Manolete Partners Plc v Ian Russell White (Re Lloyds British Testing Limited (In liquidation))

This is my extemporary judgment on the fourth day of the trial of an insolvency claim in the Insolvency and Companies List of the Business and Property Courts in Manchester proceeding under claim number CR-2021-MAN-000222.

This claim concerns the affairs of a company called Lloyds British Testing Limited. That company was incorporated as long ago as 21 May 2002 and it formed part of a larger group headed by Lloyds British Group Limited, which was the company’s sole shareholder. Mr White was a director and the majority shareholder of Lloyds British Group Limited. In evidence, he told me that he was the only shareholder with any voting shares in the group. There is no documentary evidence to support this assertion but I see no reason to doubt Mr White’s word.

The group was primarily engaged in the supply of engineering services and lifting support services, including the inspection and certification of, the giving of procurement advice in relation to, and training, maintenance, and supply of lifting equipment. The group operated on a global scale, with a turnover in each of the years ended 31 December 2014 and 2015 in the order of £20 million. The group had a number of subsidiary companies in Egypt, Ghana, India, and Uganda, and it had associated entities in Kuwait and Dubai.

The applicant is the assignee of the claims of Lloyds British Testing Limited (in liquidation), and also of claims by the company’s liquidators, in each case against the respondent, Mr Ian Russell White, pursuant to an assignment dated 26 August 2020.

The company went into administration on 24 November 2016, and then moved into creditors’ voluntary liquidation on 28 November 2017. The applicant is represented by Mr John Colclough (of counsel). The respondent is Mr White, who is 60 years of age. He served as a director of the company from 26 June 2002, shortly after its incorporation, until 23 December 2016. The company was Mr White’s life’s work, and its insolvency must have been deeply distressing to him. In evidence, he told me that 2015 to 2016 had not been the company’s best period of time. He attributed this, in part, to the enforced closure of the company’s operations in Basra, in Iraq, early in 2015. Mr White also told me that September 2016 had been a fraught time for all of the directors; and he described them as “running at a million miles an hour” in order to try to salvage the company’s business. Without financial support from the UK company, the overseas businesses were insolvent.

Although the group’s auditors, Grant Thornton LLP, were said to be satisfied with the inter-company group indebtedness, the group’s new bankers, RBS, refused to fund the overseas businesses and, as a result, they were taken out of the group and their debts were written off. According to both the 2014 and 2015 accounts, without the entitlement to the inter-company debts, the group was balance sheet insolvent.

The catalyst for the company’s insolvency was the attitude of Her Majesty’s Revenue & Customs. On 6 October 2016, Mr Smout, the finance director of the company and the group, wrote a letter to Revenue & Customs. In it, he requested, on behalf of the company, a payment plan for arrears on VAT and PAYE, where the outstanding balance date was said to be £960,000. He explained, by way of background, that the company had been trading in its current form since 2002 but had always paid its taxes, whether it be corporation tax, VAT, or PAYE. The average annual VAT for the company was in excess of 1.5 million, and PAYE was in excess of 2.04 million. Currently, the company directly employed about 350 people within the UK, over thirteen sites, and in six overseas countries.

Mr Smout explained the nature of the company’s business. It was involved in statutory inspections and manufacturing within the UK over a broad range of industrial areas. However, the overseas elements had been almost entirely reliant on the oil and gas industry. During the course of 2015, Mr Smout said that it had become apparent that there was to be no short-time recovery in oil prices, and the board of directors made the decision to reduce operational costs. That involved, predominantly, large scale redundancies and closure costs.

Due to a downturn in revenues, the directors completed a strategic review, and engaged with its manufacturing employees at its two locations in a restructuring programme that involved consolidating two sites into one with a view to preserving as many jobs as possible. The costs associated with this were £230,000 in the UK and £50,000 internationally. That involved the company in making losses for the first time in its history. Midway through that process, Lloyds Bank/Bank of Scotland entered into a dispute over retention of funds in the sum of £180,000 to enable the company to move from Lloyds to - I think - RBS. All the above had depleted the company’s short term cash resources by a total of £460,000.

