Idessa (UK) Ltd, Re

This is the trial of an action brought by Ordinary Application (originally dated 19 November 2009 and first amended pursuant to an order of the Court dated 11 August 2010) by the First Applicant Colin Thomas Burke (“Mr Burke”) of Milner Boardman & Partners, in his capacity as liquidator of Idessa (UK) Limited (In Liquidation) (“the Company”) and on behalf of the Company. A further application was made to me in the course of the trial to re-amend the Ordinary Application which I permitted for the reasons set out in my extempore judgment given during the course of the trial.

The Applicants seek relief against Dr John Morrison (“Dr Morrison”) (who is alleged to have been a de facto director of the Company) and Christopher Michael Povey (“Mr Povey”), who was a statutory director of the Company between 27 April 2003 and 3 September 2007.

Specifically, the Applicants claim relief under three broad heads of claim.

I heard evidence over four days from Mr Burke on behalf of the Applicants and from Dr Morrison and Mr Povey. After a week’s adjournment Mr Aslett and Mr Povey (on his own behalf and, with my permission, on behalf of Dr Morrison) made submissions in writing and orally on the fifth day of the trial. Although he was, at times, by his own admission, unfamiliar with the rules of procedure, Mr Povey presented his arguments and submissions clearly, succinctly and generally in a courteous and measured manner. He and I were greatly assisted by Mr Aslett who afforded to the Respondents all the assistance he could in what was, by any standards, a difficult case for them to deal with in person.

The Company is a private company limited by shares which was incorporated on 31 October 2002 under registration number 04578172. On 12 November 2007 the Company was compulsorily wound up by this Court following a petition which had been presented by Digital Vision Technologies Limited on 1 October 2007. On 30 November 2007, the First Applicant was appointed as liquidator of the Company at the instigation of the Official Receiver. The date of handover from the Official Receiver to Mr Burke was 6 December 2007.

Immediately prior to liquidation, the Company’s registered office was at 609 Stretford Road, Old Trafford, Manchester M16 0QA which was also its trading premises. The Company was engaged in the development and implementation of electronic tools used in electoral registration, election management and e-democracy including for the use of e-voting and e-counting. According to one version of a business plan which I saw for the Company (produced sometime in or prior to 2006) the Company was formed by four entrepreneurs (including Dr Morrison and Mr Povey) with previous background in property investment and IT expertise. Dr Morrison is described there as being “instrumental in designing and providing guidance for many of the new products and services” and Mr Povey as being “instrumental in the negotiations of many contracts and financial management for the company”.

The share capital of the Company is £1,000 divided into 1000 shares of £1 each. Christopher Rankilor Humphrey (“Mr Humphrey”) held 3 of the issued shares amounting to 33% of the issued share capital and he was a statutory director from 27^th April 2003 until liquidation. James Hill (“Mr Hill”), a solicitor with a firm known as Hill Jones held a further 3 issued shares and Mr Povey held the other 3 issued shares. Mr Hill served as Company Secretary between 27 April 2003 and 24 November 2006. Dr Morrison was not a shareholder although it seems that it was at one time contemplated that he would become a director and shareholder. Although the plans went so far as the production of a draft Shareholders’ Agreement dated 21 July 2003 which provided that Dr Morrison and Mr Hill would each own 20% of the shares and Mr Humphrey and Mr Povey would each own 30% of the shares, the draft was never executed.

There is no Statement of Affairs or Directors’ Report for the Company. However, according to a List of Creditors (probably prepared by David Leonard Dunn (“Mr Dunn”) who took over from Mr Hill and was the Company Secretary at the time of liquidation) the Company had debtors of £491,098.90 and trade creditors of £153,079.48. Aside from Mr Povey and Dr Morrison, who together were claimed to owe the Company £53,239.94, the only trade debtor was a company incorporated in the United States of America and based in Frisco, Texas called Advanced Voting Solutions (“AVS”) which is said to have owed the Company £437,858.96. Unpaid staff are shown as being owed £79,557.70. The largest creditor by far was Mr Humphrey who is shown to be owed £658,640.93 personally as a “long term” creditor on what is described as a loan account. The other long term creditors are Stanley Property Investments Limited; Whitelee Limited; Ascenture Properties Limited and Democracy Systems Limited (all companies controlled and/or connected with Mr Humphrey) and whose claims together with that of Mr Humphrey total £1,203,850.31.

According to its abbreviated financial statements for the period ended 31 October 2003 and the years ending 31 October 2004 and 31 October 2005 the Company was at all times balance sheet insolvent. Although those accounts are at times difficult to understand (principally but not exclusively because of errors in showing positive and negative balances and omissions) the Company had net liabilities of £97,606 in the period to 31 October 2003; £731,148 as at 31 October 2004 and £435,785 as at 31 October 2005. In each of the years to 31 October 2004 and 31 October 2005, John Spibey Associates, the Company’s accountants reported to the members that the accumulated losses of the Company resulted in an insolvent balance sheet and that the Company was dependent on the continuing support of its directors who had lent money to the Company and who had confirmed they would continue to support the Company with their loans during the foreseeable future.

The 2003 and 2004 accounts were signed by Mr Povey on behalf of the Board on or about 26 August 2004 in the case of the 2003 accounts and on or about 27 July 2005 in the case of the 2004 accounts.

Although Mr Povey sought to argue to the contrary it is clear, and I so find, that the Company was at all times balance sheet insolvent. Although Mr Povey urged me to find that the Company was at all times solvent (having regard to the continued support of its investors namely Mr Humphrey and Mr Hill and/or the companies or entities they represented for this purpose and the existence of certain other assets) I am unable to do so.

First, I am satisfied that the balance sheets in the abbreviated accounts take account of the various investments. So, for example, in the accounts for the period to 31 October 2003, the balance sheet as at that date shows £52,000 as an amount falling due after more than one year. This figure tallies precisely with the amounts paid into the Company’s HSBC bank account number 21421034 (“the HSBC Account”) by way of investment during this period (comprising two payments of £5,000 by Hill Jones on 7 October 2003 and 17 October 2003; a further payment in of £20,000 by Hill Jones on 29 October 2003; a payment from an unspecified party of £5,000 on 8 October 2003 and a payment by Stanley Property of £17,000 on 14 October 2003). Similarly, the balance sheet in the financial statement for the year to 31 October 2004 reflects investments shown in the bank statements as at that date of £648,338.

Secondly, it seems to me that Mr Povey’s evidence in this regard was directed rather to what is often termed liquidity or commercial insolvency rather than balance sheet solvency.

Thirdly, whilst I heard and saw some evidence about certain intellectual property rights and licences which Mr Povey urged were very valuable and should be taken into account when considering the solvency of the Company I am unable to accept that submission. The written evidence (which was produced by Mr Burke only in the course of the trial and exhibited to his third witness statement dated 27 January 2011) consisted of a purported assignment of certain intellectual property rights made between Mr Povey, Mr Humphrey and Dr Morrison as Assignors and Idessa International Limited (“Idessa International”) as Assignee dated 30 July 2003; an Intellectual Property Licencing Agreement purportedly made between Idessa International as Licensor and the Company as Licensee dated 30 July 2003 and a Notice of Cancellation of the Intellectual Property Licensing Agreement dated 10 April 2007. Mr Povey told me that Idessa International was incorporated on 10 June 2003 but remained at all times dormant and that in July 2003 several of the software products identified in the schedules to the assignment and licence agreement did not even exist. The provenance and authenticity of these documents was squarely challenged by Mr Povey. He denied that they were genuine documents and said that his signature on them was a forgery. Moreover he denied that the signature on the relevant Form 288a appointment of him as a director of Idessa International on 16 July 2007 was his signature. I have considerable doubts about the reliability of this evidence but it seems to me that it is unnecessary for me to decide whether the documents are genuine or not and without forensic or other expert evidence it would be unwise for me to do so especially as Mr Burke as liquidator has indicated his intention to make further inquiries in the light of the evidence given on the point by Mr Povey. Of more significant weight to my mind is the complete absence in the Company’s abbreviated accounts (for any of the three years for which they were produced) of any reference to valuable intellectual property or other intangible assets. I therefore reject the submission that the Company ought to be treated as solvent on a balance sheet basis by reference to those other alleged assets.

It is necessary for me also to say something about various other companies about which I have heard evidence. I have already referred to Idessa International which was dissolved on 24 February 2010. Consilia (UK) Limited (“Consilia”) operated from the Company’s premises in Old Trafford and, according to Mr Povey’s oral evidence, from time to time the Company provided offices, infrastructure, resources and personnel where required to Consilia and vice versa. The directors of Consilia at this time included Dr Morrison who had become a director on 8 December 1997. According to the evidence of the First Applicant (which was not challenged on this point) in 2002 the directors of Consilia were looking for investment and Mr Humphrey was introduced as a potential investor. He brought with him Mr Povey who became Consilia’s Company Secretary on 22 January 2002 and a director on 26 April 2002. Consilia subsequently went into liquidation and Dr Morrison and Mr Povey were later disqualified (according to them in their absence) from acting as directors pursuant to section 6 of the Company Directors’ Disqualification Act 1986 for a period of 4.5 years by reference to their conduct in Consilia.

Democracy Systems Inc (“Democracy Systems”) was incorporated in Delaware, USA for the purpose of lead generation and sales in that country. It is not clear to me from the evidence whether this is the same company referred to as Democracy Systems Limited in the schedule of creditors prepared by Mr Dunn at liquidation but nothing turns on the point. Mr Povey and Dr Morrison were officers and shareholders together with John McLauren, Mike Brown, Mr Humphrey (and possibly Mr Hill and Mr Dunn). Idessa Management LLC (“Idessa Management”)was a company incorporated in Dallas, Texas, USA. Mr Povey told me that he was an officer together with Dr Morrison, Mr Humphrey, Mr Hill, Mr Dunn and a financial and tax lawyer based in the USA known as Brad Bolinger (“Mr Bolinger”). The shares in Idessa Management were owned as to 90% by Idessa Management LLP (“Idessa LLP”) and 10% by its officers.

