MANOLETE PARTNERS PLC v PAUL ANTHONY RUTTER & Anor

This case concerns Rut5 Limited (in Liquidation) (‘the Company’), registered number 08413363. The Defendants (who are married) are the Company’s only directors and shareholders and ran it from its incorporation on 21^st February 2013 to the date it entered Administration on 1^st November 2017. I will refer to the First Defendant as Mr Rutter and the Second Defendant as Mrs Rutter. The Administrator was Mr Gerald Irwin (‘Mr Irwin’), who subsequently converted the Administration into a Creditors’ Voluntary Liquidation (‘CVL’) from 5^th November 2019 and became the Liquidator. On 13^th March 2020, HHJ McCahill QC refused the First Defendant’s application for a declaration that Mr Irwin’s appointment as an Administrator was invalid. Shortly afterwards, on 1^st May 2020, Mr Irwin assigned all liquidator claims against the Defendants to the Claimant, who issued these proceedings on 28^th January 2021.

Following the Defendants’ Defence on 25^th March 2021, DDJ Stewart at a Case and Costs Management Hearing on 16^th August 2021 gave directions through to trial. In February 2022, DJ Singh varied those directions and the matter was listed for trial on 13^th-15^th September 2022. On 23^rd May 2022, DJ Rouine stayed the claim until 1^st July 2022 to enable Mr and Mrs Rutter to bring an application to challenge Mr Irwin’s appointment as Administrator and/or Liquidator. No application was made at that stage. That remained the position at Pre-Trial Review on 27^th July 2022, when HHJ Williams gave relief from sanctions to both sides, permitting each to rely on their late witness statements, for the Claimant from Mr Irwin and for Mr and Mrs Rutter from each of themselves and an associate, Mr Smith. However, HHJ Williams refused permission to Mr and Mrs Rutter to call the Company’s accountant Mr Langham, in large part because there was not even a witness statement from him at that stage.

All this remained the case until the week before trial starting on 13^th September 2022. At that stage, Mr and Mrs Rutter made a flurry of applications which I heard on the first day of trial and on which I gave two oral judgments on that day. Their then-solicitors prepared and lodged those applications, including to stay the claim pending a challenge to the validity of Mr Irwin’s appointment as Administrator and Liquidator, but then came off record, so Mr and Mrs Rutter represented themselves at the trial.

A creditor of the Company Mr Hickey also applied to become a claimant in the case, effectively seeking to consolidate his existing claim against Mr Rutter for a guarantee. I refused his application to become a claimant as there was insufficient legal connection, although he does feature briefly in the story. I also refused Mr and Mrs Rutter’s application to adjourn the trial for them to obtain legal representation, which they had until very recently, then dispensed with in circumstances on which they asserted privilege (as was their right). This would have caused months of delay in the trial through no fault of the Claimant. I was satisfied that, with assistance from myself pursuant to CPR 3.1A, Mr and Mrs Rutter could have fair hearings of the trial and their application to challenge Mr Irwin’s appointments. I refused the latter partly on the merits and partly as cause of action estoppel given HHJ McCahill QC’s decision in March 2020. However, I also granted Mr and Mrs Rutter relief from sanctions to call Mr Langham who had since prepared a statement (in a change in circumstances).

Another reason I was content that Mr and Mrs Rutter could fairly represent themselves even facing a claim for almost £1 million, was that many of the issues were primarily factual – and of course Mr and Mrs Rutter know better than anyone what they factually did and why at the time. The claim for Conversion was abandoned and the date of the Company’s insolvency under s.123 Insolvency Act 1986 (‘IA’) and Mr and Mrs Rutter’s duty to act in the interests of the Company’s creditors under s.172(3) Companies Act 2006 (‘CA’) goes hand in hand with the main issue: whether a dividend of £560,000 was lawful. So, there remain three key issues I must resolve:

At trial I have done my best to assist Mr and Mrs Rutter to have a fair hearing. This included not only assisting them to articulate their legal submissions on their preliminary applications and at the end of trial; raising legal points and cases in their favour with Mr Tabari, but also taking stock of the issues once I had determined the trial should proceed; and encouraging each to ask supplementary and any re-examination questions of the other, Mr Langham and Mr Smith. Under CPR 3.1A(5), I also asked my own questions of Mr Irwin first before Mr and Mrs Rutter asked him their questions. This is a practice I have adopted on many occasions in different judicial roles over the years with litigants-in-person: to ensure all relevant points were covered, that their questions stay relevant and the represented party can fully re-examine.

However, when a Judge assists a litigant-in-person, they must not lose sight of fairness to the represented party, even a large company like the Claimant, expertly represented by Mr Tabari (whose skill in advocacy and the law was only matched by his patience with Mr Rutter). After I admitted Mr Langham’s late statement (but before I heard his evidence) and after Mr Irwin and Mrs Rutter’s evidence, I felt one potential finding of fact was that the dividend of £560,000 was decided upon and entered in the 2014-15 accounts (which might support it and indeed mentioned it) in July 2016 to reduce Mr and Mrs Fuller’s indebtedness; but was not recorded in a journal by Mr Langham until April 2017. That seemed broadly consistent with the documents, Mr and Mrs Rutter’s pleaded case and Mr Langham’s statement (even if they did not specify those dates). But it was inconsistent with the Claimant’s pleaded case that the dividend was paid in July 2015 based on the 2013-14 accounts (which did not support that dividend).

In fairness to the Claimant and to ensure any findings I made were fully ventilated in evidence (c.f. Satyam v Burton [2021] BCC 640 (CA)), I raised this and offered the Claimant the chance to recall Mr Irwin or ask further questions of Mrs Rutter. Mr Tabari declined and suggested (as I anticipated he might) this would mean the dividend was still not in law ‘distributed’ until April 2017 by when the Company was nearly insolvent, so was unlawful. I permitted the Claimant to argue that alternative case without amendment. To be clear: I did so in fairness to the Claimant because I had admitted Mr Langham’s late statement. It meant it could fully address (before Mr Langham’s evidence) a potential finding contrary to its pleaded case. It also meant that even if I made that finding, the Claimant had an alternative – if unpleaded - argument.

Moreover, as my first draft judgment was due to be handed down, Mr Tabari sought permission to re-open it, as he had overlooked in his closing submissions the alternative basis for the director’s loan claim for £104,668.12: that even if Mr and Mrs Rutter were entitled to set off any payment against a debt, they could not do so for breach of duty. AIC v FAAN [2022] 1 WLR 3223 (SC), sets out the relevant principle in its headnote:

On one hand, the ‘deadweight of the finality principle’ is heavy here as this was a draft final judgment after trial, the Claimant omitted to deal with the point in submissions and Mr and Mrs Rutter represent themselves. On the other, breach of duty was always the Claimant’s pleaded alternative case which Mr and Mrs Rutter addressed in their statements. Moreover, Mr Tabari’s trial Skeleton argued they were in breach of duty for failing to reduce the debt. But in my draft judgment, I found they had not just failed to reduce the debt but actually run up the debt of £104,688.12. So, on reflection, Mr Tabari was right to submit this was a pure issue of law and he did not need to re-open the evidence, only his submissions. Indeed, not re-opening might give Mr and Mrs Rutter an unfair windfall through that mistake, at the expense of the Company’s unsecured creditors. So, applying the overriding objective to deal with cases justly and at proportionate cost having regard to the CPR 1 factors, on balance I found it just and proportionate to allow the Claimant to re-open, but to permit Mr and Mrs Rutter to give further evidence on this narrow point, but only if they wished to do so. I adjourned until the next day to give them time, as a longer delay would not improve their situation, just increase costs. Having heard evidence, submissions and made my decision, I held back hand-down of my judgment to await BTI v Sequana [2022] UKSC 22 on 5^th October (which I discuss but does not change my decision). This is now my final judgment.

Mr Irwin in his evidence answered my questions to the best of his recollection. However, in addition to challenging his appointments, Mr and Mrs Rutter also criticised his conduct of the administration and liquidation. As I explained to them, many of these criticisms were not directly relevant to the issues I had to decide but might be relevant to his credibility. So, I permitted them to explore them and Mr Irwin accepted some of his recollection was wrong, for example his understanding of the purchase of the Company’s factory in 2014. It is also true his drafting of the report in October 2019 (pgs.263-73) recommending transition from Administration to Liquidation could have been clearer (as I said in my preliminary judgment) and his own recoveries in the liquidation were limited, as mortgagee receivers sold the factory.

However, Mr Irwin is an insolvency practitioner of many years’ experience. He has been immersed in the affairs of this company for almost five years and in his methodical way, I accept he has investigated it thoroughly, bearing in mind that Mr and Mrs Rutter did not engage fully with his investigations of the Company’s finances, despite his requests (pgs.236-240). In terms of his evidence to the Court, all Mr Irwin can realistically do as an Administrator and Liquidator is to investigate the affairs of the Company, collate then present the evidence. That he has done, in the form of voluminous documentation. It is largely thanks to Mr Irwin that I had the benefit of a four lever-arch bundle (‘MB’), supplemented by another application bundle (‘AB’) for the challenge to validity of his appointments on which I have also drawn. This all shows an often messy and incomplete picture. But I am satisfied that does not reflect shortcomings in his investigation, so much as in the Company’s paperwork.

On that topic, as CICCJ Briggs said in Re Glam & Tan [2022] EWHC 855 ps.29-31:

Mrs Rutter’s evidence on the financial and administrative side of the Company was a curious mixture of occasionally implausible assertions interspersed with disarming honesty. For example, she initially and implausibly tried to explain away invoices clearly for building work at their home Launde Lodge Farm in 2015-2016 by saying the invoices merely stated it as a delivery address. But as soon as I asked her whether they had undertaken any work on their house in the period, she candidly accepted (even in the absence of other evidence at that stage) they had part-built an extension. She later accepted some invoices had charged the Company and should have been put through the loan account. Mrs Rutter also readily accepted that her and Mr Rutter paying £116,000 to one of the Company’s creditors under their personal guarantees also included payments to other creditors. She accepted the dividend of £560,000 had not been approved by formal shareholder resolution (although I return to this below). I initially thought Mrs Rutter’s assertion that Mr Langham may have made the entry on Sage in April 2017 reducing the directors’ loan balance by £560,000 without her agreement was an implausible assertion. However, considering Mr Langham’s evidence, I now understand what she meant. It was simply that she did not agree in April 2017 to him making that entry – he does not say she (or Mr Rutter) did, but rather that he made the entry himself to ‘correct’ Sage as it was inconsistent with the 2014-15 company accounts which recorded a dividend of £560,000 being used to reduce the loan account balance. Those company accounts were discussed with Mr and Mrs Rutter and formally approved by her in July 2016 and so that was Mr Langham’s authority to make the ‘correction’ to Sage in April 2017. Mrs Rutter cannot remember much detail about those periods, but I am conscious she has had some serious health problems in the meantime and this may well have affected her memory. However, overall, I found Mrs Rutter an essentially honest and reliable witness, albeit with a tendency to speculate or not express herself clearly. I was particularly assisted by seeing the way she gave evidence in Court (she gave brief but honest evidence remotely on the re-opened issue), especially given the absence of much contemporary documentation – but that itself matters to credibility: Re Glam.