From a positive [?] position, the company was now said to have returned to profitability, having experienced three loss-making months for the first time in its history and having incurred exceptional costs associated with its reorganisation. The directors of the company had sought additional investment, and initially had a proposal from Finance Birmingham.

During the course of reviewing the costs entailed by that investment, it became obvious that the charges would be prohibitive to maintain positive cash flow and payment of creditors. The directors considered various other options and the main shareholder - presumably Mr White - had offered the following to enable and support the approval of a payment plan. The main shareholder of Lloyd’s British had already injected £100,000 of additional cash by way of unsecured lending. The shareholder was also in the process of raising a further £250,000 by way of remortgaging his personal property. Those funds were expected to be in place for early November 2016. He had further committed to releasing £250,000 from his pension fund in March 2017. The directors and shareholders were said to be working hard to restructure the business, and the attached financial model demonstrated its ability to repay HMRC in full within nine months, and also to generate significant trading cash to ensure all future HMRC payments were made on time.

Mr Smout trusted that he had been able to demonstrate that, with an approved payment plan, the company would bring its affairs with HMRC up to date in the shortest possible time and therefore sought their approval to move forward with the proposed payment plan. Prior to writing to request that plan, the company had discussed its current position with their professional advisors, as HMRC had previously recommended in correspondence. Mr Smout hoped that HMRC could see, via the attached funds flow, hat they were fully able to repay the legacy debt within the proposed period of nine months. He invited discussion or any queries by way of telephone response.

After some chasing emails, HMRC responded fairly peremptorily by letter dated 27 October 2016. The writer, a debt manager, stated that she had considered the company’s proposals, and these were unacceptable to HMRC. They would take too long to clear, and the company was not keeping up-to-date with current VAT and PAYE tax debts when they fell due. In those circumstances, HMRC indicated that they would now be preparing for legal action.

It was the threat of a winding-up petition from HMRC that led the company to invite its bankers to appoint administrators in their capacity as the holders of a qualifying floating charge. Such appointment took effect on 24 November 2016; and, as I have mentioned, the administrators moved the company into creditors’ voluntary liquidation a year later.

Although, earlier in this litigation, Mr White had been represented by specialist insolvency solicitors (Neil Davies & Partners) and counsel (Mr Martin Budworth), who settled the points of defence, since at least the time of the case management hearing before me (on 3 May 2022) Mr White has been acting as a litigant in person in defending this claim. It was at that case management hearing that I directed that the applicant need not serve a Part 7 claim form on Mr White but could rely upon the insolvency application notice, subject to payment of the prevailing fee applicable to a Part 7 claim.

The application is supported by a witness statement from Mr Nicholas O’Reilly, dated 7 July 2021, together with exhibit NHO1. Mr O’Reilly is the chief operating officer of the claimant. This action has proceeded to trial on the footing that Mr O’Reilly’s witness statement should stand as the applicant’s points of claim.

Mr White relies upon two witness statements made and served by him. The first was in answer to an unsuccessful application for freezing relief against him, which had been dismissed by HHJ Pearce on 12 October 2002. The second witness statement from Mr White is dated 26 April 2022. Mr White relies upon that witness statement in addition to his earlier witness statement of 7 October 2021. There are points of defence, settled (as I have mentioned) by counsel, and points of reply. Since he had no direct evidence to give of his own knowledge, by agreement Mr O’Reilly did not attend court for cross-examination.

The documents in the case extend to over 2,500 pages. They are arranged over five files. Although this is not the way in which they were identified by the applicant’s solicitors who prepared them, I have referred to the application bundle containing the relevant court documents, statements of case, and witness statements as bundle A, and the other bundles as bundles B through to E. In addition, there was an authorities bundle of some 300 pages, to which Mr White added a further Privy Council decision on the last morning of the hearing.