Idessa LLP appears to have existed only to hold the shares in Idessa Management. The establishment of Idessa LLP, Idessa Management and Democracy Systems appears to have been the brainchild of Mr Bolinger. I observe at this stage that I was provided with no documentary evidence and little or no other explanation in relation to the establishment of these USA entities or their purpose and the material in the previous paragraph was all based on what I was told by Mr Povey.

However, their establishment prompted a change because on 14 December 2004, Mr Povey sent an e-mail to Liz Spicer (an accountant or accounts clerk employed by the Company) (“Ms Spicer”) which instructed her as follows:

“We spoke on Friday and I promised to confirm the salary alterations effective this pay packet with you….

With regards to John and myself:

Effective this month, can you stop paying our salaries from Consilia and Idessa. Instead, send both gross amounts to the Idessa LLC/Management bank account (Our Hibernia account). Then both gross amounts in dollars to be wired to our personal accounts here in the UK. The US CPA will probably need to know so that she can record our payments from Idessa Management as “Owner Distributions”. Doesn’t really matter what you record the funds as going out of Consilia and Idessa UK for services provided [by] Idessa Management as there is no VAT etc. As of January both John and myself will have Federal tax numbers. At this point we will apportion about $2,000 each of our payments as salary through Idessa LLC and pay a small amount of tax, but only on the $2,000.”

Mr Burke’s evidence (which was not challenged on the point and which was in any event supported by various contemporaneous e-mails) was that the reference to CPA is to a US service provider which dealt with the US corporations’ administration, payroll and accountancy needs.

Idessa Management held a bank account with the Hibernia National Bank with account number 3620044597 (“the Hibernia Account”). There is evidence of substantial activity on the Hibernia Account during 2004, 2005 and 2006.

It is necessary for me to make some general observations about the witnesses. Mr Burke as liquidator did what he could to assist the court and gave his evidence clearly and in a measured and generally dispassionate manner. He did so in the face of robust questioning from Mr Povey on behalf of the Respondents. I am satisfied, despite the challenges made to his integrity, that Mr Burke was telling me the truth. However, his position as an office holder accustomed to delegating day to day matters to one or more others within his staff meant that he was remote from some of the detail and, in particular, at times appeared to lack a complete grasp of the factual position and the precise sources of information relied upon. By way of example, he had to correct his earlier evidence in order to make clear that he had obtained documents from three sources not two as he had originally stated. Further, there were times when it seemed to me that Mr Burke provided the Court (and so the Respondents) with the minimum which it was perceived on his part was required in order to make out his case when the Court would have benefited from fuller explanations. For example, as will become clear later in my judgment, despite making the serious allegation that there was a fraudulent scheme in place whereby Dr Morrison and Mr Povey were defrauding HMRC, the so-called tax claim was supported only by a proof of debt by HMRC and Mr Burke provided no further particulars of the alleged fraud.

Save where his evidence is consistent with reliable contemporaneous documents (which for the reasons set out below may be far from complete), other credible evidence or the inherent likelihood of the situation I am unable to find that Mr Povey was a satisfactory or reliable witness. Much of his evidence was given defensively or conditionally or equivocally (for example, his refusal to confirm or deny whether certain credit cards and transactions were his). Save in respect of certain core allegations (for example whether the AVS Contract was made with the Company or Idessa Management when his answers had the appearance of a rehearsed or practised stance) he was prone to answering questions with questions or speculation not answers. His evidence was also characterised by long pauses on things he might be expected to remember (for example when he purchased his house) when, so it seemed to me, he was unwilling to commit to an answer before considering the implications of that answer. He overplayed the lack of contemporaneous documents (for example, in relation to certain of the expense claims where, given that the receipts were in court, he might be expected to remember in broad terms what they were for). In other respects, his evidence was in my view simply fanciful (for example, his explanation that what was clearly a receipt for groceries from Sainsbury’s was for food to be cooked by members of staff working late). When presented with documents (for example the transaction receipts from the Hibernia Account which identified the Company under “additional information”) he refused to accept as a possible inference (let alone the most probable one) that the note was to indicate that the payment was for the benefit of the Company. When presented with a series of documents (at C1/545 to 546, C1/552 and C1/625) which purported to be from the Company but showing Idessa Management’s address in Frisco, Texas he denied that they were Company documents and was forced to say they were “a mish mash of nonsense”. He told me that an Idessa Contractor Agreement expressed to be made between Idessa UK Ltd (but with the Texan address) and Novedea Systems Inc. (a company based in Richardson, Texas) must be a mistake and he had no idea why the US address was used for the Company. For all these reasons, I find myself unable to take Mr Povey’s oral evidence at face value and I approach his evidence with considerable caution including in relation to the provenance and authenticity of documents.

Dr Morrison was a more satisfactory witness but for different reasons I find myself unable to accept his evidence as entirely reliable save where it is corroborated by reliable contemporaneous documents, other credible evidence or the inherent likelihood of the events he described. Dr Morrison suffers from ill health. On the Friday prior to the commencement of the trial he applied to adjourn the trial on that basis but his application was refused by His Honour Judge Pelling QC. As it was, Dr Morrison was able to give his evidence clearly and without incident although it is fair to observe that he appeared to find the experience of the trial gruelling. On several issues, I consider Dr Morrison was telling the truth. Unlike Mr Povey (who had said his signature on the relevant form was a forgery), Dr Morrison did not seek to deny his involvement in Idessa International and when asked about the relevant Form 288a said, fairly, that whilst he could not remember the document, it looked like his signature. When presented with the relevant documents, he did not deny having had two Company bank cards. I also have no doubt having heard his evidence that his principal interest was in product design and development and that he was the primary inventor and innovator within the Company. He accepted that he was involved in the promotion of the Company. However, Dr Morrison’s evidence followed that of Mr Povey and, on significant points (for example his role in relation to internet banking and on the payment of $50,000 to AVS), I consider that he allowed himself to be drawn into corroborating Mr Povey in a manner which was simply not true. On the core question of his role in the Company, it seemed to me that his evidence too had a practised quality as if he had learned the words almost by rote.

In his written and oral submissions, Mr Aslett has urged upon me the importance of the burden of proof in cases of this type. He accepts that the starting point is the principle that he who asserts a wrong must prove it and so, subject to one exception (which is the legal burden under section 214(3) of the 1986 Act), he submits that the legal burden rests with the Applicants. However, the Respondents as directors (de jure in the case of Mr Povey and, as he submits, de facto in the case of Dr Morrison) are in the position whereby they owe fiduciary duties to the Company and if there is a transaction which calls for an explanation (because it cannot readily be explained or accounted for by the documents or the ordinary motives of people in their position) that, he submits, is sufficient, in the absence of immediate and satisfactory evidence to the contrary, to discharge that burden of proof. Absent any satisfactory explanation, he invites the Court to infer that the transaction can only be one in breach of duty. Put another way, the evidential burden is on the Respondents to adduce evidence to counteract the inference which would otherwise arise.

I was referred in support of these propositions to a number of authorities. In Murad v Al-Saraj [2005] EWCA Civ 959 Arden LJ at [77] referred to the principle that “for policy reasons, on the taking of an account, the court lays the burden on the defaulting fiduciary to show that the profit is not one for which he should account …The shifting of the onus of proof is consistent with the deterrent nature of the fiduciary’s liability. The liability of the fiduciary becomes the default rule”. This is not controversial but her Ladyship was there dealing with an order for an account following a finding that the respondent had acted in breach of fiduciary duty. She was not dealing with the burden of proving the breach itself.

Re Barton Manufacturing Ltd [1999] 1 BCLC 740 concerned a claim for reversal of a transaction at an undervalue and misfeasance. Harman J (at 743) observed (drawing on the decision of Jacob J in the New South Wales court in Re International Vending Machines Pty Ltd (1963) 80 WN (NSW) 465) that “the person alleged to have made the disposition (the misfeasant payment) should justify it, and therefore the onus would lie on the recipients of the moneys in these cases so far as concerns the directors”. But these comments in Barton concerned the specific defence under s.238(5) of the 1986 Act where it is clear that the burden is on those resisting an order to establish the statutory defence, by showing that the company which entered the transaction did so in good faith for the purpose of carrying on its business and that at the time there were reasonable grounds for believing that the transaction would benefit the company.

In Re International Vending Machines itself the court was invited in the exercise of its discretion under what was then s.308 Companies Act 1936 (as amended) to have regard to the conduct of the directors in question, with a view to their absolution or a reduction in liability. Jacobs J. at 1421 to 1422 notes that a director who seeks to invoke the discretion of the court must “justify by proof of their conduct in the matter” because otherwise there would be a massive burden on a liquidator. As in Barton, this was concerned with establishing a specific defence, albeit one which depended on the discretion of the court and which is now embraced by s.1157 of the Companies Act 2006.

I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate that Mr Aslett is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for Mr Aslett to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes.

It is then necessary to say something about the Company’s books and records because the Respondents submit, in effect, that they are unable to discharge the evidential burden because of the absence of relevant books and records and, in particular, SAGE accounting records, a SAGE payroll system, management accounts, minutes of meetings and a volume of e-mail traffic. The Respondents sought to go further and to blame the liquidator for failing properly to investigate or, presumably, recover those books and records from Mr Humphrey or the Official Receiver.

On this Mr Burke’s final position in evidence was that there were three sources of books and records: (1) the documents handed over to him by the Official Receiver; (2) documents supplied by HMRC and (3) documents at the Company’s premises which he or his staff attended with Mr Humphrey and Mr Dunn. I accept this evidence.

It does seem to me that contrary to the submission made on behalf of the Applicants, it is likely that some form of SAGE accountancy system did at one time exist. The Respondents produced a SAGE brochure and cheque stubs dated 5 December 2003 and 12 December 2004 payable to SAGE. In her e-mail to Mr Povey dated 16 September 2004 Ms Spicer refers to “Sage accounts and payroll” being put onto a new laptop and although the relevant laptop appears to have been Consilia’s not the Company’s it would be surprising if SAGE was operated for one company and not the other. SAGE UK Limited was shown as a trade creditor in a sum of £390.00 in the list of creditors. In his evidence, Dr Morrison said (and I accept) that the reference to “nominal co” on a list of his expense claims was the sort of thing normally produced from SAGE which used nominal codes.