However, Mr Rutter I am afraid, save on one issue, was a thoroughly unreliable witness. Ironically, the one issue was that he recalled the least: the dividend. He admitted he did not use Sage and took no interest in it, but left the inputting to his wife, son and Mr Langham, whilst he focussed on the order book and bank account. So, he accepted the dividend was probably entered on Sage on 12^th April 2017 by Mr Langham. However, Mr Rutter maintained the dividend was decided on when discussing the 2014-15 accounts in July 2016, even though he could not recall the conversation. Indeed, he even admitted he may well have not declared the dividend in his tax return. However, this scanty recollection struck me as at least honest, unlike the rest of Mr Rutter’s evidence, where he had no qualms about not only implausible assertions, but giving the distinct impression of making things up as he went along. For example, on the building invoices ostensibly related to their home at Launde Lodge Farm, clearly in the light of Mrs Rutter’s candid admissions (and further evidence the Claimant had gathered overnight, including a planning application and photographs), Mr Rutter could not deny they had built an extension at their home (if not completely finished it) at the time. However, he not only stuck to his implausible explanation that various invoices to the Company explicitly referring to ‘work at Launde Lodge Farm’ or construction equipment delivered there (even in one case for the ‘Launde Extension’ - MB662) had been misaddressed because plant and materials were stored at their barn over the road. Not content with that, Mr Rutter also proffered entirely new explanations which he said he had ‘remembered overnight’: including that the Company had undertaken work for their next-door neighbours at ‘The Stables’; and indeed, that an employee had bought 4 Marsh Avenue and put through invoices to the Company. I am afraid on this issue Mr Rutter was not telling me the truth, or at least was skewing the truth (e.g. that the Company had done work for their neighbours, which I accept given new documents he produced overnight) to explain away work billed to the Company but plainly done on their home and Marsh Avenue.

Mr Smith gave brief evidence (remotely from Spain, which I permitted) on that issue. He has a building company which worked with the Company on development projects and often visited the barn at Launde Farm. However, his assertion that the invoices he saw related to legitimate development work did not go very far as he understandably could not really recall which invoices he was referring to. Therefore, while Mr Smith was honest and doing his best to assist me, his evidence in the end was peripheral.

However, by contrast Mr Langham’s evidence was not peripheral but central (relevant to my decision to grant relief from sanction for it). Mr Langham was not only by some distance the most reliable witness (with respect to Mr Irwin, for the reasons given above). Mr Langham was on any view an impressive witness. The reasons for his late witness statement became clear as he gently observed that his family and Mr and Mrs Rutter’s had known each other for years, yet he had been left with unpaid bills: ‘the last in the queue’ as he put it. Mr Langham’s candour revealed his relationship with Mr and Mrs Rutter was strained. I accept he only reluctantly came to Court and he came to tell the truth, not just to support the Rutters’ case. He accepted that Mrs Rutter spoke to him briefly about her evidence on one issue, but I accept it has not influenced his evidence. Mr Langham answered every question with clarity and force, emphasising that he was a professional, accountable to professional standards. So, I accept he would not have endorsed a decision to declare a dividend in April 2017 by which time the company was in financial trouble: as Mr Irwin said: a very strange thing for an accountant to do. Likewise, Mr Langham rejected any suggestion that he would have made entries on Sage in April 2017 without Mr and Mrs Rutter’s permission. However, as he said he made that entry himself in April 2017 to ‘correct’ Sage by reference to the accounts approved in July 2016 and does not say Mr or Mrs Rutter asked him to make it in April 2017, his evidence is ultimately consistent with Mrs Rutter’s. Mr Langham’s evidence was also essentially consistent with my own reading of the contemporary documentation and I found it entirely credible. I shall return to Mr Langham’s detailed account (that I accept) later, but the gist of it was that during the discussion of the completion of the 2014-15 accounts in July 2016 Mr and Mrs Rutter decided to declare a £560,000 ‘dividend’ and offset it against their outstanding directors’ loan account, but he did not input it onto Sage until April 2017.

I turn to my findings on the balance of probabilities. Mr and Mrs Rutter met in Leicestershire in the 1980s and later married. Mr Rutter ran a small business where Mrs Rutter helped out with administrative and finance tasks in the evenings whilst working in a technical support analyst. She was then made redundant and by 1995 was working at a car dealership in purchase ledger accounts and moved to another company in 1999 dealing with its accounts with the assistance of an accountant. So she has experience of accounting, although I accept she has no formal training.

In 1999, Mr and Mrs Rutter incorporated Rutland Communications Ltd, which was a family company that grew sufficiently for Mrs Rutter to give up her employed role and she took on full office manager responsibilities. Indeed in 2012, their son Tommy Rutter began working for Rutland Communications Ltd. I have not heard evidence from him, but I understand he went on a part-time accounting technicians’ course.

On 21^st February 2013, the Company (i.e. Rut5 Ltd) was incorporated. It initially manufactured shopfitting units, at its rented factory units in Market Harborough. Mr and Mrs Rutter were equal shareholders and directors – with Mr Rutter responsible for the operational side of the business and Mrs Rutter responsible for the administrative and financial side. Tommy inputted data to produce the management accounts on ‘Sage’ to be reviewed by Mrs Rutter and their accountant, Mr Langham.

In August 2013, the Company set up a facility to factor their book debts with Redd Factors Ltd, who also took a floating charge debenture (AB109-129). This was the later foundation in November 2017 for the appointment of Mr Irwin as Administrator when the Company hit trouble. However, back in 2013-2015, I accept the relationship between Redd Factors and the Company was reasonably good and trusting.

Whilst the Company initially manufactured shop fittings, within a few months they had begun manufacturing digital media units (‘POD’s). These are those familiar ‘digital hoardings’, comprising a cabinet and a screen, advertising products in shops and shopping centres. These clearly ‘took off’ and the Company secured a steady contract to manufacture 100 PODs a month. This enabled the Company premises to be bought in June 2014 with a mortgage for £350,000 from Lloyds Bank and an additional £150,000 secured loan from Russell Cade Investments.

So, judging by the 2013-2014 accounts prepared by Mr Langham in December 2014 (MB1405-1418), the Company had a solid first 17 months (its financial year-end was 31^st July). The Company’s turnover from February 2013 to July 2014 was £1,742,220, with gross profit of £581,151 and net profit after tax of £40,668. It had net assets of almost exactly the same - £40,670, with its main fixed asset the Company premises. Trade debtors totalled £152,501 and ‘Other Debtors’ totalled £478,888, which as Mr Irwin said would include the Directors’ Loan Account (‘DLA’).

The DLA was recorded on a separate ledger account (MB249-254) on the Company’s electronic bookkeeping system ‘Sage’, titled ‘Directors’ loan Account (P&J)’ (i.e. ‘Paul and Joanne’ – Mr and Mrs Rutter). As Mr Rutter confirmed and (in this case) I accept as consistent with the ledger entries, there was only one loan account for them both and they appear to have used it rather like an overdraft facility: debiting it with expenses – including personal expenses (such as ‘Range Rover’), ‘Wages’, ‘Salary’ and ‘VTG Commission’ (which Mr Rutter earned on POD sales), but then also regularly ‘crediting’ it. Mr Irwin has thoroughly investigated the Company’s finances but has not suggested those ‘credits’ were not genuine, although he challenges the largest such ‘credit’: the ‘net dividend’ of £560,000 to which I return later.

Most of these entries were inputted by Tommy Rutter under Mrs Rutter’s supervision. However, every few months (at least, as I will explain, until 2016) and especially around or after the financial year-end in July, one can see entries made by Mr Langham (marked ‘DML’). As he and Mrs Rutter explained, he worked for the Company and others owned by Mr and Mrs Rutter, but would visit around year-end whilst preparing annual accounts and tax returns (in late 2014 for the 2013-14 accounts, in July 2016 for 2014-15 accounts and in March 2017 for 2015-16) He would then review the Sage entries against his own records used for the accounts to make sure both were correct and reconcile them, as one would expect. Therefore, one can see in the Sage account at such times entries which appear out of date order, such as several ‘DML’ entries dated 31^st July 2014 but in between entries in November and December 2014 (MB250) – at the time Mr Langham did the 2013-14 accounts. Whilst Mrs Rutter disputes the accuracy of various entries from late-2016 onwards, insofar as they predate Mr Langham’s last (and most significant) entries on 12^th April 2017, I reject those criticisms and accept Mr Langham would have tied the loose ends. (I will also find Mrs Rutter’s criticisms of entries later in 2017 appear simply to be quibbles about how they were recorded - by her son under her own supervision – and I also reject them and find the debits and credits on the ledger for their loan is accurate).

However, what the Sage ledger (at least as printed out) does not do is record a running balance (as opposed to an end balance) of the loan, or at some points indebtedness of the Company to Mr and Mrs Rutter. But helpfully Mr Irwin later extracted the entries into a spreadsheet of debits and credits and running balance on the loan (MB269-276).

Nevertheless, there is one important ‘health warning’ with Mr Irwin’s spreadsheet, as Mr Langham confirmed when I showed it to him. Because the spreadsheet not only gives a balance, but has also arranged the entries in chronological order, it can on occasion give a misleading indication of what the loan balance was at a particular time. For example, by arranging Mr Langham’s ‘31^st July 2014’ entries on that date rather than when he entered them in November 2014, it suggests the balance on 31^st July 2014 was different than anyone viewing the Sage system on that date would see. This is particularly important to remember with the £560,000 ‘net dividend’ dated 31^st July 2015, but effectively agreed as entered by Mr Langham as I shall explain on 12^th April 2017. The legal effect of that entry is part of perhaps the most important issue I consider in detail later. However, its effect on the spreadsheet was to reduce the balance of Mr and Mrs Rutter’s debt to the Company by £560,000 from the 31^st July 2015. So, if anyone had looked at Sage between 31^st July 2015 and 12^th April 2017 to look at the running balance, the debt would have been £560,000 more than on the spreadsheet (and perhaps different again given other adjustments).

However, the dividend does not affect the accuracy of the balance on the spreadsheet before 31^st July 2015. What is striking about that is that until February 2015, the Company owed Mr and Mrs Rutter money. It rather looks like a bank account with various debits and credits, with the balance owing to Mr and Mrs Rutter of £188,971.30 on 31^st July 2014, although some higher balances (e.g. on 31^st August 2014) are ephemeral stages in Mr Langham’s year-end reconciliation. However, it is plain that between July 2014 and February 2015, the balance gradually lowered as Mr and Mrs Rutter drew on the account until it finally moved back from ‘the black’ into ‘the red’ on 28^th February 2015 (MB270) and became a true ‘loan account’.

This loosening of the purse strings reflected the health of the Company. At that same time, early 2015, fresh from its success diversifying into PODs, it diversified much more extravagantly (and as it turned out, unwisely) into financing residential property development in the South East. Mr Rutter approached Mr Smith, director of Redline Facilities Limited in Sheffield, to project-manage the building and refurbishment of residential property developments around Radlett in Hertfordshire. Mr Smith worked mainly with contacts from Yorkshire and they also sourced materials from there and I accept Mr Smith’s evidence they stored them at the empty barn at Launde Farm.

However, as Mrs Rutter candidly admitted, at around this time, they were also building an extension at their home at Launde Lodge Farm. Following that admission, the Claimant obtained overnight three overhead photographs: one from September 2011, one from June 2018 and one from May 2021. The 2011 photograph shows Launde Lodge Farm as four buildings around a ‘quad’ with an opening to the road in front crossing the picture and another building on the other side of the road (which is the barn). However, on the 2018 photograph, there is plainly a new roof all the way round this square of buildings and to the bottom-right corner (there is no compass), one can see a darker roof jutting out. That is the extension Mr and Mrs Rutter had built (with Listed Building consent granted to them in November 2011), shown from the front outside on another undated photograph. It includes a new kitchen and indoor swimming pool, even if undated photographs from Mr and Mrs Rutter show the latter in an unfinished state (although as Mr Rutter did not deny, the property has since been since marketed for sale). The 2021 photograph is broadly similar.

When investigating the affairs of the Company from 2017, Mr Irwin found 2015 and 2016 Reserves Schedules (MB35-40/52-3) referring to £225,852.48 in costs on sub-contractors and materials relating to Launde Lodge Farm. This appears to have been prepared by Mr Langham but again probably with the assistance of Mrs and Tommy Rutter – certainly they did not correct it or dispose of it as based upon any misapprehension. So, the Company’s own contemporary records between late 2014 and August 2016 clearly show a total of £225,852.48 was billed to the Company relating to Launde Lodge Farm. This is a considerable sum for an extension, but as the photographs show, this was a considerable extension and other work was clearly done at least on the rooves of the other building by Mr and Mrs Rutter at the time. However, there is no evidence that any of that was ever put through the loan account.