After half a day for pre-reading, on the morning of Monday 15 August, the trial started at 2.00 p.m. as an attended trial in court 42 of the Civil Justice Centre in Manchester. On the afternoon of day one, there were brief oral openings from Mr Colclough, for the applicant, and from Mr White in answer. The evidence was received from Mr White, over almost five hours, during the course of day two (Tuesday 16 August). On day three, I heard oral submissions, first from Mr White, and then from Mr Colclough in reply. The hearing concluded at about 1.30 yesterday afternoon when I reserved judgment, to be delivered orally, and remotely by Microsoft Teams, this afternoon at 2.00 p.m.

The overarching issue on this application is whether Mr White breached his fiduciary duties, and his other duties as a director, by causing the company to make various payments in the period after 1 April 2015, being the period of some twenty months before the company entered into administration and then creditors’ voluntary liquidation. The applicant’s case is that the payments that form the subject-matter of this claim were plainly and obviously made in the interests of the respondent and his family rather than in the interests of the company. It is therefore said that Mr White acted in breach of duty and should compensate the applicant, as assignee, in relation to those payments. Alternatively, the payments are to be regarded as transactions at an undervalue.

There are four components to the claim. The first is in relation to a series of payments made by the company to Mr White for his benefit in a total sum in excess of £1.3 million in the twenty months prior to the company entering into administration. These include payments for various motor vehicles, including Bentleys, Lamborghinis, a Porsche, a Mercedes, and a Renault truck, a Timberwolf tractor, and also a helicopter. There are also payments representing expenditure on Mr White’s residential property in Lichfield, various flights to the Maldives and Antigua, and some £620,000 paid to Mr White personally by way of drawings. The applicant claims that these payments were made in breach of the duties that Mr White owed to the company, and also that they amount to transactions at an undervalue within the meaning of Section 238 of the Insolvency Act 1986.

Second, there is a claim to a series of payments made to third parties, in a total sum of some £202,000, including payments for a Porsche for Mr White’s wife; flights to places such as the Maldives and Antigua for his family; two donations, each of £25,000, paid to the Cities of London and Westminster Association Conservative Association for the sponsorship of two social events; and, finally, a payment of over £103,000 by way of sponsorship for a motorbike racing team. Again, the applicant claims that these payments were made in breach of the duties that Mr White owed to the company.

The third element of the claim - although this is not strenuously pursued - is the writing-off of the loans, in excess of £5.3 million, owed to the company by the associated overseas companies and entities. The applicant claims that there was no justification for doing this, unless those loans were worthless because the relevant borrowers were indeed insolvent; and that, if that were the case, then Mr White acted in breach of the duties that he owed to the company in writing those loans off.

Fourthly, and finally, there is a claim to recover some £76,000 representing Mr White’s outstanding loan account. Mr White responds to the various heads of claims as follows: First, as to the payments made for his own benefit, Mr White says that certain of the payments, such as for the helicopter, were justifiable business expenses. To the extent that they were not, he says that they have been allocated against his loan account and therefore he has already paid for them, or that they would have been allocated against his director’s loan account had administration not intervened, thereby preventing any final year-end reconciliation of his director’s loan account.

Second, as to the payments made for the benefit of third-parties, Mr White says that certain of the payments were justifiable business expenses, such as the motor racing sponsorship and the payments for Conservative Association events, or that they were allocated against his loan account and therefore he has already accounted for them, or, in the case of payments for a Porsche for Mrs White, that they represented reasonable remuneration for her consultancy services to the company.

Third, as to the overseas company loan write-offs, Mr White says that there was never any realistic prospect of those debts being recovered, and therefore the company suffered no loss.

Fourthly, and finally, as to the director’s loan account, he says that the intervention of the administration prevented a final reconciliation of the loan account; and he takes issue with the contention that it was, in fact, overdrawn.