In the event, this finding does not take matters much further because the Respondents took no steps to obtain or put any relevant material before the Court. On the contrary, as the relevant order makes clear, at a directions hearing before DJ Khan on 24 May 2010 Mr Povey (on behalf of himself and Dr Morrison) informed the Court that they would, at the final hearing of the claim, rely only on the documents attached to the Applicants’ statements and their own statement dated 2 April 2010. On that basis their obligation to serve a standard disclosure statement pursuant to Part 31.10(5) CPR 1998 was waived. Although, notwithstanding the terms of that Order I permitted the Respondents to rely on certain documents produced on the first morning of the trial, I must not overlook that by not producing a List of Documents (which I am reminded would have been signed by them personally), the Respondents have circumvented a requirement to identify the documents they have or have had in their possession or control. The Respondents inspected the documents in the possession of the Liquidator but made no application for specific disclosure under Part 31.12 CPR 1998.

I accept the submission made on behalf of the Applicants that such documents as have been provided appear to be selective. The “memory stick” said by Mr Povey to be the source of the late production of the draft AVS contract has not been produced and the Applicants have been deprived of the opportunity forensically to examine the same or to investigate the properties of the document. It is also the case that the Respondents made no effort to obtain any documentation or witness statements from any third party. Perhaps most significantly, despite both being officers of Idessa Management, the Respondents have produced no documents or other evidence in support of their case that this and the other US entities were genuine, separate trading entities or that the AVS Contract was made with Idessa Management. Mr Povey was asked repeatedly why no steps had been taken by him or Dr Morrison to obtain any documents, for example those relating to Idessa Management or his own credit card records. Save for repeating their case that it was for the Liquidator to prove his claims against them he was able to provide no satisfactory explanation.

The absence of complete documentary and other materials undoubtedly makes the Court’s task a more difficult one. In particular, deriving a precise picture of the way in which certain matters were handled within the Company (for example the nature of expenditure by the Company and the treatment of reimbursement of expense claims) is not easy. Broken down into each individual claim, the Claim Guide constitutes a challenge to hundreds of payments over several years between 2003 and 2007 and I accept that the Respondents cannot be expected to recall each and every one. However, I am unable to accept in this regard anything other than that the Respondents are the authors of their own misfortune. Pages and pages of credit card slips, purchase receipts and credit card statements have been put before the Court in support of the Applicants’ broad contention that payments have been made which cannot properly be justified as Company expenditure. However, most of the evidence advanced by the Respondents was not directed to the specific allegations (but rather to attacking Mr Burke’s competence and credibility). Such admissible evidence as was before the Court from them comprised only general rebuttals. In several instances, I formed the view that the Respondents were using the absence of books and records as a smokescreen to avoid answering questions. I am therefore unable to accept generally that the absence of other books and records prevented them from fairly presenting their case as to the majority of the payments.

The case as originally put was that Dr Morrison was a shadow or de facto director of the Company and no distinction was made between these concepts or the evidence required to prove them. This was plainly misconceived and by the time of his closing submissions Mr Aslett fairly submitted only that Dr Morrison occupied the position of a director and so acted as a de facto director. However, the misconceived way in which the case was first advanced (coupled with the fact that Dr Morrison is entitled to the benefit of doubt on such an important issue) led me to scrutinise the evidence on this point with particular care.

The issue of what constitutes a de facto director has been the subject of recent guidance by the Supreme Court in Holland v Revenue and Customs Commissioners and another [2010] UKSC 51 and it is no longer necessary for me to summarise the earlier authorities, which are in any event fully considered in the judgment of Lord Hope DB at [20] – [39] and Lord Collins SCJ at [70] to [93].

It is clear that persons who are not directors de jure may nevertheless be treated as de facto directors and it was not disputed there (or here) that such directors are within section 212 of the 1986 Act. As Lord Collins makes clear at [93] it does not follow that the term is to be given the same meaning in all the different contexts in which a director may be liable but in the context of the fiduciary duty of a director not to dispose wrongfully of the company’s assets the crucial question is whether the person assumed the duties of a director. According to Lord Hope at [39] all of the relevant factors must be taken into account but at least in the context of section 212 of the 1986 Act, it is relevant that liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests.

At [91] relevant tests are set out including whether the person was the sole person directing the affairs of the company (or acting with others equally lacking in a valid appointment) or if there were others who were true directors, whether he was acting on an equal footing with the others in directing its affairs; whether there was a holding out by the company of the individual as a director and whether the individual used the title and taking all the circumstances into account, whether the individual was part of the “corporate governing structure”.

Having considered all of the circumstances, it is my view that Dr Morrison did act as a de facto director of the Company and did so from incorporation until its liquidation for the following reasons:

Having regard to all of the above circumstances, I am satisfied that Dr Morrison was exercising real influence over the Company’s affairs and that he was acting on an equal footing with Mr Povey such that he is fairly to be regarded as part of its corporate governance. In my judgment in giving his evidence, Dr Morrison significantly downplayed his role and influence in the Company.

Sometime in early 2004 there was secured what proved to be a lucrative contract with AVS relating to the writing of software for DRE machines which are touch-screen electoral voting machines (“the AVS Contract”). According to an invoice dated 1 April 2004, which related to services from 1 April 2004 to 1 May 2004, the AVS Contract generated fees of $100,000.00 per month which, it is not disputed, were paid into the Hibernia Account. At the bottom of the invoice, AVS was asked to confirm when payment would be made to Ms Spicer at liz.spicer@idessa.com.

It is the First Applicant’s case that the AVS Contract was, in substance, a contract made with the Company and that the monies held in the Hibernia Account were held on trust for the Company. At first blush this seemed to me to be a bold submission. I have referred above to the changes which took place following the e-mail from Mr Povey to Ms Spicer dated 14 December 2004 on which Mr Burke bases his belief (see his first witness statement dated 18 November 2009 at [29] and [30]) that “the First and Second Respondents were paid significant sums each either from the Company via Idessa Management or from the benefit of the AVS Contract income which was paid to Idessa Management, under this scheme, without payment of tax or national insurance to HMRC or at all”. Later, at [30] he contends that the reference in that e-mail to “Owner’s Distributions” is a “sham and nonsense”.

On this basis he claims to be entitled to relief in connection with various payments out of the Hibernia Account which, he contends, were not for the proper purposes of the Company. Mr Aslett accepts that the burden is on the liquidator to satisfy me on this point and that if the contention in this regard fails substantial elements of the misfeasance claims fall away. For their part, Dr Morrison and Mr Povey say that the AVS Contract was made with Idessa Management (which was established for the single purpose of servicing the AVS Contract) and that the Company (and by extension the First Applicant) had no entitlement to the monies in the Hibernia Account or to complain as to what has become of those monies. The point is therefore of some significance.

In support of this contention, the Applicants rely on the following matters:

I was provided with no detailed explanation from anyone (let alone assistance in the form of expert evidence) as to how the so-called “scheme” was intended to operate or, with any real particularity beyond what might be said to be implicit from the fact that the payments were ostensibly ones made in the USA, how it was said by Mr Burke to have deprived HMRC of payments of tax or national insurance. The only evidence on this point (aside from Mr Burke’s statements to this effect) consists of a final proof of debt issued by HMRC dated 23 July 2008 in which a sum of £274,946.11 is claimed as the total Inland Revenue Non Preferential Claim. I will return to this point later in this judgment but note that I am unable, on the basis of the evidence before me, to be more specific as to what the scheme was or to form any view on its effectiveness (for example as a tax savings scheme either here or in the USA). I am required to form a view on it only to the extent that it is relevant to my findings on the AVS Contract and on the unpaid tax claim.

It is necessary also to say something about the transactions using the Hibernia Account. I have been provided with a number of documents (comprising 1090 pages commencing at Tab 8 of Bundle C1 and concluding at the end of Bundle C4) which relate to payments made using the Hibernia Account (including a number of “Towernet” wire transaction requests together with related receipts and correspondence) between 6 May 2004 and 10 April 2006. Some but not all of these payments are challenged within the Claim Guide. As I have already noted in a different context, in many instances, there is reference within the “additional information” box of the relevant request some reference to the Company – see by way of example the payment to SL Consulting on 6 May 2004 which refers to “Invoice 101 Idessa UK Ltd”; the payment to Ransoft Consulting dated 5 November 2004 which refers to “Idessa UK Ltd 1422” and the payment to Mike Brown on 4 January 2005 which refers to “Idessa UK Ltd”. Other requests are also tied to the Company – for example the transfers on 13 May 2004 to Newdata Strategies and 10 September 2004 to Lance Schlegel were made pursuant to vendor information provided on standard automated clearing house forms bearing the name of the Company (but with the Frisco, Texas address). According to her e-mail to Newdata Strategies, Ms Spicer was responsible for making the wire transfers. Also in May 2004 (and periodically thereafter), a series of payments are made to Todd Weeks, Cathy Wun, Kim Tate, Danny Morrow and Vanessa Keitges through what appear to be United States bank accounts but described as “salary Idessa UK”. On 1 June 2004 and 31 August 2004, Mr Povey directed 4,500 EUROS and 6,000 EUROS respectively to be sent from the Hibernia Account to Micronasnit at an account held with Continental Banka AD Novi Sad in Serbia and Montenegro. Once again the receipts identify “Idessa UK Ltd” by way of further information and this is the account specified in what appears to be a contract dated 25 May 2004 made between the Company and Micronasnit.

Absent any other credible explanation, and I was given none by the Respondents, the obvious inference and I so find is that these were payments on behalf of the Company. According to a note signed by him and dated 16 June 2004, Mr Povey was also responsible for directing transfers from the Hibernia Account of 5,000 USD to Mr Bolinger described as being “Re Idessa UK Ltd” and 10,400 USD into the HSBC Account.

