve against a breach of section 330 or other breach of duty such as I have found, and I proceed on the assumption that it is.

[68]It is clear that under the subsection three discrete requirements need to be satisfied, and that the onus is on the director seeking relief to satisfy them, namely:(1) that he acted honestly;

(2) that he acted reasonably; and

(3) that having regard to all the circumstances of the case he ought fairly to be excused. There is no suggestion that Mrs Walker was dishonest; and that requirement is plainly satisfied. The question is whether the other two are satisfied, and I am not persuaded that they are.

[69]Mr Maxwell Lewis urged on me that Mrs Walker acted reasonably and in all the circumstances ought fairly to be excused because she was not in any position of knowledge such as should have compelled her to do anything but be acquiescent to the payments which occurred; she did nothing wrong; and in particular did not do anything to damage or defeat the interests of creditors. On the findings which I have made I do not consider that Mrs Walker acted reasonably for the purposes of section 727(1). It may be that by referring to Mrs Walker’s position of knowledge it was intended to submit that Mrs Walker acted reasonably and ought fairly to be excused because her allowing the payments to occur was attributable to ignorance of her duties as a director and/or ignorance that such payments could involve a contravention of section 330 Companies Act 1985 or a misapplication of company funds. I would not accept any such submission.

[70]In any event I do not consider that Mrs Walker ought fairly to be excused under the subsection when the effect of doing so would operate to the prejudice of the Company’s creditors, in that I would be relieving Mrs Walker from a liability to repay money to the Company at their expense.

[71]Mr Walker also asked me to consider relieving him from liability under section 727(1). Again no suggestion of dishonesty has been made against Mr Walker. But on the findings I have made I cannot accept that in doing what he did, Mr Walker acted reasonably. Nor do I think in all the circumstances that it would be fair to excuse him from the liability I have found, when, as in the case of Mrs Walker, to do so would operate to the prejudice and at the expense of the Company’s creditors.

[72]Accordingly, subject to hearing the parties on the form of the Order, I propose to order Mr and Mrs Walker jointly and severally to repay the sum of £147,208.76.

The contribution claims

[73]By the terms of his Part 20 Claim Mr Walker sought contribution from Mrs Walker in respect of any liability which he might be found to have to the Claimants referable to sums which were paid either to or for the benefit of Mrs Walker, or for their joint benefit. At the beginning of the hearing before me, Mr Walker indicated that he would not in fact seek any contribution from Mrs Walker in the event that I found him liable to the Claimants. However by the end of the hearing, perhaps because of the way in which Mrs Walker was putting her contribution claim, Mr Walker told me that he was seeking 100% contribution from Mrs Walker in respect of all and any liability which he might be found to have to the Claimants.

[74]By the terms of her Part 20 Claim, Mrs Walker seeks contribution from Mr Walker for any liability which she was found to have to the Claimants other than in respect of funds which were used for her benefit. During the hearing however Mr Maxwell Lewis was more ambitious. He submitted that Mr Walker should make a 100% contribution, or indemnify Mrs Walker, in respect of any liability for which she was found liable, without reference to any question of who had benefited from the payments in question.

[75]The basis upon which Mr Maxwell Lewis sought that 100% contribution or indemnity was succinctly put by him as being that Mr Walker had got Mrs Walker into it, and so he should get her out of it. But even if I had accepted (which I do not) that Mr Walker should, as between himself and Mrs Walker, be regarded as bearing sole causative responsibility for the liability which I have found them to owe, causative responsibility is only one, albeit important, factor in determining what contribution it is just and equitable to order. And in the circumstances of this case I cannot see that it is right to order Mr Walker to indemnify Mrs Walker for liability even in respect of payments from which she, and it may be she alone, has benefited. Nor by the same token does it seem to me that I should order Mrs Walker wholly to indemnify Mr Walker in respect of payments from which he has benefited.

[76]Having rejected each of Mr and Mrs Walker’s submissions that they should receive 100% contribution from the other, it remains to consider the terms of their contribution claims as pleaded. These, as I have understood them, were intended to bring about a result whereby, as between Mr and Mrs Walker, any liability to the Claimants should be borne in the proportions in which each of them respectively had the benefit of the payments concerned. Whether or not that was the intention, I am minded, subject to what I say below, to order contribution between them on that basis.

[77]The evidence before me at the hearing did not enable a view to be formed as to the proportion of the £147,208.76 of which each of Mr and Mrs Walker had the benefit. This was in particular because, as I have mentioned, the composition of that £147,208.76 is not clear, and because the consequences for contribution purposes of the agreement of that sum have not been worked through. In those circumstances Mr and Mrs Walker agreed that, if I decided each of them had a liability to the Claimants and if I was not prepared to order 100% contribution in favour of one of them against the other, I should give an indication of the basis upon which I was minded to order contribution and should leave for short further argument, and if necessary evidence, the question of the basis of the apportionment of the liability to the Claimants as between them.

[78]Accordingly, although I will hear from Mr and Mrs Walker, I propose giving strictly limited directions for the purpose of the matter returning to me quickly for the determination of that question, in the event that it cannot be agreed in the meantime.