As a result, the following issues fall to be determined: First, was the company able to pay its debts, within the meaning of Section 123 of the Insolvency Act 1986, at any or all times after 1 January, or 1 April, 2015. Secondly, and dependent upon the answer to that question, did Mr White know, or ought he to have known, that the company was, or was likely to become, insolvent at any or all times after 1 January, or 1 April, 2015. Thirdly, were any of the payments identified at paragraphs 22-23.3 of Mr O’Reilly’s witness statement made in breach of the duties Mr White owed to the company and/or its creditors? Fourthly, were any of the payments identified at paragraph 22 of Mr O’Reilly’s witness statement transactions at an undervalue within the meaning of Section 238 of the Insolvency Act 1986? Fifthly, did Mr White act in breach of duty in writing-off the loans of the overseas entities? Sixthly, is Mr White liable on his director’s loan account as alleged at paragraphs 49-51 of Mr O’Reilly’s witness statement?

This is conveniently addressed in Mr Colclough’s written skeleton argument which I had the opportunity of pre-reading before trial. Recognising that Mr White was likely to be unrepresented at trial - as has proved to be the case – Mr Colclough has set out the relevant legal principles in slightly more detail than might otherwise have been the case, and in what he hopes is a non-controversial manner. Mr Colclough first addresses the duties owed by a director to a company for which they act as such. At the heart of this claim are the two duties to be found in sections 172 and 174 of the Companies Act 2006:

Section 172 (3) provides that the duty imposed by section 172 has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company. That recognises the duty that directors owe, in certain circumstances, to the company’s creditors. The most authoritative present statement on the creditor duty is to be found in the leading judgement of David Richards LJ (as he then was) in the Court of Appeal in the case of BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] BCC 631. The creditor duty is triggered when “the directors know or should know that the company is or is likely to become insolvent”. In this context, “likely” means “probable”, and not some lower test. David Richards LJ recognised that the interests of the creditors are likely to be paramount where the directors know or ought to know that the company is presently and actually insolvent. Mr Colclough informs the court that Sequana is the subject of a pending judgment in the Supreme Court (Lord Reid, Lord Hodge, Lord Briggs, Lady Arden and Lord Kitchin). Although argument was heard some eighteen months ago (on 4 to 5 May 2021), judgment has still not yet been handed down. The issues on the appeal include the issue of whether the test for the engagement of the creditor duty is whether there is a real risk, as opposed to a probability, of insolvency. Mr Colclough recognises that until such time as judgment is handed down, and the Supreme Court identifies some other test as the trigger for the engagement of the creditor duty, the law is as stated by the Court of Appeal.

One aspect of a director’s fiduciary obligations is that it is for a director to account for company property received or applied by him. Mr Colclough relies upon the statement of Mr Robert Miles QC, sitting as a Deputy Judge of the Chancery Division, in the case of Gillman & Soame Ltd v Young [2007] EWHC 1245 (Ch) at [82]. The burden is on the company to show that the director received the relevant payment. The burden then passes to the director to show that such payment was proper.

The duty imposed by section 172 of the Companies Act to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, including, where insolvency has supervened or is probable the duty owed to its creditors, is ordinarily a subjective one. The question is whether the director honestly believed that his act or omission was in the interests of the company. Authority for that proposition is to be found in the judgment of Jonathan Parker J in the case of Regentcrest plc v Cohen [2001] BCC 494 (Ch) at [120]. Mr Colclough points out that if a particular transaction causes substantial detriment to the company, the court may be slow to conclude that the director honestly believed he was acting in the company’s best interests. However, that is an evidential issue rather than a subversion of the subjective nature of the test.

However, there are circumstances in which the subjective test becomes an objective one. These were identified by Mr John Randall QC, sitting as a Deputy Judge of the Chancery Division, in HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch) at [92]. First, if the director did not, in fact, consider the best interests of the company, then his actions are to be judged objectively. Secondly, if the director failed to take account of a very material interest (such as a particularly large creditor), then his actions are also to be judged objectively. Mr Colclough submits, in my judgment correctly, that the same principles must apply when the creditor duty is engaged. Ordinarily, the test is subjective, namely, did the director honestly believe his actions were in the best interests of the creditors? However, it becomes an objective test if the director did not, in fact, consider the interest of the creditors, or overlooked a very material interest.