However, starting with a transaction receipt dated 18 November 2004, payments were increasingly being made from the Hibernia Account for or on behalf of Democracy Systems and it is clear from her e-mail dated 30 November 2004 and an e-mail sent to her on 13 December 2004 that Ms Spicer was also involved in making payments described as payroll to Ransoft Consulting on behalf of Democracy Systems and Idessa Management. Other transaction receipts, for example those in respect of transfers to Dr Morrison and Mr Povey dated 24 December 2004, identify Consilia by way of additional information.

There is therefore clear evidence and I so find that the Hibernia Account was used extensively to fund expenditure on behalf of the Company as well as for Idessa Management, Democracy Systems and, to a lesser extent, Consilia and the Respondents (but especially Mr Povey) did not draw any clear boundaries between the companies. This was in sharp contrast with what Mr Povey said in evidence which was that there was no relationship between the companies and that each was a separate venture with different products, markets and customers.

There is also ample evidence of the HSBC Account and the Hibernia Account being used interchangeably. For example, by an e-mail dated 19 October 2004, Mr Povey directed Ms Spicer to send 11,000 EUROS to Micronasnit and suggests “Perhaps send half from US account and half from UK account”. Later, in answer to a e-mail request from Mr Povey on 3 August 2005 as to “what do we have in each of the accounts at the moment” Ms Spicerreferred to the HSBC Account as being in credit, a Barclays account (about which I otherwise heard no evidence) as overdrawn in a sum of £37,500 and the Hibernia Account as being 2,900 USD overdrawn.

In his evidence, Mr Povey said that Idessa Management employed a number of software engineers who were engaged in producing, testing and re-engineering touchscreen voting applications for AVS. I saw no evidence of this in the form of contracts of employment. As I have noted, the salary payments to Todd Weeks and others were in many (but not all) cases identified as being referable to Idessa UK and, Mr Weeks signed the Novodea Systems agreement on behalf of the Company as “Director of US Operations”. The automated clearing house forms I have referred to were all in the name of the Company not Idessa Management.

The thrust of all of this evidence (and in particular that according to Mr Povey and Dr Morrison a key motivation in the establishment of Idessa Management appears to have been tax efficiency rather than any other commercial purpose) is tolerably clear. In my judgment, Idessa Management was no more than a vehicle to facilitate the perceived tax efficiencies (by notionally employing and paying the US based staff and to facilitate the tax efficient scheme for payment to Mr Povey and Dr Morrison). The true commercial activity, including in my judgment the benefit and burden of the AVS Contract, was undertaken by the Company.

Before turning to the individual aspects of this claim, I will set out the relevant legal principles. It was not disputed that the Respondents (assuming for this purpose that I found, as I have, that Dr Morrison was a de facto director and so liable for actions or decisions in relation to the Company) each owed common law and/or equitable or fiduciary duties to the Company including duties:

It was also not in dispute that once a company is insolvent or in financial difficulties such that its creditors are at risk the interests of the creditors override those of the shareholders because the creditors become prospectively entitled, through the mechanism of liquidation, to deal with the company’s assets – see West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 at 225-253 and Re MDA Investment Management Ltd [2003] EWHC 227 (Ch) at [69]-[70].

So far as material section 212 of the 1986 Act provides as follows:

“212.

Summary remedy against delinquent directors, liquidators etc.

(1)

This section applies if in the court of the winding up of a company it appears that a person who-

a)

is or has been an officer of the company, or

b)

…

c)

not being a person falling within (a) or (b), is or has been concerned, or taken part, in the promotion, formation or management of the company,

has misapplied or retained, or become accountable for, any money or property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

Section 263 of the 1985 Act provides as follows:

“263.

– Certain distributions prohibited.

(1)

A company shall not make a distribution except out of profits available for the purpose.

(2)

In this Part, “distribution” means every description of a company’s assets to its members, whether in cash or otherwise ….

(3)

For the purposes of this Part, a company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.”

Section 330 of the 1985 Act provides as follows:

“330.- General restriction on loans etc. to directors and persons connected with them.

(1)

The prohibitions listed below in this section are subject to the exceptions in sections 332 to 338.

(2)

A company shall not-

a)

make a loan to a director of the company or of its holding company.”

Section 337 of the 1985 Act provides:

“337.-Funding of a director’s expenditure on duty to company.

(1)

A company is not prohibited by section 330 from doing anything to provide a director with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company.

(2)

…

(3)

Subsections (1) and (2) apply only if one of the following conditions is satisfied-

a)

the thing in question is done with prior approval of the company given at a general meeting at which there are disclosed all the matters mentioned in the next subsection;

b)

that thing is done on condition that, if the approval of the company is not so given at or before the next annual general meeting, the loan is to be repaid, or any other liability arising under any such transaction discharged, within 6 months from the conclusion of that meeting;

….

(4)

The matters to be disclosed under subsection (3)(a) are-

a)

the purpose of the expenditure incurred or to be incurred, or which would otherwise be incurred, by the director,

b)

the amount of the funds to be provided by the company;

c)

the extent of the company’s liability under any transaction which is or is connected with the thing in question.”

This head of claim concerns payments said to have been made by way of salary in respect of the Company and Consilia between 23 December 2004 and 26 October 2005 totalling £76,041.20 in the case of Dr Morrison and £58,270.41 in the case of Mr Povey. It is not in dispute that in each case, the relevant payments were made from the Hibernia Account. Further, although the relevant amount in dollars varies (depending on the exchange rate at the particular time) Dr Morrison and Mr Povey did not seriously challenge the Applicants’ case (and I so find) that the payments equated to £5,833.33 per month each in relation to the Company (equivalent to a sum of £70,000 per annum divided by 12 months) and in relation to Consilia £3,333.33 (equivalent to a sum of £40,000 per annum) in the case of Dr Morrison and £2,083.33 (equivalent to a sum of £25000 per annum) in the case of Mr Povey.

I am satisfied that the First Applicant is entirely correct in characterising these periodic payments as salary and that they were payments made to the Respondents pursuant to the scheme. First, the payments are referred to in the Towernet documents to which I have already referred. So, on 23 December 2004, there are “transaction receipts” in respect of transfers of £5,833.33 made that day to Mr Povey [C1/775] and Dr Morrison [C1/775]. In each case, the relevant additional information entry identifies “Idessa UK Ltd”. Then, on 24 December 2004 one day later, there are “transaction receipts” in respect of a transfer of £2,083.33 to Mr Povey [C1/785] and £3,333.33 to Dr Morrison [C1/780] identifying “Consilia UK Ltd”. Secondly, someone (probably Ms Spicer) has endorsed on a copy of the e-mail dated 14 December 2004 that “J” (whom I infer to be Dr Morrison) is to receive £5,833.33 and £3,333.33 whereas “C” (whom I infer to be Mr Povey) is to receive £5,833.33 and £2,083.33. Thirdly, in their joint letter dated 28 May 2007 to the Insolvency Service, the Respondents confirmed that their remuneration from Consilia was £40,000 and £25,000 respectively. Finally, whereas prior to 23 December 2004, the Company’s bank statements record periodic payments to Mr Povey and Dr Morrison which are described as “Idessa UK Payroll”, the payments cease following that e-mail (the last such payments being on 26 November 2004). In so finding, I reject the evidence of Mr Povey that the 14 December 2004 e-mail related to only one payment.

The First Applicant contends that it was not in the interests of the Company for it to be paying such large sums (or in the case of Consilia any sums at all) in circumstances in which it was both balance sheet insolvent and unable to pay its debts as they fell due and, separately, that such payments were in any event inappropriately paid without accounting for income tax and national insurance.

In their outline submissions at [4.1], Dr Morrison and Mr Povey did not seriously dispute the receipt by them of these sums but contended that they were “employed by Idessa (UK) Ltd for which they received legitimate salary payments, expenses, travel expenses and subsistence”. They disputed that there was no service contract or contract of employment with the Company but were unable to produce such a contract whether in draft or final form. I find this surprising given that one would have expected that if such a document existed, a copy would have been provided to or been retained by the Respondents as well as the Company itself.

In his oral evidence, Mr Povey denied that the so-called scheme was to avoid paying PAYE and NI and told me that there was a consultancy agreement in place between Idessa Management on the one hand and the Company and Consilia on the other whereby Idessa Management would invoice them for consultancy services. Dr Morrison initially said he did not know where his pay came from but when shown the e-mail dated 14 December 2004 accepted that he was paid direct in the USA and that his employment contract had been varied. I have seen no evidence of any such consultancy agreement or of any such invoicing arrangements or of the advice given by tax lawyers as to the setting up of the scheme. I accept the submission made on behalf of the Applicants that this elaborate arrangement was simply a vehicle to enable the Respondents to be paid by the Company from monies in the Hibernia Account (derived principally from the AVS Contract) without accounting for PAYE and National Insurance. Moreover, I also accept that these were payments which were authorised by the Respondents.

In the case of payments made in respect of Consilia, I accept the submission that these were not payments which were in the interests of the Company. Although Mr Povey referred to various inter-company arrangements I have seen no evidence of either an inter-company account or of any inter-company transfers from Consilia to the Company. Furthermore, it seems to me that this suggestion is inconsistent with the evidence given by him elsewhere in his oral evidence that there was a consultancy arrangement in place between Idessa Management and Consilia. In my judgment, Dr Morrison and Mr Povey acted in breach of their fiduciary duties and for improper purposes in causing or procuring the Company to pay the sum of £33,333.33 (ten payments of £3,333.33) to Dr Morrison and £20,833.33 (9 payments of £2,083.33 and payments of £2,000 and £83.33) to Mr Povey in respect of Consilia. I direct pursuant to s.212(3)(a) of the 1986 Act that Dr Morrison and Mr Povey repay the sum of £54,166.66 to the First Applicant on behalf of the Company. Given my finding that Dr Morrison and Mr Povey were jointly responsible for the governance of the Company, my order is that they are jointly and severally liable to make that repayment.