The details of some of the invoices are revealing, for example the labour invoices for ‘work at Launde Farm’ (as well as other places) from James Stapleford (pgs.282-300) and BB Builders (e.g. MB305) and skip hire (MB595), crane hire (MB603) and scaffolding (MB644) there. A building inspector visited “Two storey pool extension at Launde Farm Lodge” (MB489) and an invoice showed hire of an excavator for the “Launde Extension” (MB662). Whilst Mr Smith said he had been shown invoices definitely relating to Company work he was unclear whether they were these invoices.

Mr and Mrs Rutter’s case in the Defence and Mr Rutter’s evidence included the assertion that all these invoices relate to work done elsewhere but billed to Launde Farm, especially as it had been the registered office of the Company. However, that changed to the Company factory premises in March 2015, close to the start of the development project and it is not credible that so many contractors made that same mistake. Moreover, whilst I accept Mr Smith’s evidence that the barn was used for storage for other development projects, this does not explain all the invoices Mr Irwin found plainly relating to Launde Lodge Farm, as opposed to simply addressed there. Indeed, whilst Mrs Rutter initially started off in evidence parroting their pleaded case, after candidly admitting they had built the extension, she also admitted that some of the invoices related to that extension and were paid through the Company, although she thought that they would be accounted for in the loan account. However, she accepted that this was the first time she had said this and did not in fact point to any entries in the loan account on this issue. I find none of them were accounted for.

These concessions prompted Mr Rutter to change tack overnight. As I have said, he started deploying entirely new arguments in cross-examination to try and explain away the evidence, in an increasingly strained and incredible way. This included that the work actually related to construction the Company and Redline had undertaken at a neighbouring property ‘The Stables’ (the first time he had mentioned this), producing an invoice. ‘The Stables’ is shown on the 2021 photograph (on the other side of a neighbouring property ‘Launde Abbey’ which seems largely unchanged) in the bottom-right hand corner, as an ‘L-shaped’ building with a fence round a yard. However, this fence is absent in the 2018 photograph and this building is absent in the 2011 one (although there may have been old stables under the trees, hence the name). So, I accept there was building work at ‘The Stables’. On the assumption (which the Claimant does not accept) this 2016 invoice from the Company to the owners of ‘The Stables’ is genuine and had not just been created by Mr Rutter overnight, it shows that the Company undertook construction work there. It does not prove that any of the invoices Mr Irwin relies on relate to work at ‘The Stables’ rather than ‘Launde Lodge Farm’. It is the latter they refer to – and I note the Company’s invoice to ‘The Stables’ is addressed to ‘The Stables’, Launde Road, Launde’, not ‘Launde Lodge Farm’. Whilst some workers using the barn may have referred to the barn as ‘Launde Lodge Farm’, they are unlikely to have referred to that for work relating to ‘The Stables’.

Ultimately, if Mr and Mrs Rutter had been straightforward from the start that they spent Company money on developing their home, it is theoretically possible they may have been able to point to particular invoices which were legitimate Company expenditure, or which were properly accounted for as part of the directors’ loan account. But I simply do not know, as that is not the course they took. Whilst I have assisted them with legal points and in questioning, it is not my role to trawl through invoices trying to look for a factual case they’d be aware of yet are not presenting.

I am therefore driven to conclude that the Claimant has proved on the balance of probabilities that all £225,852.48 of work invoiced from 2014 to August 2016 referring to Launde Lodge Farm all related to work done on Mr and Mrs Rutter’s property and was billed to the Company but not properly accounted for through their loan account. I stress that conclusion does not rest on the burden of proof being on Mr and Mrs Rutter in any way, although in principle I consider it should be to the extent discussed by ICCJ Briggs in Re Glam and Tan and clearly the Defendants have failed to discharge that burden to the extent it is on them.

The Claimant makes a similar argument in relation to £30,226.56 in invoices relating to 4, Marsh Avenue in Kibworth. Again, there are many invoices referring to work at ‘Marsh Avenue’ (e.g. MB766-70). Mrs Rutter accepted that Marsh Avenue was their property and a considerable amount of work had been done there. Indeed, Mr Rutter put to Mr Irwin that it was far more than £30,000-worth of work, which he accepted. However, that is not inconsistent with the Claimant’s pleaded case that £30,226.56 of Company money was used to (part-)fund the refurbishment of Marsh Avenue, since that is what the invoices show, corroborated by Sage entries (see MB55-159). In the Defence, the only positive case is that invoices were made out to the Marsh Avenue address in error. But this makes no sense – the invoices relate to work at Marsh Avenue. Moreover, Mr and Mrs Rutter did not address this at all in their statements. Mr Rutter’s entirely new assertion that the owner of Marsh Avenue worked for the Company and had ‘put invoices through’ is totally new, not evidenced and I reject it. Again, I am driven to conclude the effectively evidentially uncontradicted Company records show £30,226.56 of Company money was used to refurbish Marsh Avenue: neither Company expenditure, nor declared in the loan account.

However, whilst Mr Irwin tentatively floated in his statement that an additional £167,000 of expenditure could relate to Marsh Avenue, I am not in a position to make findings about that. It is not part of the Claimant’s pleaded case which is limited to £30,226.56 and this is merely asserted in Mr Irwin’s statement but not set out in any detail. If it is not my role to plough through invoices to build a case for the unrepresented Defendants to reduce their liability on Launde Farm, it is certainly not to do so for the represented Claimant to increase its recovery on Marsh Avenue. Indeed, whilst the Claimant initially sought an account, that was sensibly abandoned. So, I simply find on the balance of probabilities Mr and Mrs Rutter in total used £256,079.04 of Company money on their own two properties without declaring it.

In fairness, most of this personal expenditure funded by the Company was in 2015 when it was doing very well for most of the year. The POD contract was still proving very lucrative and it may well be the foray into property development prospered early on. Certainly, the accounts for the year-end 31^st July 2015 (AB28-41) prepared by Mr Langham and signed off by Mrs Rutter on 29^th July 2016 showed a spectacular year. Instead of the £1,742,220 turnover in 2013-14, turnover in 2014-15 increased almost ten-fold to £10,175,076, and net profit to £768,753 after allowance for tax of £204,970 (roughly the same as the £199,074.28 in Corporation Tax for the year declared to HMRC at the same time (but not paid, to which I return later). The reserve and net assets had also risen from £40,670 in 2014 to £809,423 in 2015 (before the £560,000 dividend). Moreover, in August 2015 Redd provided a loan of £250,000 secured on the 2013 debenture to pay off the £150,000 loan and interest to Russell Cade. However, the Company’s rude health had encouraged Mr and Mrs Rutter’s lavish spending on their loan account. Their indebtedness had risen from credit on 28^th February to owing £688,833.07 six months later, on 22^nd July (MB271).

The next entry dated 31^st July 2015 (MB272) is the ‘net dividend’ of £560,000, which on Mr Irwin’s spreadsheet reduced the debt down to £128,833.07. However, as I explained, this is a reflection of the automatic chronological re-ordering of that spreadsheet, which was pulled through from the Sage account. Sage shows the ‘net dividend’ entry of £560,000 is dated 31^st July 2015 but is sandwiched between two entries dated 12^th April 2017 (MB254-5). That date is now agreed to be when Mr Langham inputted it. The Claimant no longer says this was on 31^st July 2015.

Whilst I will come back to the circumstances in which Mr Langham made this entry on 12^th April 2017 below, to understand why he did so, it is necessary first to set out my findings of fact in the intervening almost two-year period. However, I should first make clear it is also now common ground there was no actual movement of money at any stage. The ‘net dividend’ of £560,000 was a purely ‘accounting transaction’ having the effect of offsetting that ‘dividend’ to Mr and Mrs Rutter as shareholders against their directors’ loan liability to the Company. The dispute is when that ‘accounting transaction’ was a ‘distribution’ under s.829 CA: 31^st July 2015, 29^th July 2016 or 12^th April 2017. The different timings make a huge difference as to its legality because of the very different financial state of the Company on those three dates.

Indeed, the respective year-end accounts show dramatic decline from a £768,753 net profit in 2014-15 (AB31) to a £423,663 net loss in 2015-16 (MB24-5). This is explained by several factors. However, given a key issue is what and when Mr and Mrs Rutter should have known about the financial state of the Company, it is important not to roll those together in hindsight but rather take them in sequence:

However, whilst it certainly would have been apparent to Mr and Mrs Rutter by July 2016 that 2015-16 had been a worse year than 2014-15, it is important not to place too much weight on the hindsight that comes from knowing the Company entered Administration in November 2017. Of course, Mr and Mrs Rutter had access to Sage, but they did not have Mr Langham’s formal 2015-16 accounts (MB21-34) until March 2017. Indeed, even looking at those accounts, it is striking that not only had expenses not changed much since 2014-15, but also that the asset and creditor position had not changed much either e.g. the short-term creditors had been £1,571,223 in 2014-15 and were £1,384,701 in 2015-16; the long-term unsecured creditors (both more than 1 year and more than 5 years) had been £667,745 in 2014-15 and were £669,325 in 2015-16; whilst the secured creditors had been £387,880 in 2014-15 and were £319,281 in 2015-16 after the re-financing with Redd in July 2015. Therefore, all in all, the Company was still servicing its debts, even if it was effectively treading water with them rather than making real headway. Yet, that is scarcely surprising given the catastrophic fall in turnover – and lesser but still significant fall in debts owed – noted above. So, by 31^st July 2016, the Company had had a very bad year, but it was not yet in real financial trouble, even on its own later accounts for 2015-16.

Moreover, that bad trading year in 2015-16 had come after a stellar trading year in 2014-15. Small companies often hit a large bump in the road but recover and keep on going. Mr and Mrs Rutter had long experience of such small businesses since the late 1980s and I accept that it was not simply mindless optimism or ‘Micawberism’ which led them to consider that 2014-15 proved they were on to a good thing with the PODs and they could turn it round again and/or the property development would come good. Mrs Rutter, with evident fondness, described in evidence her faith based on experience that Mr Rutter would find a solution, as he had with their other businesses before.

Nevertheless, as Mr and Mrs Rutter got to July 2016, whilst it would be 8 months before they had the concerning 2015-16 accounts, they must have already known it had been a bad year and they needed to tighten their belts. As Mr Langham prepared the 2014-15 accounts reflecting easier times, it became apparent to him the net profit for 2014-15 would be nearly £770,000 and tax liability about £200,000. In fact, the Corporation Tax Return Mr Langham prepared for 2014-15 also dated 29^th July 2016 shows liability of £199,274.28 (MB1074-8), whilst the accounts a slightly higher figure of £204,970. Therefore, the net profit after tax was £768,753, which with accumulated profit reserves from 2013-14 of £40,668 gave distributable profits of over £800,000.

It does not appear Mr Langham made any Sage entries in July 2016 (MB253) (it would be much a simpler case if he had). But he said and I accept that he would have looked at the loan account. I took him to the running balance in July 2016 in Mr Irwin’s spreadsheet and he agreed that one would need to add on £560,000 to see what the balance would have appeared as at that time, since it was not adjusted until April 2017. Therefore, as at the entry on 28^th July 2016 (which was made on that date – see MB253), the apparent balance of £181,218.31 (MB273) may well have then appeared as £741,218.31. Therefore, by around that date three important factors would have been clear to Mr Langham analysing the internal records. Firstly, on one hand for 2014-15 there was a substantial fund of undistributed profits which could be declared as a dividend. Secondly, on the other, by July 2016, there was a substantial debt on the directors’ loan account which could be reduced dramatically by the ‘accounting offset’ of such a ‘dividend’. Thirdly, whilst work on the 2015-16 accounts lay 8 months ahead, the year just finishing had plainly been much worse than 2014-15 had been.