Mr Colclough points out that the duty to act in the best interests of the company involves applying company property for the purposes and the benefit of the company. If authority is needed for that trite proposition, Mr Colclough points to the judgment of Mr Robert Miles QC in Gillman & Soame Ltd v Young at [87]:

“[Counsel’s] third general contention, that many directors of companies use their company's assets to pay personal expenses, may be accurate empirically, but it offends basic legal principles. Companies are separate legal persons, and the creditors who deal with a company, and its shareholders, are entitled to require the directors to apply corporate assets for proper purposes and in its interests.”

Mr Colclough points out that there is some crossover in such cases with the obligation under section 171 (a) of the Companies Act 2006 that a director must act in accordance with the company’s constitution, and the further obligation in Section 171 (b) only to exercise powers for the purposes for which they are conferred.

Mr Colclough recognises that where a director acts in breach of duty, he can escape liability in certain circumstances if his breach is subsequently ratified by the company’s members. This is the so-called Duomatic principle, which was summarised by Buckley J in the case which has given its name to that principle: Re Duomatic Ltd [1969] 2 Ch 365 at page 373, between letters C and D, as follows:

“… where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

However, the Duomatic principle does not apply in various circumstances. First, where the company is insolvent, or it is rendered insolvent by the impugned transaction, if a party seeks to invoke the Duomatic principle, it is for that party to discharge the burden of establishing that the company was solvent at the material time. In relation to the Duomatic principle, the burden of proof of solvency, if disputed, is on the respondent. Secondly, where the transaction itself is ultra vires the company, such as an unlawful distribution of the company’s assets, the Duomatic principle will not apply. Thirdly, the principle will also not apply where the transaction is not bona fide and honest. Authority for those propositions is to be found in the judgment of Nugee LJ in the case of Satyam Enterprises Ltd v Burton & Anor [2021] EWCA Civ 287, [2021] BCC 640 at [47] and [56].

In his oral closing submissions, Mr White took me to the decision of the Privy Council, on appeal from the British Virgin Islands, in the case of Ciban Management Corporation v Citco (BVI) Ltd & Anor (British Virgin Islands) [2020] UKPC 21, [2021] AC 122. The facts of the case were somewhat complicated but, for present purpose, it is sufficient to refer to [47] of the judgment of the court, delivered by Lord Burrows, in his first judgment in the Privy Council. At [47], Lord Burrows said this:

“A further possible qualification of the Duomatic principle is that, in some cases, doubts have been expressed as to whether the principle applies where it is the beneficial owners, rather than the registered shareholders, who consent ... But the correct view is that, at least as here where the ultimate beneficial owner and not the registered shareholder is taking all the decisions in the relevant transactions, the Duomatic principle applies as regards the consent of (and authority given by) the ultimate beneficial owner ... Certainly, the [claimant] in this case did not seek to argue that, in relation to the Duomatic principle, any distinction should be drawn between Mr Byington, as ultimate beneficial owner, and Mr Stollman, his lawyer, who held the bearer shares.”

Mr Colclough submits that this extension of the Duomatic principle has no application in the present case because this is not a case where the holding company was holding its shares on trust for Mr White. Nevertheless, it seems to me that if Mr White held all of the voting shares in the holding company then, in principle, the Duomatic principle would be capable of applying, even without reference to the recent Privy Council decision. As will appear, however, I do not consider that this case in any way turns on the application of the Duomatic principle.

Finally, on the aspect of director’s duties, Mr Colclough points out that it is no defence to a claim for breach of duty for a director to say, “I took the money with an intention to declare a dividend at the end of the financial year but did not get round to doing so because of an intervening insolvency”. Mr Colclough points out that a similar argument was advanced, and rejected by the Court of Appeal, in the case of Global Corporate Limited v Hale [2018] EWCA Civ 2618, [2019] BCC 431.