However, I am unable to accept the submission that the payments made in respect of salary for work done by the Respondents for the Company itself were not in the interests of the Company. There was ample evidence before me that the Respondents acted as directors in relation to the Company and devoted a significant amount of time and attention to its affairs. Although Mr Aslett pointed to the absence of any employment contracts and the absence of evidence in the form of any minutes suggesting that board meetings took place to sanction those payments, the overwhelming inference which I draw (supported on this point by Mr Povey’s evidence that salaries were approved by the directors including Mr Humphrey) is that the Company had sanctioned those payments. Mr Humphrey was also a director of the Company and, as such, would have had access to the bank statements which, as I have already noted, showed payments to Dr Morrison and Mr Povey prior to December 2004 as “Idessa UK payroll”. Although it was not executed, the draft Shareholders’ Agreement clearly contemplated that contracts of employment would be entered into between the Company and, amongst others, Mr Povey and Dr Morrison. I am unable to accept that Mr Povey and Dr Morrison were expected to work for the Company without being paid. Furthermore, although the First Applicant complained about the amount of the payments (especially having regard to the financial position of the Company), I was provided with no evidence as to whether their levels of remuneration were commensurate with what others in similar roles would be paid. In my judgment, the Applicants’ claim to recover these sums fails although I will return to this topic below when I consider the tax liability. It seems to me that the real substance to this complaint is that Dr Morrison and Mr Povey caused the payments to be made without accounting for PAYE and National Insurance. It follows that the alternative claim to recovery of these sums as being unlawful distributions and/or illegal loans also fails.

Item 2 concerns three payments to Dr Morrison totalling £16,000: a payment of £6,000 on 28 December 2005 and two payments of £5,000 each on 10 February 2006 and 1 March 2006. In each case the payments were made from the Hibernia Account to Dr Morrison’s account with the NatWest Bank. Item 6 concerns 5 payments to Mr Povey totalling £26,000: a payment of £4,000 on 7 December 2005; two payments of £6,000 on 28 December 2005 and 5 January 2006 and two payments of £5,000 on 10 February 2006 and 1 March 2006. In each case the payments were made from the Hibernia Account to Mr Povey’s account with the Halifax.

I can deal with these fairly shortly. Despite the substantial nature of the payments and the noticeable feature that they were paid in round sums, the Respondents were unable convincingly to explain the reason for them. Mr Povey ventured that they might be repayment of sums spent by him, for example, on his personal credit cards (but for the reasons set out below in relation to Item 7 this seems to me to be improbable because in those instances the relevant payments were made directly to the credit card providers). Moreover, bearing in mind that these were payments made from the Hibernia Account, it seems to me that these answers betray a fundamental contradiction in the case advanced by Dr Morrison and Mr Povey. If as they sought to persuade me, the monies in the Hibernia Account related to entirely separate business from the Company and belonged to Idessa Management, why was that company repaying expenses incurred by them on behalf of the Company at all?

There is no evidence in the form of documents or other explanation to indicate that these payments were sanctioned by the Company (either formally at a board meeting or otherwise) and nothing which allows me to infer that they were payments made for the benefit of the Company. Indeed, the fact is that as I have already indicated Dr Morrison and Mr Povey were being paid substantial amounts by way of salary on a periodic basis. Moreover, as outlined below, these payments do not appear to constitute the repayment by the Company to them of expenses incurred by them on behalf of the Company because, in that event, on their own evidence, the payment would be supported by an expense claim form and a receipt.

In my judgment, Dr Morrison and Mr Povey acted in breach of their fiduciary duties and for improper purposes in causing or procuring the Company to pay the sums of £16,000 to Dr Morrison and £26,000 to Mr Povey. I order that the Respondents should repay to the First Applicant on behalf of the Company the sum of £42,000. Once again, this liability is to be a joint and several one.

Item 3 on the Claim Guide is for a sum of £51,975.09. It consists of a series of 8 payments made in 2004 in a total sum of £39,895.09; one payment on 29 March 2005 in a sum of £230.00; 3 payments in 2006 in a total sum of £5,100 and 2 payments in 2007 in a total sum of £6,750. In each case the payee was Dr Morrison and the relevant payments were made from the Company’s HSBC bank account.

Dr Morrison’s evidence was that the payments in 2004 and the payment of £4,000 on 11 April 2007 were likely to be payments of salary. I accept his evidence on this point. The payments in 2004 pre-date the establishment of the scheme whereby payments were to be made through the USA and in each case the source of the reference to payroll was the Company’s bank statements. For the reasons already identified, I am not prepared to conclude that payments in relation to salary for work done by Dr Morrison constituted a payment for an improper purpose.

In relation to the payment of £230.00 in 2005, the relevant bank statement and cheque stub are marked “Cash – see JM receipt”. Unsurprisingly, Dr Morrison was unable to shed any light on this payment after such a long period of time but I am not prepared to conclude that this was a payment which was not for proper purposes in circumstances where the contemporaneous books and records of the Company indicate that it was properly supported by a receipt. Similarly, I accept Dr Morrison’s explanation that the cheque drawn for cash for £600.00 on 14 September 2006 was, as the cheque stub suggests either to pay for a business trip at the MacDonald Houston Hotel or to reimburse him for that expenditure.

Dr Morrison was unable to provide any explanation for the payment of £2,000 made on 4 September 2006, the payment of £2,500 made on 17 October 2006 or the payment of £2,750 on 11 January 2007. In each case these were cheques drawn in his favour. Absent any explanation, and for the reasons identified in relation to Item 2, I find that these payments were not authorised by the Company or for its proper purposes.

Item 7 on the Claim Guide is for a sum of £118,681.44. It consists of 4 payments made in 2003 in a total sum of £2,500; 29 payments made in 2004 in a total sum of £55,115.88; 19 payments made in 2005 in a total sum of £15,989.71; 29 payments made in 2006 in a total sum of £23,776.24; 18 payments made in 2007 in a total sum of £18,009.61 and 3 payments made on unidentified dates between October 2005 and August 2006. The relevant payments were made from the Company’s HSBC bank account. With a couple of exceptions the payees are shown to be Mr Povey himself and various companies providing credit card services including Marbles; GE Capital Bank; Bank of Scotland; MBNA; Citi Financial; Morgan Stanley; Monument; HFC; British Credit and American Express.

The cheque stubs on three of the payments made in 2004 (totalling £2,000) indicate that the payment is in respect of salary. A further 8 payments in 2004 (those on 10 May 2004, 26 May 2004, 17 June 2004, 28 July 2004, 26 August 2004, 28 September 2004, 28 October 2004 and 26 November 2004) are identifiable as relating to the Company’s payroll from the schedule before me. Mr Povey said (and on this point I accept his evidence because it is corroborated by the contemporaneous evidence in the form of the bank statements and cheque stubs) that in the early days of the Company’s life he did not draw a regular salary and that payments were made intermittently. For the reasons already identified, I am not prepared to conclude that these payments in relation to salary for work done by Mr Povey constituted a payment for an improper purpose.

So far as concerns the various payments to credit card providers, Mr Povey’s evidence on this was that these were personal credit cards but which were used for company expenditure and that these payments were properly made to discharge company expenditure. In effect, he said personal credit cards were used as a means of obtaining short term credit on behalf of the Company. The difficulty for me accepting this explanation is twofold: first, I simply have no evidence in the form of documents, statements, receipts or any other form of explanation which enables me to be satisfied that the credit cards were in fact used for company expenditure rather than Mr Povey’s personal expenditure. In this regard, I stress that these were personal credit card accounts and it was open to Mr Povey to produce the relevant statements if he had them or to obtain duplicates from his credit card provider if he did not. Secondly, as will become clear from the next items, substantial amounts of other expenditure was made by Mr Povey and Dr Morrison using credit and debit cards issued in the Company’s name. In my judgment, the obvious inference (which I draw) is that all of the payments to credit card providers were not authorised by the Company and were not for proper purposes.

Five of the payments (those on 13 June 2005, 21 June 2006, 27 June 2006, 23 November 2006 and 12 February 2007) appear from their description to relate to the financing and/or repairing of a BMW motor vehicle. Mr Povey told me (and I accept) that this was a Company car and I am not prepared to conclude that these payments were for improper purposes. In relation to the sum of £1,850.00 drawn in cash on 8 January 2007, the contemporaneous notes indicate that £350.00 of that sum concerned expenses in relation to a trip to Glasgow and the inference is that these were approved expenses on behalf of the Company. This is also the case in relation to one of the payments made on an unknown date (the payment for £190.00 drawn on cheque number 100433 where the stub refers to “CP car tax”.

However, Mr Povey was unable to provide any credible explanation for the balance of the payments shown on the schedule [A1/201-207]. Save to the extent that I have specifically identified above that I regard the payments as being properly incurred on behalf of the Company, I find that these were not payments made for proper purposes and in relation to those payments Dr Morrison and Mr Povey acted in breach of their fiduciary duties to the Company. I order that they repay those sums in a total of £83,916.68 to the Company pursuant to section 212(3)(a) of the 1986 Act. Again, this will be a joint and several liability.

Items 4 (in a sum of £21,840.67) and 8 (in a sum of £19,385.67) concern expenditure incurred by Dr Morrison and Mr Povey respectively on Company credit card accounts. After some hesitation, Dr Morrison and Mr Povey accepted (and to the extent that it is not accepted in any event I so find) that they each had a number of credit and debit cards for accounts maintained by the Company. In the case of Dr Morrison, there were two HSBC business cards; two Maestro debit cards; two Mastercards and three VISA cards. Mr Povey had one HSBC Business card; one Mastercard and four VISA cards. Although Mr Povey maintained that some of these cards were used by other employees, the evidence is against this but in any event he accepted that ultimately, it was for the directors to satisfy themselves that payments made on those cards were bona fide payments made for the benefit of the Company.

Both of the Respondents told me (and on this I accept their evidence) that there was an approved expenses scheme in place whereby they (and other employees) were required to submit expense claim forms and receipts. I accept this evidence because, although none of the expense claim forms are before me, there are lots of receipts and, as I have already noted, although the documents before me are not complete they indicate that attempts were made to allocate the expenses against nominal codes (probably derived as I have found from the SAGE accounting system).