Neither Mr Langham, Mrs Rutter nor Mr Rutter could remember exactly how the dividend arose in their discussion of the 2014-15 draft accounts in late July 2016. However, I accept Mr Langham’s account (not inconsistent with Mr and Mrs Rutter’s evidence, although neither could remember much detail). I find on the balance of probabilities that Mr Langham explained the combination of high undistributed profits in 2014-15 and high loan balance by July 2016 to Mr and Mrs Rutter who recognised a chance to reduce their indebtedness by using a dividend to reduce the loan. They probably also have realised they needed to do so then, given 2015-16 had been worse.

I pointed Mr Langham to the corrected balance on Mr Irwin’s spreadsheet on 1^st August 2016 of £43,343.07 (MB273), suggesting a pre-adjusted balance of c.£600,000 - Mr Langham thought it may have been £560,000 so the dividend reduced it to nil. However, the Sage entry of 1^st August 2016 reducing the balance by £137,875.24 to £43,373 was actually made in late October 2017, just before Administration (MB254). So, the better inference from the documents on the balance of probabilities is that a dividend of £560,000 was chosen in July 2016 to reduce the undistributed profits in the 2014-15 accounts down to £249,421 (MB38). That was over six times higher than the figure in the 2013-14 accounts: £40,668. A reserve cushion of just under £250,000 for losses in 2015-16 was a wise provision at the end of a worse year in 2015-16 than in 2014-15, although hindsight now shows that year turned out worse even than feared.

Be that as it may, whatever the reason £560,000 was chosen, I accept Mr Langham’s evidence that Mr and Mrs Rutter decided to use it as a dividend back-dated to 31^st July 2015 to reduce the directors’ loan. Mr Langham did not decide that off his own bat – he says and I accept Mr and Mrs Rutter decided to do that following discussion of the draft accounts in July 2016 and he recorded that they had done this in the 2014-15 accounts which Mrs Rutter then approved on 29^th July 2016. This recorded not only the dividend and reserves but that the ‘other debtors’ balance (which as Mr Irwin said, would record the directors’ loan account) at 31^st July 2015 was £245,727. The last unaffected directors’ loan account balance before the £560,000 adjustment was on 22^nd July 2015: £688,833.07 (MB271). It follows that Mr Langham’s 2014-15 accounts also plainly recorded the reduction of £560,000 in the directors’ loan account balance as at 31^st July 2015 under ‘other debtors’, because otherwise that balance in the accounts would have been far higher than £245,727. Both dividend and reduction were recorded.

Therefore, in short, I find as facts on the balance of probabilities that in July 2016, as Mr Langham prepared and discussed the 2014-15 draft accounts, Mr and Mrs Rutter decided (i) to take a dividend of £560,000, leaving profit reserves of c.£250,000 and (ii) to offset that £560,000 against their directors’ loan debt, then almost £700,000. Mr Langham then prepared the final accounts on that basis, backdating the transaction to the year-end 31^st July 2015; and explicitly recording both aspects of it in the accounts which Mrs Rutter then formally approved on 29^th July 2016. This ensured the accounts gave a true and fair view of the Company’s finances as at 2014-15 (s.393 CA to which I return). However, no entry was made on Sage reducing the directors’ loan balance then.

Another point emerges when one studies the detail of the accounts. Mrs Rutter accepted that she and Mr Rutter had not declared the dividend by shareholder ordinary resolution under Art.54.1 of the Company’s Articles. However, Art.54.1 states: “The company may by ordinary resolution declare dividends and the directors may decide to pay interim dividends .” (my underline). Whilst I and Mr Tabari both missed it at the time, actually if one looks at the relevant ‘line’ of the 2014-15 accounts, the £560,000 is declared as an interim dividend (AB35). So, Mr and Mrs Rutter’s decision (as directors) to award themselves as shareholders an interim dividend appears consistent with Art.54 (though it was not explored in evidence, I also consider its lawfulness later). Moreover, as the loan account was in their joint names and as there was no explicit apportionment, it follows the credit of £560,000 just reduced their joint indebtedness on their loan.

Mr Tabari also pressed Mr and Mrs Rutter whether they had declared that dividend in their personal 2014-15 income tax returns, which they have pointedly failed to disclose despite repeated requests. Whilst Mrs Rutter speculated that she had asked for them from Mr Langham, he denied having prepared them (which I accept). Tellingly, amid all his tall tales about Launde Lodge Farm in evidence, Mr Rutter, having started out with the same line as his wife, when pressed on this by Mr Tabari, rather sheepishly accepted that he probably did fail to declare it in his tax return. I find this was the case for both of them and sadly also echoes their failure to pay the Company’s Corporation Tax of just under £200,000 and various other tax liabilities which finally led to the winding-up petition. This reflects no credit whatsoever on them. However, the irony is if Mr Tabari is right that the £560,000 ‘dividend’ had no legal effect until April 2017, Mr and Mrs Rutter did not break the law in not declaring it for tax in the year 2014-15.

This is not the only respect in which, as I said above, it would have been a much simpler case if Mr Langham had on or about 29^th July 2016 entered on Sage the net dividend of £560,000 dated 31^st July 2015 as reducing the loan account, as he did on 12^th April 2017. Had he done so, the one remaining but (according to Mr Tabari’s and my own researches) apparently novel and complex legal issue I have to resolve later of whether the ‘distribution’ under s.829 CA happened on 31^st July 2015, 29^th July 2016 or 12^th April 2017 would not have arisen. Mr Tabari (as I will explain, fairly and in my view correctly) does not argue that if the ‘distribution’ under s.829 was in July 2016 that it was unlawful. Indeed, I have foreshadowed the basic reason in this judgment above: by 29^th July 2016 it would have been clear to Mr and Mrs Rutter that 2015-16 had been worse than 2014-15, but they did not yet have the detail of that in the 2015-16 accounts which did not come until March 2017. Moreover, unlike at that stage, as at July 2016, the Company ended a bad year but was not yet in real financial trouble. Indeed, using a dividend of £560,000 to reduce what they owed the Company, rather than taking it out of the Company as cash, benefitted the Company as well as them.

Yet Mr Langham did not complete that Sage entry recording the net dividend of £560,000 at the end of July 2016. In fact, he did not do so until 12^th April 2017 just after he had finished preparing the 2015-16 accounts signed off on 30^th March 2017, because he did not do further work for the Company for those 8 months. Mr Tabari argued that Mr or Mrs Rutter therefore could and should have made the Sage entry back in July 2016 or soon afterwards. However, Mr Langham said it would have been more appropriate for him to have done that as a year-end adjustment. Mrs Rutter also said that such a year-end journal entry would have been made by Mr Langham. As she said, she was not a trained accountant. However much she and Mr Rutter merit criticism for failing to declare to HMRC the dividend, it would have been bold of them to have changed their Company’s ledger themselves to reflect their own decision to reduce their own joint indebtedness by £560,000. It is not unrealistic to anticipate official questions about the legitimacy of doing that. I can understand why she would prefer it be done by Mr Langham. After all, here we are six years later and her joint liability for £560,000 hangs on the legal status of that entry and the July 2016 decision and accounts. Of course, I do not find that Mrs Rutter would have anticipated that. However, I do accept that she preferred – reasonably – for Mr Langham to make that Sage entry – indeed he said himself in evidence it would be more appropriate. I accept that it was.

However, what Mrs Rutter could have done in Autumn 2016 is just to ask Mr Langham to make that Sage entry of £560,000. There were several reasons why she did not:

This brings me at last to Mr Langham making that entry for £560,000 net dividend on Sage. It was plainly done on 12^th April 2017, because it is sandwiched between two other entries on that date, the second of which was also done by Mr Langham. He had already finished the 2015-16 accounts, which Mrs Rutter had signed off on 30^th March 2017, following discussion of the tax position (MB257-258). The gap in time between lodging the abbreviated accounts at Companies House was almost a month – to 25^th April, much longer than the previous year and straddling this date of 12^th April. However, whilst suggesting in cross-examination to Mrs Rutter that this was in some way sinister (which prompted her to warn Mr Langham overnight before his evidence), Mr Tabari did not really pursue that point in submissions. He recognised that given the dividend (and indeed its offset on the loan account in ‘other debtors’) had been recorded in the 2014-15 accounts in July 2016, it was not sensible to argue the dividend had only been decided upon in April 2017 in some way to steal a march on the by-now looming insolvency. Instead, Mr Tabari has pursued the much better legal point that the ‘distribution’ under s.829 CA was only complete when entered on Sage on 12^th April 2017 and by then, the risk of insolvency was so high that it was unlawful.

However, Mr Langham rejected that interpretation of his actions in cross-examination really for two reasons. Firstly, he said that far from the Sage entry in April 2017 constituting the ‘transaction’ itself, it was correcting and backdating Sage to reflect what was in the 2014-15 accounts, which is what year-end Sage adjustments were for and as he had done many times before. Secondly, it was plain from his evidence that Mr Langham would never have considered facilitating a dividend of £560,000 for a company whose accounts he was just about to lodge at Companies House showing a loss of over £400,000. Mr Irwin had said it would be ‘surprising’ for a qualified accountant to have done so. I would say it would have been reckless and indeed unlawful as Mr Tabari argues. Moreover, as I have noted, Mr Langham does not say he was reminded or instructed by Mr or Mrs Rutter on 12^th April to make that Sage entry, yet I entirely accept he would not have made it completely off his own bat (and properly understood, I do not consider that was what Mrs Rutter was suggesting). I find on the balance of probabilities that Mr Langham made this entry thinking he was simply ‘tidying up Sage’ as a year-end correction. His authority to do so derived from Mr and Mrs Rutter’s decision in July 2016 and his and their expectation he would enter it on Sage, which he accepted it would be more appropriate for him to do than them.

I can take the rest of my findings of fact relatively quickly. Leaving to one side the dividend issue, from Mr Irwin’s spreadsheet of the directors’ loan account, it might appear that it was again in credit for much of the second half of 2016 and first half of 2017 until July 2017. However, that would not be how it would have appeared at the time, because it would have shown Mr and Mrs Rutter substantially in debt to the Company throughout, were it not for the last credit to Sage of £13,875.24 dated 1^st August 2016 entered by Tommy Rutter apparently on or after 26^th October 2017 – just before the Administration started on 1^st November 2017 (MB254). I spotted this point in my draft judgment and it was briefly explored with Mrs Rutter in her evidence on the re-opened issue. I accept Tommy made this entry in late October 2017 and backdated it to August 2016 on Mr Langham’s instructions and that it was legitimate.

However, in my draft judgment, I also found that due to that retrospective correction, in mid-July 2017 the directors’ loan account had strictly been in credit. Therefore, the debt of £104,688.12 which the Claimant claims had been run up between July and October 2017 – despite the difficult financial circumstances of the Company. As I explained above, this finding was enough of a factual foundation for the Claimant’s re-opened legal point, which Mr Tabari omitted to deal with in closing submissions, that this was not just a debt (which could be set-off) but a breach of duty (which legally cannot be). This was one of the main reasons why I both allowed the Claimant to re-open the point (that it had pleaded and established in evidence but simply omitted in submissions) but also for Mr and Mrs Rutter to give further evidence if they wished to address it and indeed ordered repeat disclosure of Company bank statements as they had requested. Mrs Rutter gave evidence and was cross-examined. Mr Rutter added observations that Mr Tabari did not challenge and which I shall treat as evidence. I accept their evidence on this issue as genuine and honest (although as I will explain, that does not help them on the legal issue) and I will make the following additional findings of fact on the point.

As I have said, in March 2017, Mrs Rutter signed off the 2015-16 accounts (that Mr Rutter also saw) which showed that 2015-16 had been much worse than they had feared in July 2016 when I have found they decided on the £560,000 dividend. Moreover, as I have explained, by Spring 2017 the actual situation had deteriorated: there was a cash-flow crisis. Judging by those re-disclosed bank statements, by late March the Company bank account had entered its £50,000 overdraft and rarely left it.

Indeed, by early June 2017, the Company had been near or even above its £50,000 overdraft limit for a couple of months. This briefly changed on 7^th June when Redd Factors leant it £133,000, but that same day it was all paid out and the account when back into overdraft and a fortnight later was back at its over-draft limit. This is where Mr Hickey briefly enters the story, as on 14^th July he leant the Company £300,000 (which he maintains was guaranteed by Mr Rutter: the subject of Mr Hickey’s claim). Whatever the position about that guarantee (which I need make no findings about), I accept that money was soon spent on PODs and three days later on 17^th July, the Company was back in its overdraft yet again and then remained there.

It was also on 17^th July that the director’s loan account (as retrospectively corrected by Tommy Rutter’s 2016 entry in October) moved from credit to debit (pg.276). In the following three months until the last entries (including Tommy Rutter’s retrospective one) on 26^th October 2017, just over £220,000 of debt was accumulated, offset with about £70,000 of repayments. However, making undisputed adjustments, the figure the Claimant seeks as non-Company expenditure by Mr and Mrs Rutter which they are said to owe in debt and in breach of duty in that period is £104,688.12 (MB276). In fact, I accept Mrs Rutter’s re-opened evidence that £10,000 to ‘Exodus Financial’ was genuine Company expenditure, reducing that total debt to £94,688.12.

Nevertheless, I see no other reason to adjust my finding in my draft judgment that all the rest of that £94,688.12 was personal expenditure by Mr and Mrs Rutter. Indeed, the vast majority of the entries in the Sage ledger say ‘P & J Rutter’. There were no fewer than 24 payments to themselves, including of £18,597.96 (apparently according to the bank statement the finance on their BMW car), £10,000 and £15,000, as well as £7,143.20 apparently to a travel agent. Mrs Rutter did not seem too sure if that related to a holiday or business travel, but as Mr Tabari says, if the latter, there would be no need to claim it through the loan account. Whilst Mrs Rutter challenged some of the other payments, for the most part these seem to be quibbles about accounting or wording, which is particularly ironic given the ledger throughout would have shown a substantial debt until ‘corrected’ by the credit of c.£137,875.24. I find on the balance of probabilities all withdrawals were properly included, related to personal not Company expenditure. So, in just over 3 months to 31^st October 2017, aside from the dividend, credit of £137,875.24 and £10,000 to Exodus Finance, the debt run up was £94,688.12.

Indeed, Mrs Rutter accepted that they had continued to use the directors’ loan account as they had always used it – to pay themselves ‘wages’ (strictly ‘drawings’, but it does not matter) and other personal expenses. I find they did to the sum of £94,688.12. Indeed, unlike the dividend, this can be seen in the ‘real world’ expenditure of the bank account (which of course may only have covered part of their journaled spending). This shows a number of the items on the ledger (including the £18,597.96 for the BMW finance and £7143.20 for the travel agent which I accept related to a holiday especially given the time of year in July). By the end of July, the bank account was back up to its £50,000 overdraft limit. Whilst this occasionally and very briefly reduced, the account was near its limit both before and after 18^th September 2017 when HMRC presented its winding-up petition for £326,438.29 (MB228), including £200,000 Corporation Tax.

Mr and Mrs Rutter freely admit continuing to use the loan account as they always had - even despite this line of financial shocks: the disastrous 2015-16 accounts approved in March 2017, the massive unpaid Corporation Tax bill of £200,000 which came back to roost in that petition and the intervention of a bank insolvency adviser. They maintained their determined optimism because the Company was owed a total of £1.3 million from various sources and they were advised they could trade through the storm. I accept that this was their genuine view. However, to use an analogy I floated at the time, they did not ‘batten down the hatches’ despite that storm, they just kept on sailing as usual because they could see daylight on the horizon. I will have to consider below if that was a breach of duty to the Company and creditors. For now, I can return to my findings of fact as they were in the draft judgment.

Mr Rutter repeated what he said in the course of the earlier challenges to Mr Irwin’s appointments: that even after that winding-up petition, the Company could have kept on trading with its full order book. They had an offer of finance to pay off the tax bill from another corporate lender and Mr Rutter plainly feels ‘tricked’ by Mr Sullivan from Redd Factors into agreeing to Administration on 31^st October 2017, when presented with an inflated demand for over £800,000. I have some sympathy with Mr Rutter’s concern this level of indebtedness was inaccurate – Mr Sullivan appears to have acknowledged as such a few months later. But be that as it may, as HHJ McCahill QC found on 13^th March 2020, it did not invalidate Redd’s appointment of Mr Irwin as Administrator and as I found his transfer to liquidation was also valid.

Much of Mr and Mrs Rutter’s challenge to Mr Irwin in questioning him was to the conduct of the administration and liquidation. This is not only irrelevant, it is unfair. Mr Irwin was diligent – and if his job was complicated, that was because of the poor and confusing record-keeping at the Company – perhaps typified by that 18-month delayed ‘correction’ to the Sage account on 28^th October 2017 of over £130,000. Whilst Mrs Rutter says that she and her son were untrained, this does not explain why she and Mr Rutter failed to engage with Mr Irwin’s investigation and his draft statement of affairs dated 1^st November 2017, suggesting a total deficiency of £1,246,127 (MB241). Whilst Mr and Mrs Rutter said they provided an annotated response at the time (MB1131), as I will find, the ‘County Asset Finance’ and ‘Lead Asset Finance’ debts were not paid off until 2020 and 2021. I find they did not co-operate with that investigation (not least because Mr Irwin chased them for a response in 2019 (MB240).

So, even if Redd Factors’ debt was much lower than £840,000 and they did pay off vehicle finance prior to the Administration so the deficiency was much lower, the Company was still plainly insolvent at the point of Administration and I am afraid that Mr Rutter’s contention that they could have traded out of it is close to self-delusion. Moreover, Mr Irwin could not prevent Lloyds appointing the LPA Receivers for the factory and they did in fact recover over £400,000 even after the mortgage. However, the Claimant has accepted that the claim for conversion cannot be pursued as there is no evidence property was taken by Mr and Mrs Rutter after receivers entered.

Yet, in fairness to Mrs Rutter, I was struck by her candour in her evidence that their payment of £116,000 to County Asset Finance to stave off their bankruptcy in December 2020 included not only their debt which they had guaranteed on behalf of the Company, but also debts owed to other creditors. I accept Mrs Rutter’s evidence, corroborated by an email of 21^st December 2020 (MB1079) that County Asset Finance were paid £116,000, but that Mr Irwin received £5,000 and Rate Setter £10,000, so I find County Asset Finance were paid £101,000 by Mr and Mrs Rutter under a guarantee (which I have not seen), which extinguished the Company’s debt to them. Likewise, I accept that on 13^th December 2021, Mr and Mrs Rutter paid off £16,150 of the Company’s debt to Lead Asset Finance under a guarantee as well. That is accepted to extinguish the directors’ loan claim in debt, but I will have to consider breach of duty. However, first I will deal with in much more detail the more complex dividend claim.

This claim is at first sight legally complex – and there appears to be no reported case on the ‘date of distribution’ point, according to the research of both myself and Mr Tabari. However, as I said above, he (rightly) does not say that if the dividend of £560,000 was a ‘distribution’ made in July 2016, it was unlawful, whereas I accept if the ‘distribution’ only came with the Sage entry on 12^th April 2017, by then it was unlawful. So, this complex issue – and £560,000 riding on it – comes down to timing.

I have set out my findings of fact already on this issue. I can summarise them by saying that I have found on the balance of probabilities that in the course of preparing the 2014-15 accounts in July 2016, Mr Langham had a discussion with Mr and Mrs Rutter about the level of net profits of £768,753, creating with that accumulated from 2013-14, reserves of £809,423. At the same time, the directors’ loan account indebtedness was £688,833.07. However it came up, I have found Mr and Mrs Rutter decided to pay a dividend from the distributable profits and use it to reduce the loan account debt. A dividend of £560,000 was settled upon, leaving a little under £250,000 distributable reserves. Given Mr and Mrs Rutter knew in July 2016 that 2015-16 was much worse than 2014-15, that was a reasonable figure to leave in reserves, but they did not yet know that by the time the accounts for 2015-16 were prepared, they were much worse. Both sides of this purely ‘accounting transaction’ were recorded in the accounts dated 29^th July 2016: the director-declared valid interim dividend of £560,000 and reduction in ‘other debtors’ reflecting the £560,000 reduction in the loan debt with effect from 31^st July 2015. Mr Langham could have also recorded that on Sage at the time, but he left it to do later. Perhaps neither he nor Mr and Mrs Rutter thought it would be 8 months later, but it was reasonable for them to leave it to him and with the growing crisis in Autumn 2016 that they did not remind him was an understandable oversight (although the failure to pay tax on the dividend or the 2014-15 Corporation Tax was not). When Mr Langham did return in March 2017 to complete the 2015-16 accounts, it became apparent the 2015-16 loss was much more substantial than the 2014-15 reserves. However, Mr Langham did not think that prevented him on 12^th April 2017, without even checking with Mr and Mrs Rutter, from making what he thought was simply an accounting correction to Sage to bring it into line with the 2014-15 accounts.

It may be the lawyers will be interested in my detailed legal reasons for my conclusion based upon my full findings of fact (of course not simply that brief summary). But Mr and Mrs Rutter – and Mr Irwin and his colleagues – simply want to know my decision. For reasons I will explain, my decision on the dividend claim is that the ‘distribution’ in law happened in July 2016 and so was lawful. Therefore, I dismiss the claim for £560,000. Before launching into a complex legal analysis, I will summarise it.

Mr Tabari’s basic argument in his extremely helpful closing submissions is this:

In any event, even if Mr Tabari is right that the ‘distribution’ legally did not happen until 12^th April 2017, it follows that Mr and Mrs Rutter were not dishonest in failing to declare it to HMRC and I find they were reasonable to leave the inputting to Mr Langham and it would be fair overall to relieve them of their liability for breach.

Save for a couple of paragraphs later, this is the only part of my judgment which is amended to reflect the Supreme Court decision in BTI v Sequana [2022] UKSC 22. I did not call for further argument on it, as the Supreme Court upheld the decision of the Court of Appeal in BAT v Sequana [2019] Bus LR 2178 (CA). Indeed, my decisions on the couple of minor points where Sequana directly applies to this case are clearer. However, as the reasoning of the Supreme Court differs in some respects from the Court of Appeal, it seems to me preferable for me to focus on the former, not the latter.

Having said that, I start with a helpful explanation of ‘dividends’ in the Court of Appeal by Richards LJ (now Lord Richards, as he has become in the same week his decision in Sequana was upheld by his new colleagues in the Supreme Court). The classic example of a ‘dividend’ is a sum declared by a company to be payable (and then paid) to shareholders in relation to their shares. Richards LJ said in the CA judgment at p.41:

The issue before the Supreme Court in Sequana was whether the dividend paid was not only a ‘transaction at undervalue’ enforceable against the recipient (and now insolvent) shareholder, but also a breach of duty by the company’s directors enforceable against them. Upholding the decision in the Court of Appeal, the Supreme Court in summary agreed that at common law (as recognised by s.172(3) Companies Act 2006 (‘CA’)), directors owed duties to their own company to take into account the interests of its creditors when the directors knew or ought to have known that the company would be imminently insolvent, or that its insolvent administration or liquidation was probable; (including in relation to the distribution of an otherwise lawful dividend). However, since in Sequana that trigger was not met at the time the dividend was paid, there was no breach of what Lord Briggs called this ‘creditor duty’ (although he agreed with Lord Reed it was not a duty owed to creditors, but to the company itself about its creditors).