In the case of Dr Morrison, the First Applicant challenges (if I have tallied them correctly given that there was no numbered schedule) a total of 235 separate items. In the case of Mr Povey, 169 individual items are challenged. They range over substantially the whole life of the Company (from 24 May 2004 to 12 February 2007). Some of the challenges are to very small amounts (for example, sums of £4.50 and £5.50) and in circumstances where the nature of the payment is plain and obvious from the identity of the payee (for example in relation to the £5.50 identified above where it is “NML Arena Parking”). In many instances, the nature of the payment is such that it could credibly relate to Company or personal business (for example, a number of them appear to be for petrol).

It seems to me that this all-inclusive approach to this head of claim was singularly unhelpful and that the Court is entitled to expect a degree of common sense and proportionality when formulating this type of claim. I am unable to accept Mr Aslett’s submission that I can simply form a “global” view as to the propriety or otherwise of these payments. In fairness to the Respondents, it seems to me that I have to reach some considered view on whether these are properly to be regarded as Company expenses or not. Without losing sight of the fact that it was the responsibility of the Respondents, as directors, to ensure that proper books of account and records were kept for the Company I have some sympathy for the fact that it is difficult, several years later, for the Respondents to pinpoint specifically what each payment was for (and in this regard, have some doubt as to whether they would be in any better position to do so even if the SAGE records which they maintain were kept were before the Court). That said they made no effort prior to going into the witness box to undertake the exercise even on a superficial basis. Inevitably, this exercise invites a somewhat broad brush approach.

I have worked though the schedules and sought to characterise the payments by reference to the relevant transaction details. In my judgment, on balance, it is more likely than not that the following payments were not legitimate expenses incurred on behalf of the Company (either because of the absence of any credible explanation or by inference from the nature of the payee when taken together with all that I have heard about the nature of the Company’s business and its manner of operation):

In reaching these findings I make the following general observations:

Accordingly, I find that payments in a total of £16,348.89 were not made for proper purposes and in relation to those payments Dr Morrison and Mr Povey acted in breach of their fiduciary duties to the Company. I order that they repay the sum of £16,348.89 to the Company pursuant to section 212(3)(a) of the 1986 Act. Again, this will be a joint and several liability.

Item 9 is claim for £274,946.11 being the sum claimed by HMRC by way of final proof of debt issued on 23 July 2008.

According to that document, the sum is broken down as follows:

“2006/2007 Tax PAYE Underpayment 29161.91

2006/2007 NIC PAYE Underpayment 29714.46

2005/2006 Tax PAYE Underpayment 60387.34

2005/2006 NIC PAYE Underpayment 53803.52

2005/2006 SLD PAYE Underpayment 1052.00

2004/2005 Tax PAYE Underpayment 2177.00

2004/2005 NIC PAYE Underpayment 193.41

£21576.75 is claimed in respect of PAYE NIC underpayment (estimate due to P35 not being received) for the period 06-04-2007 to 11-11-2007…

£19762.29 is claimed in respect of PAYE Tax underpayment (estimate due to P35 not being received) for the period 06-04-2007 to 11-11-2007…

£14934.56 is claimed in respect of Reg 80 NIC determination for the period 06-04-2005 to 05-04-2006…

£5738.27 is claimed in respect of Reg 80 Tax determination for the period 06-04-2005 to 05-04-2006…

£800.00 is claimed in respect of PAYE Penalty for the period 06-04-2005 to 05-04-2006 …

£2399.39 is claimed in respect of Accrued Interest dated 11-11-2007 …

Interest Accrued to Date of Insolvency Claim £33245.21”.

in respect of Reg 80 NIC determination for the period 06-04-2005 to 05-04-2006…

The first part of the claim concerns the underpayment of tax. Mr Burke’s evidence on this was that from the tax year 2003-2004 despite receiving salaries from Consilia and the Company which placed them in the higher tax band and the requirement (which they did not dispute) that a person employed by two companies should notify HMRC so that the second income stream can be allocated a “BR” tax code, the Respondents failed to do so. I am told that “BR” stands for basic tax. The effect was that the Company was paying income tax and national insurance but only at the lower not higher rate and Dr Morrison and Mr Povey were being paid too much. This lead to HMRC bringing proceedings against Dr Morrison in 2006.

The second part of this head of claim concerns what Mr Burke puts as a failure, by reason of the scheme put in place in December 2004, to account for any tax or national insurance to HMRC in relation to the “salaries” paid to Dr Morrison and Mr Povey thereafter.

For the reasons given earlier in this judgment, I am satisfied that the periodic payments made to Dr Morrison and Mr Povey after December 2004 fall to be treated as salaries paid to them by the Company. I am also satisfied that there has been a failure properly to account to HMRC in relation to PAYE and national insurance on those sums and in relation to the underpayment of tax by the failure to notify HMRC of the income from the Company as well as Consilia. In my view, in failing to account to HMRC and paying the salaries gross rather than net Dr Morrison and Mr Povey failed to act in good faith and used their position as directors to obtain a personal profit at the expense of the Company and its creditors. In my view, the proper order is that they should contribute the sum of £274,946.11 to the assets of the Company by way of compensation in respect of their breaches of duty pursuant to section 212(3)(b) of the 1986 Act.

Item 10 of the Claim Guide concerns 5 payments totalling £2,529.96 to Lynn Klein Consulting between 2 November 2004 and 18 January 2005. The payments were all made from the Hibernia Account. The supporting e-mails indicate that the payments were for what was termed “voting memorabilia”.

The First Applicant’s case is that, having regard to the financial position of the Company, the Respondents ought not to have caused or procured the Company to incur this type of expenditure. There is some force in that submission when one considers what is known now about the demise of the Company and the financial position as revealed by its accounts. However, it seems to me to be tolerably clear firstly, that this was business related expenditure (in the sense that the Company was engaged in business concerning voting services); secondly, that the material was to be used in a promotional capacity and thirdly, that the level of expenditure is relatively modest in amount. I am not prepared to conclude that this expenditure was for improper purposes.

Item 11 concerns a payment on 28 January 2005 of £7,000 from the Hibernia Account to Stone Mortgage Partnership. According to a handwritten note in the trial bundles and the relevant transaction receipt Stone Mortgage Partnership operates from Formby in Merseyside. The latter records by way of additional information “Chris Povey Scott Watson”. When asked about this Mr Povey denied that this was a payment for his personal benefit and, initially at least, denied having purchased a house in or about January 2005. I have already observed much earlier in this judgment that I found his evidence on this point wholly unconvincing. He was forced to accept that he did buy a house at this time when presented by Mr Aslett with the relevant Land Registry Office Copy entry showing that he did indeed purchase a house for £625,000.00 on 14 January 2005. His evidence was that he did not use Stone Mortgage Partnership in connection with that purchase but that Scott Watson did. It does not matter. I am wholly satisfied that whether the services were for the benefit of Mr Povey himself or Scott Watson (who was a part-time employee), they were not for the benefit of the Company. In my judgment, this was a payment for improper purposes and one made or authorised by Mr Povey in breach of his fiduciary duties to the Company. Dr Morrison said (and I accept his evidence on this point) that he had no idea who Stone Mortgages was and that he was not involved in this payment. Given his genuine surprise about this payment, and notwithstanding my other findings in relation to him, I am unable to find that Dr Morrison caused or authorised this payment. I direct that Mr Povey repay the sum of £7,000.00 to the Company pursuant to section 212(3)(a) of the 1986 Act.

Item 12 concerns 2 payments from the Hibernia Account of £10,000 on 2 December 2004 and £5,000 on 26 January 2005. Mr Povey’s evidence on this was that on occasions loans were made between the companies but also that, on occasions, work and services were provided and cross-charged between them. I have already commented on what I regard to have been a wholly unacceptable level of informality in the movement of monies between the various entities with which the Respondents were involved. Other than speculating that the payments might have been for project work, Dr Morrison could not be more specific. It seemed to me that at this point in his evidence, Mr Povey was indulging simply in guesswork and that neither he, nor Dr Morrison, was in a position to give any credible explanation for these payments, let alone justify them by any form of inter-company account. I am not satisfied that these were payments for the benefit of the Company and in my judgment Dr Morrison and Mr Povey acted in breach of their duties to the Company in causing or procuring them to be made. I order that the sum of £25,000 be repaid by the Respondents on a joint and several basis to the Company pursuant to section 212(3)(a) of the 1986 Act.

This concerns two payments of £1,666.67 each to “Miss B Preston” in March 2005 and on 6 July 2005. The bank statements refer in this context to “Consilia UK”. In the Claim Guide, this is described as being a payment to a “phantom” employee but this case was not put to either Mr Povey or Dr Morrison. Mr Povey told me that she was a home worker who was engaged to update contract information for 476 local authorities. Although he was unable to say whether she worked for Consilia or the Company Dr Morrison recalled that she was employed by the Company. On balance, I am prepared to accept this evidence and that the reference to Consilia in the bank statements (for her and other employees) was a mistake.

Item 14 concerns the payment of £28,000 (the sterling equivalent of 50,000 USD) to AVS which was made on Mr Povey’s direction to Ms Spicer in the e-mail dated 17 September 2004. The text of the relevant e-mail is repeated here for convenience: “John and I sent $50,000 to AVS investment bank yesterday. We have worked a deal with them that benefits us greatly on a great number of matters. Also we will no longer have any issues on getting paid on time from them”.

Mr Povey acknowledged that he carried out this transaction (but on his case, on behalf of Idessa Management not the Company). Given my findings in relation to the AVS Contract, it follows that in my judgment this was a payment made on behalf of the Company. Mr Povey also said for the first time in his oral evidence that this was a loan to AVS but he was unable to point to any paperwork which evidenced that this was a loan because he said it was confidential. When he was asked about it, Dr Morrison denied any knowledge of any loan note. Given his closer relationship with Mr Van Pelt of AVS and that, according to the e-mail the deal had been worked up by both of them, I would have expected Dr Morrison to know about a loan if it had been made. On this, I am unable to accept Mr Povey’s account which seems to me to have been something thought up on his feet in the witness box.