This is not the main way in which the Claimant puts the dividend claim here. It primarily relies on Part 23 CA, although this was also briefly discussed in Sequana. For example, in deciding the creditor duty applied to otherwise lawful dividends, Lord Briggs summarised the statutory and common law rules on paying dividends at p.158:

As to annual accounts, the requirements for the Company as a ‘Small Company’ being exempt from audited accounts are set out at ss.393-6 CA (the accounts must be circulated to the Company’s shareholders – here Mr and Mrs Rutter - under s.423 CA):

The complicated statutory framework in Part 23 CA 2006 summarised in Sequana, so far as material actually provides as follows:

Therefore, as Zacaroli J summarised in SSF v Loch Fyne [2021] BCC 354 at ps.88-9:

By contrast, the personal liability of ‘members’ (i.e. shareholders) is dependent on what they knew or ought to have known, as provided by s.847 CA, which states:

In SSF, Zacaroli J summarised personal liability for shareholders in SSF at ps.97-103:

In SSF, Zacaroli J then summarised at ps.104-113 the legal liability of directors, which arises not under s.847 CA but under their statutory directors’ duties in s.171-5 CA:

Zacaroli J’s reference in that last paragraph in SSF to ‘the duty to act in the interests of creditors where the company is, or is likely to become, insolvent’ refers to the directors’ ‘creditors duty’ to the company noted in s.172(3) CA and explained in Sequana, which I summarised above. This arises in this case both in relation to the dividend claim (depending on when I find the ‘distribution’ under s.829 CA happened) and the directors’ loan breach of duty claim, so I need to explain both the content and the trigger point of that duty. Lord Briggs stated its content at p.176 and its trigger at p.203:

Lord Briggs’ reference to s.172(1) CA points towards the other statutory duties on directors to the company in Part 10 CA which Zacaroli J mentioned in paragraph 113 of SSF. In this case, it is helpful to cite ss.171-174 CA as is relevant with headnotes (omitting e.g. s.172(2) as it is irrelevant and also s.172(3) as I have just addressed it):

As s.170 and 178 CA explain, these duties codify common law and equitable principles and are to be interpreted and applied in the same way, with the same remedies (see Lord Reed in Sequana p.63). s.171 CA codifies the requirement on directors to act within their powers, not ‘ultra vires’. s.174 CA codifies a director’s duty of care to the company. ss.173 and s.172 CA codify aspects of a director’s fiduciary duties to the company. In particular, as Lord Briggs noted in Sequana at ps.139-140, s.172(1) CA:

This reinforces Mr Tabari’s submission that sole director-shareholders cannot simply treat the interests of the company as the same as their own personal interests. Indeed, there can be a conflict between their interests as shareholders and interests as directors. Whilst Mr Tabari relied on s.175 CA (duty on directors to avoid conflicts of interest), s.175(3) states: “This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.” However, his submission is supported by a combination s.172(1), s.173 and s.175 CA given they can overlap: s.179. (However, Mr Tabari did not rely on s.177 - duty to declare interests in transactions - presumably as Mr and Mrs Rutter obviously knew of each other’s interests: s.177(6)(b); or s.197 CA – the requirement of ordinary resolution for directors’ loans - because the Claimant relies on not impugns the directors’ loan). However, Mr Tabari also argues the dividend was outside Mr and Mrs Rutters’ powers as directors (s.171) as in breach of the Company Articles (incorporating the CA 2006 Model Articles 2008 for private companies limited by shares), especially Art.54 (and I add Arts.56 and 60) which state:

Indeed, it is relatively common for directors to be empowered as Mr and Mrs Rutter were here to pay an interim dividend, as Richards LJ observed in Sequana (CA) at p.48:

The distinction is said to be the difference between a ‘final dividend’ which requires ordinary resolution or an ‘interim dividend’ which the directors may decide to pay – a distinction noted in Palmer’s Company Law (2022) at 9.711-12:

Moreover, as Palmer goes on say at p.9.715:

I recognise the significance of this legal distinction between ‘interim’ and ‘final’ dividends only occurred to me in writing this judgment and was not explored in evidence or submissions. I offered the Claimant the opportunity to make submissions about it, but Mr Tabari declined, contending it would require re-opening of evidence, but stressed the Claimant does not accept this point. It seems to me more a point of law than of contested evidence, but I accept I must not decide a case on a basis not neither pleaded nor canvassed at trial (Satyam p.36). However, this is not the basis upon which I decide the case, merely an alternative basis. The basis upon which I decide the case (which I did expressly raise to ensure it was canvassed at trial) was the potential finding of fact I have now made. That is: Mr and Mrs Rutter decided in July 2016, in the course of discussing with Mr Langham the 2014-15 accounts, both to declare the dividend of £560,000 back-dated to 31^st July 2015 and use it to reduce their directors’ loan account, but Mr Langham did not input it onto Sage until 12^th April 2017. That is why I offered Mr Tabari the opportunity to recall Mr Irwin on that point and to ask further questions of Mrs Rutter, both of whom had already given evidence. Mr Tabari, perfectly sensibly and on instructions, preferred to deal with the point with Mr Langham and Mr Rutter, yet to give evidence. On all the evidence – particularly that of Mr Langham – I have now made those findings of fact and indeed relied upon the Claimant to argue the ‘distribution’ was not until April 2017. That is the ‘basis’ on which I will decide in law whether the ‘distribution’ under s.329(1) CA was in July 2016 or April 2017.

Be that as it may, another reason I referred Mr Tabari to Satyam was what is sometimes called the ‘Duomatic principle’ after the case that articulated it, but which in Sequana was called - and which I shall call - the ‘ratification principle’ (see the discussion in Lord Reed’s judgment ps.23-4, and 37-42), as summarised by Lord Briggs at p.125:

For the ratification principle to apply, all shareholders must agree to the action: Dickinson v NAL [2020] 1 WLR 1122 (CA) and positively manifest such agreement: Satyam p.45; and the transaction must not involve dishonesty or bad faith towards the company: Satyam ps.56-9. None of these limitations appears to be an issue on my findings of fact. I have found that in July 2016 Mr and Mrs Rutter decided to declare a dividend of £560,000, used it to reduce the directors’ loan account and recorded that in the 2014-15 accounts they approved. So, if the ratification principle applies, this decision can be treated as being authorised by the shareholders by ordinary resolution. This would fully answer the Claimant’s challenge that Mr and Mrs Rutter had no power to make this decision under the Articles and so violated s.171 CA. (Indeed, it would also appear to avoid any complex questions of quorum of directors at a meeting voting on an interim dividend which may arise under the Articles and the provisions of s.175 and 177 CA on directors’ duties: see s.180(4) CA: not relied on here by the Claimant).

However, Mr Tabari argues the ratification principle is excluded here for two reasons:

As noted in Satyam, ‘unlawful distribution’ at common law now is governed by the approach in Progress Property v Moore [2011] 1 WLR 1 (SC). In Moore, PPC Ltd sold to M Ltd shares in YMS Ltd when all three were controlled by one common shareholder. The director procuring sale for £60,000 genuinely believed it was at market value, but it turned out to be a huge undervalue. The Court held it was not an unlawful disguised distribution of capital but a genuine (if disastrous) commercial sale. Lord Walker explained the common law principles of ‘unlawful distribution’:

However, the question of ‘unlawful distributions’ at common law under the principle in Moore (so potentially disabling reliance on the ratification principle to avoid breach of s.171 CA following Satyam) is closely related to whether there is unlawful distribution under Part 23 CA at least on the meaning of ‘distribution’ in s.829 CA, which I repeat:

Speaking of ‘parliamentary intention’, the general principles of statutory interpretation were recently considered by Lord Hodge DPSC in R(O) v SSHD [2022] 2 WLR 343:

Finally, directors can be relieved of liability for breach of duty under s.1157(1) CA:

However, Newey LJ went on to agree with HHJ Cooke’s (Footnote: ¹ ) refusal to grant relief where the director-shareholder had sold company property to himself at an undervalue and leased it back, as he was not acting in the company’s best interests at the time. The discretion under what is now s.1157 also arose – and in the context of an unlawful dividend - In Re Marini Ltd [2004] BCC 172. As well as Mr Richard Seymour QC (sitting as a Deputy High Court Judge) deciding that liability for unlawful distributions under Part 23 and common law is limited to the extent that it is unlawful – as noted by Zacaroli J in SSF (and if not he’d have granted relief under the forerunner of s.1157 for the ‘lawful part ‘) Mr Seymour refused relief for the ‘unlawful part’ at p.57:

At last, I turn to the central issue in the case: whether the ‘distribution’ under s.829 CA and common law (as in SSF not suggested to be different) was in July 2016 or April 2017. Mr Tabari argued Moore, Satyam and SSF were concerned with whether a given ‘transaction’ was or was not a ‘distribution’, not with its date. But another way of putting the question here is precisely that: whether what I have found happened in July 2016 was by itself a ‘distribution’ in law or whether that was only in April 2017.

I will set out Mr Tabari’s written submission that the ‘distribution’ was in April 2017 in full (although will add points he elaborated on in oral submissions below):

Mr Tabari’s argument, in writing and orally, was of the highest quality. Nevertheless, on reflection I have come to the conclusion that I respectfully disagree. I summarised my reasons above that the ‘positive action which affects the Company’s finances in some definite way’ was the decision in July 2016 not just to declare a dividend of £560,000, but to allocate it to reduce the balance of the directors’ loan account, at that stage almost £700,000, and record that in the 2014-15 accounts, I shall call by the neutral word ‘transaction’ (which a dividend can be: Sequana CA). In my judgment, in July 2016, even before the entry was made on Sage in April 2017, that transaction was a ‘distribution’ both under s.829 CA and in common law, for five alternative reasons:

Firstly, I will assume Mr Tabari is right to submit that a ‘distribution’ under s.829 CA must be a positive action not only affecting a company’s finances in some definite way, but also changing the legal position and tax liability of its shareholders. In my view, that perfectly describes Mr and Mrs Rutter’s decision in July 2016 to declare themselves a dividend, ‘pay’ it immediately into their directors’ loan account reducing it, both of which were recorded in the 2014-15 accounts: declaring the dividend and reducing the ‘other debtors’ figure. Those statutory accounts did not predict or even constitute that whole transaction, they recorded it as having already happened: indeed, backdated it to the 2014-15 year. In my judgment, this is a clear and straightforward ‘distribution’ within s.829(1) CA as a question of fact. But if necessary to analyse it in legal terms, Mr and Mrs Rutter used their dividend to part-pay their debt to the company, in a straightforward ‘set-off’. (Footnote: ² ) The parties were Mr and Mrs Rutter, each with their two different ‘hats’: as directors (on behalf of the Company) and as shareholders. Wearing their director ‘hats’ on behalf of the Company, they declared the interim dividend, as it is recorded in the accounts, then ‘agreed with themselves’ wearing their ‘shareholder’ hats that ‘dividend’ would be ‘paid’ into their directors’ loan account. It was either an ‘agreed means of payment’ under Art.56 or a ‘non-cash distribution’ under Art.60, but even if it was neither, the ‘set-off’ of the dividend against the directors’ loan account was a ‘distribution’ of Company non-cash assets to its members (Mrs and Mrs Rutter, who used it to reduce their debt as directors) under s.829 CA. Of course, putting it like this sounds strange. But it follows from the legal fiction of separate corporate personality in Salomon v Salomon [1897] AC 22 (Sequana p.136) applied to a case where the only directors are also the only shareholders, as is common. Moreover, this is precisely what their accountant Mr Langham understood they had done (not just decided), which is why he recorded it as he did in the 2014-15 accounts. Those showed the £560,000 stayed in the company, which benefitted by being ‘repaid’ rather than ‘paying out’. The ‘distribution’ also raised a personal tax liability, which if not paid does not change what in law was done: it just means Mr and Mrs Rutter may well (subject to tax law) owe HMRC more tax. Of course, not only that tax, but the ‘split personality’ distribution itself, raise the question of whether that distribution was lawful, which I consider later. However, it is the very fact there was a ‘distribution’ under s.829 CA (and at common law) that raises this question of its legality.

Secondly, even if I am wrong, I do not in any event accept Mr Tabari’s oral submission (not argued in his written submissions) that a ‘distribution’ under s.829 CA must change the legal position and the tax liability of the shareholders. s.829(1) CA states that ‘distribution’ ‘means every description of distribution of a company's assets to its members, whether in cash or otherwise’. There are three observations I would make:

Therefore, I will interpret ‘distribution’ in s.829 CA in the light of the approach in Moore, where Lord Walker focussed not just on form but substance. He said at p.27:

This chimes with his quote in Moore from Lord Hoffmann at p.1 and comment at p.16:

I have endeavoured to follow that approach here and have set out my findings of fact. Without repeating them, I am satisfied in July 2016, while they discussed the draft 2014-15 accounts, Mr Langham showed Mr and Mrs Rutter there were net profits after tax of £768,753, which with those from 2013-14 created a reserve of £809,423, but at the same time, the directors’ loan account indebtedness was £688,833.07. Mr and Mrs Rutter decided to declare a dividend of £560,000 and to off-set it against their directors’ loan account not in the future but retrospectively. Mr Langham recorded both aspects in the 2014-15 accounts which Mrs Rutter then formally approved on 29^th July 2016 on the basis – as was her duty under s.393 CA – that they gave a ‘true and fair view’ of the Company’s financial position in 2014-15. Of course, as Mr Tabari says, an entry in the accounts is not definitive of reality. But it can evidence reality, as I find it does here.

That transaction in July 2016 was not a ‘pretence’ or a ‘sham’, but a genuine transaction and indeed ‘a positive action which affected the Company’s finances in some definite way’, even if it did not legally reduce the level of Mr and Mrs Rutter’s debt (which I found above that it did). It reduced the distributable profits and also the reserves for future years, which had implications for future potential dividends, for example. Indeed, Mr Langham thought it also reduced the indebtedness to the Company of Mr and Mrs Rutter (who did not disagree with this) and this is why he made his entry on Sage in April 2017. He rejected the suggestion this itself was a payment of the dividend and said (and I accept) that it was just a correction to bring Sage into line with the real financial position recorded in the accounts in July 2016. At that time, Mr Langham had not understood Mr and Mrs Rutter to be simply ‘deciding to make a distribution in the future’, as Mr Tabari characterises it. Mr Langham understood them in July 2016 to be making a retrospective transaction, which is how he recorded it in the accounts. It was his task to reflect this July 2016 transaction on Sage, but there was delay in doing so. I consider on all the relevant facts that in substance, just as Mr Langham thought, the ‘distribution’ had taken place in July 2016, even if (contrary to what I have found above) in form, the dividend in July 2016 was not ‘paid’ until April 2017 nor indeed changed the legal or tax position until then.

Thirdly, even if it is one of those cases which Lord Walker mentioned in Moore at p.28 where the states of mind of the individuals involved are irrelevant, in my judgment the transaction in July 2016 which Mr Langham recorded in the 2014-15 accounts to use a dividend of £560,000 to reduce the loan account (under ‘other debtors’) was objectively a ‘distribution’ under s.829 CA in substance not just form following Moore. The dividend of £560,000 was not just an informal ‘decision’, or a ‘plan’ to declare and pay a dividend eventually to reduce the loan. It was a decision in July 2016 to make an ‘accounting distribution’ recorded in the Company’s 2014-15 accounts (even if it was not a legally-effective transaction, which I have found it was). By contrast, the Sage entry in April 2017 was objectively in substance not form merely a correction to align Sage with the 2014-15 accounts, not least as it was backdated to 31^st July 2015 – the last day of the accounting period in the 2014-15 accounts. Of course, if those accounts had been inaccurate (whether or not a deliberate ‘sham’) or simply the ‘form’ of the transaction not reflecting its true ‘substance’, that would be different. But even just on the objective facts, the 2014-15 accounts reflected the substance of the ‘distribution’.

Indeed, the Claimant is pushed into the strange position of arguing that one accounting transaction where no assets actually changed hands - the Sage entry in April 2017- was a ‘distribution’; whereas an earlier accounting transaction – recorded in the Company’s statutory accounts - was not. If so, a purely administrative exercise of adjusting a ledger that no-one outside the Company sees would be a ‘distribution’. But a transaction recorded in statutory accounts accessible to others outside the Company and affecting its tax position and indeed its distributable profits and reserves would not be. An internal journal entry would ‘trump’ the statutory accounts. Indeed, it would falsify them because it would over-ride the recording in the 2014-15 accounts (and Sage itself) that the dividend arose and was offset against the loan in July 2015. What apparently would matter is the date on which such a back-dated Sage entry happened to be made, here 12^th April 2017. Indeed, it would not apparently matter who made the Sage entry, nor even if it was actually made without authority or even by mistake (unlike here). This could accidentally (or deliberately) skew the date of the ‘distribution’ outside of the control of the directors (who at least do approve the statutory accounts), let alone the shareholders, especially in larger companies. Parliament cannot have intended that result from the words it chose in s.829 that ‘distribution’ ‘means every description of distribution of a company's assets to its members, whether in cash or otherwise’. Mr Tabari did not suggest any statutory purpose for such an interpretation – his premise was simply that there was no ‘distribution’ until the Sage entry because that was akin to ‘payment’. But that elevates an entry on an internal accounting record to the status of a payment into a bank account and indeed above the company’s statutory accounts. It assumes what it needs – and I find, at least here, fails – to prove.

Ultimately, a ‘distribution’ by actual transfer of assets (e.g. a bank transfer from a company’s bank account to a shareholder’s bank account) happens on a particular day. Likewise, where a ‘distribution’ is by ‘accounting transaction’, it should happen on the date that happens. If there is a choice of date between earlier statutory accounts where the ‘distribution’ of dividend and offset on liability are recorded as happening (indeed as having happened retrospectively); and a later internal journal entry where only one side is recorded, objectively and rationally, the date of the formal accounts must be the date of ‘distribution’. This is especially as s.829(1) CA applies to ‘every description of distribution of a company’s assets to its members, whether in cash or otherwise’. Therefore, objectively, in substance, the date of ‘distribution’ here was 29^th July 2016.

Fourthly and more fundamentally, even aside from the detail of my findings of fact, in my judgment it is consistent with the statutory wording, context and purpose of s.829 CA that if a dividend is genuinely allocated by shareholder-directors to reduce their directors’ loan and that is recorded in the company accounts, that is a ‘distribution’ in s.829 CA without any further action and irrespective of the legal effect of their actions.

Fifthly, even if I am wrong on all four grounds discussed above, there is a simpler route to a conclusion in this case that there was a ‘distribution’ in July 2016, albeit as I have said, it was not explored in evidence or submissions, and is merely a (fallback) alternative finding. The point is simply that an ‘interim dividend’ recorded in statutory accounts in itself amounts to a ‘distribution’ in s.829 CA, even if not ‘paid’ (or allocated to a directors’ loan account). Indeed – it did in SSF itself (the dispute was limited to the ‘management charge’). This is because the dividend is a debt owed to the shareholders. This is not only a positive action with a definite effect on a company’s finances, it also changes the legal position (if not also the tax position, even if there may be an issue about in which year it is taxable). That distinction between a ‘dividend’ and its ‘payment’ is not artificial: it is included in this Company’s articles (Art.56.1):

For those five alternative reasons, there was a ‘distribution’ under s.829 CA in July 2016, in the circumstances of this case. The question is then whether it was lawful. I can deal with this issue much more briefly because in closing submissions Mr Tabari accepted the Claimant had not argued that if the ‘distribution’ under s.829 CA was in July 2016, as I have found that it was, that it was unlawful. I consider that the Claimant was right not to do so for the following reasons, which I can set out relatively briefly.

As I have found the ‘distribution’ was in July 2016, under Part 23 CA, as discussed in SSF, whilst s.830 CA provides that a company can only make a distribution out of profits available for the purpose, that is determined by reference to the ‘relevant accounts’: s.836 CA. Those are the last annual accounts, except where the distribution would be found to contravene Pt 23 by reference to the company’s last annual accounts, it may be justified by reference to ‘interim accounts’. Since the 2014-15 accounts Mrs Rutter signed off on 29^th July 2016 had been circulated to all shareholders – namely her and Mr Rutter, I consider that if the ‘distribution’ simply took effect through those accounts (i.e. my fifth reason above), they were ‘the relevant accounts’ under ss.836 and 837 CA and so the distribution plainly lawful. However, if (consistent with my first to fourth reasons) the ‘distribution’ took effect in the July discussions and was simply recorded in those accounts signed off on 29^th July 2016, then the last official accounts were those for 2013-14, which cannot justify the distribution of £560,000 (a similar point to the Claimant’s original case). However, since that is the case, then under s.836 CA the distribution can be justified by ‘interim accounts’, which under s.838 must ‘be accounts that enable a reasonable judgment to be made’ as to distributable profit etc. The draft accounts for 2014-15 enabled a much more ‘reasonable judgment’ to be made than those for 2013-14, especially for an ‘accounting transaction’ backdated to 2014-15. Moreover, the draft accounts enabled the assessment of a provisional reserve for distributable profits of just under £250,000 even after the dividend, which was reasonable on the information Mr and Mrs Rutter had, even allowing for their knowledge that 2015-16 was much worse than 2014-15. So, I am entirely satisfied that the draft accounts Mr Langham prepared which led to the discussion about the dividend qualify as ‘interim accounts’ under s.838 CA and legitimise the dividend of £560,000, especially as backdated to the 2014-15 accounts.

It follows there was no violation of Part 23 CA for which Mr and Mrs Rutter could be liable, whether as directors or shareholders. Even if there was a technical breach, since the 2014-15 draft accounts showed a distributable reserve of nearly £250,000 left, Mr and Mrs Rutter neither knew nor had reasonable grounds to believe there was any breach so would not be liable as shareholders in s.847 CA. The same is true as directors for breach of Part 23 being unlawful under s.171 CA, as they were entitled to rely upon Mr Langham’s opinion (SSF). Even if technically liable as they did not wait a few days until the 2014-15 accounts were lodged, I relieve them from liability under s.1157 CA.

Turning to Mr and Mrs Rutter’s wider liability as directors, I have found that they were entitled as directors to declare and pay an interim dividend and could (subject to unlawful distribution at common law discussed below) rely on the ratification principle to treat the dividend as being authorised by general resolution in any event, so they did not act in excess of their powers and so there is no breach of s.171 CA. Likewise, I consider that they did exercise independent judgment under s.173 CA and were not in conflict of interest under s.175 CA because they reasonably considered the distributable profits enabled a dividend not to be removed from the Company for their own consumption, but to reduce a debt to it, that was in the Company’s best interests (so there was no violation of ss.172(1) either) and reasonable exercise of functions (so s.174 is not breached). I have also found that as at July 2016, the Company had a worse year but was not yet in real financial trouble and was still paying debts and meeting liabilities as they fell due. It was neither insolvent nor was that ‘imminent’, so there was no breach of the common law duty preserved by s.172(3) CA discussed in Sequana. In any event, since in my judgment Mr and Mrs Rutter acted honestly and reasonably in relying on Mr Langham’s reassurance that a dividend of £560,000 could be used to offset the directors’ loan, in the absence of a finding of unlawful distribution as in Re Marini, I would grant them relief from liability for breaching ss.171-5 under s.1157.

Moreover, unlawful distribution at common law, is not an entirely objective question of whether ‘distribution’ was made out of capital, as Lord Walker said in Moore at p.26:

Instead, Lord Walker in Moore at p.32 approved this approach in Steadman:

Indeed, if the common law took a purely objective approach looking purely at the company’s objective financial condition and distributable reserves in hindsight at the time of ‘distribution’, that would completely circumvent the careful checks and balances in Part 23 CA of ‘relevant accounts’ and ‘knowledge’ and indeed render the statutory scheme almost completely otiose. There should be harmony between statute and common law (Sequana p.235) Here, for the reasons already given, I accept Mr and Mrs Rutter’s state of mind at the material time (i.e. July 2016) was such that they were reassured by their trusted professional accountant that this course was open to them. I would find no breach of the common law principle of unlawful distributions (and so no exception from their ability to rely on the ratification principle discussed in Satyam). Even if I were wrong about that, I would relieve them from liability under s.1157 CA. In any event, it follows I find the £560,000 dividend was lawful and dismiss that claim.