Absent any better explanation, I am unable to conclude that the payment to AVS was for the proper purposes of the Company. Dr Morrison and Mr Povey acted in breach of their duties to the Company in causing or procuring the payment to be made and I order that the sum of £28,000 be repaid to the Company pursuant to section 212(3)(a) of the 1986 Act.

Item 15 comprises a number of miscellaneous payments made from the Company’s HSBC Bank Account between 5 November 2003 to 31 July 2007. The total sum is £78,828.42. As the Claim Guide recognises, the sum of £3,333.34 in respect of the payments to Beverley Preston has been included twice (in Item 13 and in this Item) and so has here been deducted. Aside from those, the payments are all made by cheque and several are drawn to cash or petty cash.

In many instances it is impossible to identify the relevant payee and in relation to the challenged payments made between 5 July 2007 and 31 July 2007, there is no information beyond the amount of the payment because the relevant cheque book stubs are missing. Although the suggestion was made on behalf of the Applicants (relying in this regard on something which had been said by Mr Humphrey in his letter to the liquidator dated 1 August 2008) that Mr Povey was responsible for taking the Company cheque books, there was no other evidence to support this and he denied the suggestion. In his letter, Mr Humphrey had said something different (namely that Mr Povey had stolen 6 cheques which had been used to clear personal credit card payments). I am not prepared without more to conclude that Mr Povey took the relevant cheque book and it seems to me that without it, it is impossible for Court to reach any safe conclusions about those cheques in July 2007. I am not prepared to order that the Respondents repay those sums.

Three payments of £5,000 on 18 August 2004, £4,000 on 13 September 2004 and £2,000 on 13 September 2004 and a payment of £2,500 on an unknown date were to “MUFC” which, it was not in dispute, is a reference to Manchester United Football Club. I accept the explanation of the Respondents that these were payments for the use of a box at the Old Trafford Ground. However, I am unable to accept that these payments were for proper purposes or that their primary purpose was for entertainment of clients. There was no real evidence of this and I found Mr Povey’s suggestion that this was initiated by Mr Humphrey improbable having regard to the lack of any other evidence to substantiate any active involvement by him at this time. In any event, this was, on any analysis a substantial amount of money on what can only be regarded as a luxury. Expenditure of this type by a company in a sound financial position is one thing. This was not such a case for the reasons I have already given. In my view, Dr Morrison and Mr Povey acted in breach of their fiduciary duties in causing or procuring the Company to incur this expenditure at a time when it was, according to the 2004 accounts, insolvent on a balance sheet basis and dependent on substantial support from its investors for its liquidity.

I have again worked though the schedules and sought to characterise the payments by reference to the relevant transaction details. In my judgment, on balance, it is more likely than not that the following payments were legitimate expenses incurred on behalf of the Company (because of the inference which can be drawn from the nature of the payee and description of payment when taken together with all that I have heard about the nature of the Company’s business and its manner of operation):

The total amount which I find to be legitimate is £4,950.00. In relation to the remaining entries on the relevant schedule [C1/335-338] there is simply no explanation for them. I am not satisfied that these payments in a sum of £46,995.06 were for the benefit of the Company and in my judgment Dr Morrison and Mr Povey acted in breach of their duties to the Company in causing or procuring them to be made. I order that the Respondents repay the sum of £46,995.06 to the Company pursuant to section 212(3)(a) of the 1986 Act and on a joint and several basis.

The final item 16 on the Claim Guide concerns 8 cheques in a total sum of £41,583.59 drawn on the Company’s HSBC account and said to constitute payments for the joint benefit of the Respondents. Mr Povey’s evidence was to the effect that he was unable to say whether he had received these payments. This was despite the relevant cheque stubs identifying him and Dr Morrison as the recipients of almost all of them. One particular payment stands out because of the amount – the cheque drawn on 7 June 2005 to an unknown payee in a sum of £21,583.59. Someone (it is not clear who) has annotated the relevant bank statement with the following “JM 9166.66 CP 7916.66 17083.32 4500.27 JM”. The obvious inference is that the sum was divided between Dr Morrison and Mr Povey in the manner annotated. I can find no evidence from which to conclude that it was a payment made for the benefit of the Company.

Save in respect of the part of the cheque drawn on 7 June 2005 to “£600 – KR payroll; £600 - DM payroll” and the cheque drawn on 14 June 2006 for £3,400.00 which relates principally to an airfare and expenses, I can find no evidence from which to conclude that any of the other payments in the relevant schedule [A1/291-292] were properly made on behalf of the Company.

I order that the Respondents repay the sum of £36,983.59 to the Company pursuant to section 212(3)(a) of the 1986 Act. Again, this is a joint and several liability.

In view of my conclusions on the payments (and in particular that there they were justified they were for legitimate expenses of the Company and properly authorised as such) it is not necessary for me to consider whether liability arises separately under s.337 of the 1985 Act. In relation to those payments, even if I had concluded that the relevant expense scheme had not been authorised strictly in accordance with the provisions of that section such that the expenses had been repaid in breach of duty, I would nevertheless have taken the view that the Respondents acted honestly and reasonably and would have exercised my discretion to relieve them from liability pursuant to section 1557 of the Companies Act 2006.

By way of summary on the misfeasance claims, I direct the Respondents to repay or compensate the Company in the following sums:

By paragraphs [7] to [10B] of the Re-Amended Ordinary Application, the First Applicant sought in the alternative to his case that the relevant payments constituted misfeasance, recovery of payments made between 1 October 2005 to 1 October 2007 on the basis that they constituted transactions at an undervalue pursuant to section 238 and/or 423 of the 1986 Act. In view of my conclusions in relation to the misfeasance claims it seems to me to be unnecessary to make any findings under this head. It will be apparent from this judgment and I make clear now that where I have refused to order the Respondents to repay sums it is because I have concluded that the Company entered into the relevant transaction in good faith and for the purpose of carrying on its business and that at the time there were reasonable grounds for believing that the relevant transaction would benefit the Company. Accordingly, even if I had otherwise concluded that the relevant payments constituted transactions at an undervalue I would not have made an order under section 238 of the 1986 Act.

The claim under section 423 of the 1986 Act was not really developed in any real sense by Mr Aslett on behalf of the Applicants in his opening or closing submissions. For the reasons I have identified in relation to my conclusions on misfeasance, where those claims have failed, I would not have been satisfied that they were transactions entered into by the Company for the purpose of putting assets beyond the reach of its creditors or otherwise of prejudicing the interests of any person making a claim against it.

Section 214 of the 1986 Act provides as follows:

“214.

Wrongful trading

(1)

Subject to subsection (3) below, if in the course of a winding up of a company it appears that subsection (2) of this section applies in relation to person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.

(2)

This subsection applies in relation to a person if-

a)

the company has gone into insolvent liquidation,

b)

at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, and

c)

that person was a director of the company at that time;

but the court shall not make a declaration under this section in any case where the time mentioned in paragraph b) above was before 28^th April 1986.

(3)

The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company’s creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) he ought to have taken.

(4)

For the purposes of subsections (2) and (3, the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both-

a)

the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

b)

the general knowledge, skill and experience that that director has.

…..

(6 ) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(7)

In this section “director” includes a shadow director.”

For this claim to succeed, it must be established in relation to each Respondent that:

The focus of the section is whether a director, knowing there is no reasonable prospect of avoiding insolvent liquidation, has done all that he or she can to minimise loss to creditors. As Mr Aslett correctly submitted, the burden of proof is on the First Applicant in relation to the first three elements and on the Respondents to establish the statutory defence. However, particular care should be taken not to invoke hindsight and proper regard must be had to the difficult choices which often confront directors when deciding whether to continue to trade and on what basis.

There was no real dispute that the Company has gone into insolvent liquidation and insofar as it was in issue, for the reasons already identified I find that it did so.

In the light of my findings on the AVS Contact, it is the First Applicant’s case that the Respondents knew or ought to have concluded by 30 June 2005, when that contract was lost, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Mr Povey thought that the AVS Contract did not come to an end until the end of 2005 or beginning of 2006 but he was unable to be more specific. Dr Morrison denied that the AVS Contract was lost and says that it was rather a case that, at some point – he could not remember when - AVS stopped paying.

As to this, Mr Aslett points to the fact that the Respondents knew by 31 October 2004 that the Company’s balance sheet showed a deficit of £97,606. According to Mr Povey’s evidence, management accounts were produced on a weekly or sometimes daily basis and the directors met on a weekly or monthly basis to discuss the Company’s financial position. So, says Mr Aslett, although we have not seen those management accounts we can infer that by June 2005 they would have shown a position somewhere between a deficit of £97,606 and the deficit of £435,785 ultimately shown in the balance sheet of the 2005 annual accounts prepared on 18 December 2006. In addition, Mr Povey accepted in evidence that he was aware that there had been an underpayment of PAYE and NI from sometime in 2004/2005.

Against this, the Respondents’ case is a simple one. They deny that the Company was insolvent and point to the fact that there were agreements in place whereby the Company was to be supported by its internal investors (principally Mr Humphrey and Mr Hill and the various companies which they controlled). According to Mr Povey these were “longstop” arrangements which did not require early repayment and the investors were to be repaid over a number of years (possibly up to 5 to 10 years) based on the Company’s success. Despite his evidence that these agreements were made in writing no documents were produced. In cross-examination, Mr Povey was unable to provide any particulars as to the basis of the arrangement and unable to say whether they were to be repaid in the form of share options. Dr Morrison said he did not know anything about the investors but that given the Company was starting from scratch the money for research and development had to have come from somewhere.