Just as Mr Tabari accepted he was not arguing if the distribution had been in July 2016 (as I have found) that it was unlawful (with which I agree, as I have just explained), I did not call on him to elaborate why he argued that if the distribution had been in April 2017 (which I have rejected), it would have been unlawful. It plainly would have been. As Mr Tabari submitted, by 12^th April 2017, the ‘last relevant accounts’ under s.836 CA were those for 2015-16 which showed a huge loss and negative distributable reserves that could not support any dividend being paid at all. Moreover, since Mr and Mrs Rutter would have been aware of those accounts, they plainly would have been aware that a distribution would have been unlawful, both in statute and at common law. This would have disabled them from relying on ratification (Satyam). Indeed, by April 2017, insolvency was ‘imminent’ (if the Company was not already ‘balance sheet insolvent’) so they owed a duty to creditors: Sequana. Any dividend would be unlawful

Therefore, the question would come down to whether I could properly relieve Mr and Mrs Rutter of liability under s.1157 CA. This was not pleaded by them, but I raised it as an issue at trial and the Claimant had the opportunity to address it in evidence. In any event, it is another alternative finding. It is perhaps unrealistic to decide how I would have exercised a discretion on a very different legal conclusion than my own. However, my factual findings would be the same. (I have not found, as the Claimant at one stage argued I should, that the decision to pay the dividend was made in April 2017 despite those 2015-16 accounts. If I had done, relief would have been out of the question).

So, in this context, I would be exercising the discretion on the basis that Mr and Mrs Rutter made the decision to make the distribution in July 2016 and recorded it; and on the draft accounts and other information they had at the time this was reasonable. Indeed, I would have found – as I have found above – that this decision was taken not to remove profits from the company, but to reduce their indebtedness to it, improving its financial position, at a time when the business had a bad year, but insolvency was not yet ‘probable’. However, I would have found the ‘distribution’ was in April 2017 –because of Mr Langham’s 8-month delay in entering the net dividend on Sage which he and Mrs Rutter reasonably considered was a matter for him not her and Mr Rutter. I would have found this delay was explained by their focus on improving, then eventually just trying to save the business rather than paying for Mr Langham to come in to make an entry whose legal significance not even he appreciated. When he did so in April 2017, the Company was plainly in deep trouble. There is no evidence – and I have not found – that Mr Langham was asked at that stage to make the entry by Mr and Mrs Rutter. But that does not mean he did it completely off his own bat as Mr and Mrs Rutter speculated. I have found he made that entry under the authority to do so he was given in July 2016 and thinking (legally incorrectly on this hypothesis) that he was not making a ‘distribution’; and that had he realised he was, he would not have made because by then, a distribution of any size, let alone £560,000 was unlawful.

On that basis, not only were Mr and Mrs Rutter honest (as Mr Tabari accepts – their failure to declare tax being irrelevant, and on this hypothesis lawful, as I have said), contrary to his submissions, I would have found they also behaved ‘reasonably’, especially since their decision to distribute was in July 2016, not April 2017. That was also so in Re Marini, yet Mr Seymour QC still declined to order relief at p.57:

However, concern about leaving a director who was never entitled to dividend to keep it at the expense of creditors does not address a situation, as here, where the director’s decision to distribute was intended to keep the profits in the company as well as reduce indebtedness, so improving the solvency of the company at a time when insolvency was not probable. Nor does it address the situation that the entry would have been lawful had an accountant made the entry reasonably delegated to him to make at the time, but was rendered unlawful by an accountant doing so several months later. In my judgment, Mr Seymour QC in Re Marini was not intending to articulate a ‘bright line rule’ that an unlawful distribution can never be relieved and if he was, I respectfully disagree.

Moreover, since Re Marini, in Dickinson at p.47, Newey LJ suggested that relief would be ‘improbable’ for directors who breached duties by wrongly taking company property at an undervalue, there was no ‘absolute bar’ to doing so. If that is the case for proprietary claims in breach of trust, I consider it should also be the case for unlawful distributions: relief is ‘improbable’ but there is no ‘absolute bar’. In the extremely unusual even exceptional circumstances which I have described here, I would have been satisfied that relief should have been granted to Mr and Mrs Rutter. However, in the light of my finding the ‘distribution’ was in 2016 not 2017, that is academic.

I can deal with this issue more briefly. I have found as a fact above in this judgment that between July and October 2017, Mr and Mrs Rutter ran up a debt on the directors’ loan account of £94,688.12 (quite aside from the final credit of over £130,000 entered by Tommy Rutter on Mr Langham’s instructions in October 2017). I found this was a series of payments to themselves which they made, were not legitimate company expenditure and so which were owed to the Company. However, I went on to find above that I accepted on the balance of probabilities that in December 2020, they paid under a guarantee to County Asset Finance £116,000 (of which £101,000 discharged the Company’s debt to it) and in December 2021, they paid off £16,150 of the Company’s debt to Lead Asset Finance under a guarantee as well. Mr Tabari accepted that if I made those findings of fact, as I have, that Mr and Mrs Rutter were entitled to set off those payments to cancel out the balance on the directors’ loan owed in debt even though they were made after liquidation: DTI v Frid [2004] 2 WLR 1279 (HL).

However, as I have explained, Mr Tabari had also pleaded and argued the position was different if running-up of this debt of £94,688.12 was also a breach of directors’ duty. Whilst he omitted to address this in his closing submissions, I have explained why I permitted the Claimant to re-open this issue after my draft judgment. Mr Tabari is right to submit that liability for breach of director’s duty cannot be offset by a director paying a guarantee for the Company’s debt. In Manson v Smith [1997] 2 BCLC 161, Millett LJ (as he was) said in refusing permission to appeal against a decision refusing set-off of a debt owed by a company to a director against a liability for a wrongful director’s loan (approved in Smith v Bridgend CC [2001] 3 WLR 1347 (HL) at p.35):

By way of context for the running up of that debt in July-October 2017, I noted that the 2015-16 accounts were signed off by Mrs Rutter in March 2017. They showed ‘a dramatic decline from a £768,753 net profit in 2014-15 to a £423,663 net loss in 2015-16’. I found this was explained by three factors. Firstly, there was the fall in POD sales (with turnover falling from £10,175,076 in 2014-15 to £4,930,298 in 2015-16 and stock rising from £196,882 in 2014-15 to £240,856 in 2015-16, suggesting more unsold stock). Sales may also have started to suffer from the difficulties of a regular customer who later went into liquidation owing the Company £225,000. Secondly, business expenses had not markedly fallen from £1,187,351 in 2014-15 to £1,080,023 and the Company was in a classic ‘cash-flow crunch’. Thirdly, the new property development and lending side of the Company was not prospering. There was a dramatic shift in the Company’s debtors from 2014-15 where the Company was owed £1,086,349 (£840,622 trade debtors and £245,727 other debtors – of course as reduced by the dividend) to 2015-16 where the Company was only owed £669,129 in total (£111,248 trade debtors and £557,881 other debtors). However, the asset and creditor position had not changed much e.g. the short-term creditors had been £1,571,223 in 2014-15 and were £1,384,701 in 2015-16; the long-term unsecured creditors (both more than 1 year and more than 5 years) had been £667,745 in 2014-15 and were £669,325 in 2015-16; whilst secured creditors had been £387,880 in 2014-15 and were £319,281 in 2015-16.

However, whilst I explained why there was cause for optimism for Mr and Mrs Rutter when the dividend was decided on in July 2016 (when not all these figures would have been available), by March 2017, that situation had deteriorated. For convenience, I will repeat my key findings for mid-to-late 2017:

Against the background of those findings of fact (expanded given the re-opened evidence of Mr and Mrs Rutter), Mr Tabari sensibly does not rely on s.171 (excess of powers), as s.197 CA states directors’ loans may be authorised by ordinary resolution and here the ratification principle would apply. However, he puts his case in three other ways, which in my judgment do establish individual and alternative breaches:

I repeat my findings of fact above, starting with those relating to Marsh Avenue:

I added that it was not my role to plough through invoices to try and increase the Claimant’s recovery up to the asserted but not evidenced further c.£160,000 Mr Irwin claims. However, in fairness the Claimant does not ask me to do so, but to order an equitable account. But there are potential arguments against that in relation to a situation where Mr Irwin has had several years to do so and not evidenced that breach. So, I will hear further submissions on this point when I hand down judgment. However, I have found Mr and Mrs Rutter spent £30,226.56 of Company money on their own (non-home) property at Marsh Avenue, which was a plain breach of trust and fiduciary duty, as well as a breach of the duty to act in the Company’s interests under s.172 CA. As the property has been sold, they are certainly liable to account personally at least £30,226.56, subject to further submissions on hand-down of judgment.

On Launde Lodge Farm, I will also repeat my key findings of fact above:

However, in respect of Mr and Mrs Rutter’s home, the Claimant has not only personal claims for breach of s.172(1) CA and fiduciary duty, but also a proprietary claim for breach of trust, as in Dickinson, where a director took Company property in breach of duty (by buying it at an undervalue then leasing it back). Whilst s.1157 CA is theoretically available, as confirmed in Dickinson itself, it is ‘improbable’. In this instance of funding the extension through the Company without declaring it through the loan account, I have found Mr and Mrs Rutter did not act honestly and reasonably and so, no relief would be appropriate under s.1157 CA. It follows that they must pay the Claimant a further £225,852.48 to reimburse the Company what they wrongly used.

However, Mr and Mrs Rutter still own Launde Lodge Farm and they told me that it has been valued at between £1.8 million and up to £5 million (but probably nearer £2.5 million), with a mortgage of about £1.5 million. Therefore, given the extent of the extension the Company at least in part funded with the £225,852.48 they used in breach of trust, the Claimant seeks not just a personal remedy (a judgment debt Mr and Mrs Rutter must pay) but a ‘proprietary remedy’ (i.e. an interest in the house). The Claimant’s choice of remedies is explained in Snell’s Equity, 34^th ed:

As Mr Tabari says, this is not a case where there is a question about the Company’s money being paid into a mixed fund and thereby becoming unidentifiable. There has been no evidence to support an equitable defence of ‘change of position’. However, he rightly recognised the difficulty in valuing any beneficial interest in the absence of ‘before and after’ valuations. Given the level of the existing equity, the claimant sought an ‘equitable lien’ which works more like a second mortgage in the sum of £225,852.48, which does not rise or fall in value with the house, but reduces as it is paid off, like a mortgage. When I explained this to Mr Rutter, he accepted it seemed ‘fair’. I entirely agree with that fair concession and I will order it.

Therefore, I dismiss the dividend claim, but uphold the claim in respect of the director’s loan account in the sum of £94,688.12 and the claims on Marsh Avenue and Launde Lodge Farm. On Marsh Avenue, I will enter judgment against Mr and Mrs Rutter for £30,226.56. In respect of Launde Lodge Farm, I will enter judgment for £225,852.48 plus interest against Mr and Mrs Rutter and order an equitable lien on their home.

Having heard the further evidence on the re-opened loan account claim and decided it, I also heard argument on costs and finalised my order. In summary it is that there will be judgment for the Claimant in the sum of £350,747.16 (all three successful claims) plus interest of £40,707.96 continuing to accrue at the daily rate of £38.44; that Launde Lodge Farm will be subject to an equitable lien in respect of £225,852.48 plus interest at 4% from the date of liquidation, namely £26,210.25 and accruing at a daily rate of £24.75, making a total of £252,062.73; and that the Defendants will pay the Claimant’s costs of the claim – and indeed of their last-minute applications in the insolvency proceedings - in the terms of my order.