I accept that to some extent the Company was a start-up company such that it might take some time before the investment would yield fruit in the form of profit. Further, as I have already indicated earlier in this judgment there is evidence of substantial investment into the Company. At my request, Mr Aslett on behalf of the Applicants helpfully produced as part of his Closing Submissions a schedule which summarised the information from the bank statements and showed all of the deposits into the Company’s HSBC Account. This shows clearly that whatever had been the position previously, external investments had dried up by 26 August 2005. That was the day on which Hill Jones made its last investment of £50,000. The last investment made by Stanley Property was on 30 June 2005 and by Whitelee Ltd on 13 May 2005. Thereafter, whilst the schedule indicates some trading income being generated it is at nothing like the level which would have been required to make significant reductions in the overall deficit.

In my judgment, the picture which emerges clearly from the evidence and which I infer is the picture which was known to the Respondents by the end of June 2005, or so shortly thereafter as to make little difference, is that the combined loss of income from external investors and the AVS Contract meant that they ought to have concluded that there was no reasonable prospect that the Company would avoid insolvent liquidation.

Did the Respondents take every step they ought to have taken to minimise the potential loss to creditors? I can deal with this shortly. The Respondents did not advance any positive case to this effect and, as I have indicated, the burden is on them to do so. Notwithstanding that formal position, given that they appeared before me in person, I have considered all of the evidence with a view to seeing whether there is material on which I might conclude that the statutory defence was made out. In my judgment there is no such material. On the contrary, all of the evidence points to the fact that the Respondents continued to use (and as I have found in several instances abuse) the Company’s money in much the same way as they had done previously. The Respondents continued to pay themselves the same salaries and continued to incur the same type of expenses as before. There was no “tightening” of the corporate belt or any evidence that they or their employees were encouraged to implement cost savings or do anything differently. In short, there is no evidence that the Respondents gave any thought at all to the Company’s creditors or to the impact on them of continuing to trade. There is no material at all from which I can infer that they had in place any strategy to enable the Company to repay the sums owed to creditors (or for that matter, its investors).

In these circumstances, the Applicants’ case on wrongful trading succeeds. I turn then to consider the guidance as to how to fashion and quantify the appropriate remedy.

In Re Produce Marketing Consortium Ltd (1989) 5 BCC 569, Knox J stated at 597 that:

“[I]n my judgment the jurisdiction under s 214 is primarily compensatory rather than penal. Prima facie the appropriate amount that a director is declared to be liable to contribute is the amount by which the company's assets can be discerned to have been depleted by the director's conduct which caused the discretion under sub-s (1) to arise. But Parliament has indeed chosen very wide words of discretion and it would be undesirable to seek to spell out limits on that discretion, more especially since this is, so far as counsel were aware, the first case to come to judgment under this section. The fact that there was no fraudulent intent is not of itself a reason for fixing the amount at a nominal or low figure, for that would amount to frustrating what I discern as Parliament's intention in adding s 214 to s 213 in the 1986 Act, but I am not persuaded that it is right to ignore that fact totally.”

In Re Purpoint Ltd [1991] BCC 121 at 128, Vinelott J. said this:

“The court, in making an order under s 214, is concerned to ensure that any depletion in the assets of the company attributable to the period after the moment when the directors knew or ought to have known that there was no reasonable prospect of avoiding an insolvent winding up – in effect, while the company's business was being carried on at the risk of creditors – is made good: see Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520 at 553 per Knox J. The purpose is to recoup the loss to the company so as to benefit the creditors as a whole. The court has no jurisdiction to direct payment to creditors or to direct that moneys paid to the company should be applied in payment of one class of creditors in preference to another. Moreover, creditors whose debts are incurred after the critical date in fact have no stronger claim than those whose debts were incurred before that date. The former class also suffers to the extent that the assets of the company are depleted by wrongful trading.”

For the avoidance of doubt, the learned Judge was not there dealing with the separate question as to whether recoveries form part of the general assets of the relevant company. On that, there is difference between misfeasance claims (where sums recovered form part of the general assets of the company and so capable of being caught by a prior debenture or charge over its assets) and sums recovered pursuant to a declaration made under section 214(1) of the 1986 Act (which constitute sums held by the office-holder on behalf of the creditors of the Company and do not form part of the assets).

In view of my findings on the misfeasance claims, the question also arises as to the relationship between the remedies in section 212 and 214 of the 1986 Act. On this I derive some support from the approach taken by John Weeks QC sitting as a Judge of the High Court in Re DKG Contractors Ltd [1990] BCC 903 at 912:

“I therefore propose to make a declaration that the directors are liable, jointly and severally, to make a contribution equal to the amount of the trade debts incurred by the company on or after 1 May 1988. This is not in addition to the orders made under sec 212 and 239, and payments under the orders made under those sections are to be taken as satisfying the order under sec 214 as well.”

Park J. in Re Continental Assurance Company of London plc [2001] BPIR 733 stated at paragraph [297] that:

“I first had to consider the maximum quantum of liability for the purposes of the interim ruling which I gave, my judgment on which is in Annex B. I ruled that the measure was not, as the liquidators were contending, 'the 10C basis' which in my view was a calculation of loss to Continental's creditors, but rather what I called in that ruling and in this judgment the 'increase in net deficiency', which in my view reflects the loss to Continental itself as a result of liquidation being delayed. The concept is that, if the directors had decided on 19 July 1991 that Continental was insolvent, and had caused it to be put in liquidation then or soon thereafter, there would have been a deficiency in the hypothetical 1991 liquidation of one amount, say £ x. In the actual case Continental did not go into liquidation until 27 March 1992, and in the actual 1992 liquidation there was a deficiency of a different amount, say £ y. If £ y is greater than £ x the excess is the increase in net deficiency.”

So far as concerns the extent of any order for contribution under section 214(1), the starting point is the difference between the net deficiency as at the date of the hypothetical insolvency (namely the date on which the directors ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation – here 30 June 2005) and the net deficiency as at the date of the actual insolvent liquidation.

As to concurrency of relief between the claims under section 212 and 214 of the Act 1986, it seems me that the correct approach is as follows:

As was made clear by Park J. in Re Continental Assurance (supra at [382] to [390]) the question of joint and several liability under section 214 of the 1986 Act is a matter for the exercise of the Court in its discretion. Given my findings that Dr Morrison was engaged in the management of the Company to the same degree as Mr Povey, my view is that they share liability for wrongful trading on a joint and several basis.

Despite the acknowledged importance of the increase in the net deficiency to the calculation of the extent of any contribution to be ordered under section 214 of the 1986 Act, I was provided with no relevant balance sheet or statement of affairs or deficiency account. There was no real explanation for this and Mr Aslett did not advance with any enthusiasm his submission that I might direct the taking of an inquiry by a Chancery District Judge and order an account of whatever was due on taking such an account. As he pointed out such an exercise would be costly. In short, he urged me to “do my best” with the material before the Court.

The starting point is the net deficiency as at 30 June 2005. Mr Aslett urged me to pro-rate the deficit between 31 October 2004 and 31 October 2005 which would produce an estimated deficit of £524,239.00. I was initially concerned at this approach: first, it may do injustice if, in fact, the majority of the relevant liabilities were incurred early in that period. Secondly, it seems to me that the Court should only adopt such a rough and ready approach if no other approach was or is available. It seemed to me that I should be cautious to accept such an approach in circumstances where there is no good explanation as to why a deficiency account has not been produced. However, I am persuaded that it is not in the best interests of Mr Povey and Dr Morrison for this matter to be prolonged and for additional costs to be incurred in remitting the matter to a Chancery District Judge.

Turning then to the deficiency as at 1 October 2007, Mr Aslett invites me to find that this is £1,851,633.50 made up of the £274,946.11 owed to HMRC; £81,803.88 in respect of VAT £120,300.90 redundancy costs; £17,653.90 (being the actual claims received by the Liquidator in respect of unpaid staff); trade creditors of £153,079.48 and long term creditors of £1,203,850.31. In relation to the VAT claim, as Mr Aslett frankly acknowledged, there was no evidence before the Court to substantiate the claim. I am not prepared to permit this sum to be taken into account in calculating the net deficiency. On the other hand Mr Aslett quite properly invited me to consider whether, in the exercise of my discretion, I should reduce the net deficiency by the sums which the Respondents claim to be owed (which subject to confirmation before finalising this draft I understand to be £573.29 and £479.07). I will do so. I find that the net deficiency as at 1 October 2007 (before taking account of any recoveries in respect of the misfeasance claims) is £1,768,777.34. This means that the maximum amount for the extent of any contribution is £1,234,583.34.

Assuming payment in respect of the misfeasance claims this sum will fall to be reduced in the following ways:

Mr Aslett helpfully prepared a schedule in which he identified the element of the claim which related to the period prior to and after 30 June 2005 but this required some adjustment in the light of this judgment. I invited Mr Aslett (and if they so wished the Respondents) to lodge an amended schedule reflecting the terms of this judgment at the same time as submitting corrections of typographical or other obvious errors. Mr Aslett took the opportunity but the Respondents did not. This final judgment reflects those figures.

Accordingly, the total liability of the Respondents is £1,438,513.23 being £340,411.09 in respect of the misfeasance clams and £1,098,102.14 in respect of wrongful trading (including the Tax Claim). Of this, £1,431,513.23 is a joint and several liability and £7000.00 is a liability of Mr Povey alone.

At the handing down of the judgment I will also invite submissions on the question of what, if any, interest should run on the amounts I have awarded and on the issue of costs.

My attention has been drawn to section 10 of the Company Directors Disqualification Act 1986 and to the power, where the Court makes a declaration under section 214 of the Insolvency Act 1986 that a person is liable to make a contribution to a company’s assets, if it thinks fit, to make a disqualification order against the person to whom the declaration relates. I was also directed to the procedure which was adopted in Re Brian D Pearson (Contractors) Limited [2001] BCLC 275. I direct that a copy of this judgment be passed to the Secretary of State for Business, Innovation and Skills and that representations, if any, on the exercise of the power under section 10 be lodged on his behalf (copied to the parties) by 4pm on 29 April 2011. The Applicant should then take the necessary steps to have the matter relisted before me as soon as practicable.

Finally, I should record my gratitude to the Respondents and to Mr Aslett for the careful and helpful way in which they conducted the case.