In the present case, there is no evidence of any relevant practice of the company declaring dividends, and Mr White did not seek to contend that there was ever any intention of doing so. In evidence, Mr White said that there could not have been a dividend because no dividend was shown in the company’s accounts. He left matters to the company’s finance director to determine how payments to Mr White should be addressed and treated for accountancy purposes. It is Mr White’s case that there would have been a reconciliation at the company’s financial year-end of any sums received by him by way of drawings or otherwise for items of personal expenditure. However, due to the intervening administration, no such reconciliation took place.

Nevertheless, it seems to me that the same principle applies in that situation. It is no defence to Mr White to say that he received the monies with the honest intention of achieving a reconciliation in his director’s loan account at the end of the financial year in circumstances where no one got round to such reconciliation because of an intervening insolvency. The Global Corporate case also establishes that if, in fact, payments were not made by way of distribution, then the court will need to grapple with the true characterisation of such payments, and the legal consequences that follow on from such characterisation.

Mr Colclough spent rather less time dealing with transactions at an undervalue because he recognises that it is difficult to see how the applicant could succeed on a claim under section 238 if it fails in its principal claim of breach of director’s duty. Section 238 applies in the case of a company which enters into administration. Where the company has, at a relevant time, entered into a transaction with any person at an undervalue, the officeholder, and in the case of administration, the administrator, may apply to the court for an order under section 238. On such an application, the court shall make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. A company enters into a transaction with a person at an undervalue if (a) the company makes a gift to that person, or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or (b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.

By section 238 (5), the court shall not make an order under section 238 in respect of a transaction at an undervalue if it is satisfied (a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and (b) that at the time it did so, there were reasonable grounds for believing that the transaction would benefit the company.

So far as is relevant for present purposes, relevant time is defined in section 240 as meaning within two years of the date of the company entering administration, and at a time when the company was either unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986, or became unable to pay its debts as a consequence of the transaction in question. That requirement is presumed to be satisfied, unless the contrary is shown, where the company and the transferee were connected. In the present case, the period since 1 April 2015 is a relevant time unless Mr White can show that the company was able to pay its debts notwithstanding the transactions sought to be challenged.

The impugned ‘transaction’ is to be identified through the application of commercial common sense. For that proposition, Mr Colclough relies upon observations of Deputy ICC Judge Curl QC in Re De Weyer Limited, Kelmanson v Gallagher [2022] EWHC 395 (Ch) at [108]. There, the Deputy ICC judge referred to Phillips v Brewin Dolphin as supporting the view that commercial common sense should be applied to linked or composite transactions involving more than one stage or multiple parties under the transaction avoidance machinery in the Insolvency Act.

The effect of the authorities seems to me to be as follows:

Mr Colclough addresses the issue of balance sheet solvency at paragraphs 36-40 of his skeleton argument. As at 31 December 2014, according to its statutory audited accounts, the company had shareholders’ funds of £4,181,730. It reported total debtors of £9,835,734, and cash at bank of only £81,354. Its debtors included £5,184,429 owed on an unsecured, interest-free basis by group undertakings. By 31 December 2015, according to its filed and audited statutory accounts, the company had shareholders’ funds of £4,541,551. It reported total debtors of £9,092,573, and cash at bank of only £96,590. Its debtors included £5,360,135 owing on an unsecured, interest-free basis by group undertakings.

In his evidence, Mr White pointed out: (1) that the statutory filed accounts are only a snapshot of the position at the company’s bank at the relevant financial year end, and (2) that the concept of cash at bank ignores the cash that was available to the company under its invoice discounting facility.

Mr Colclough submits that the company’s purported balance sheet solvency was entirely due to the value of the debts owed by group undertakings. If the true value of those debts was nil, then the company had net liabilities of over £1 million as at 31 December 2014, and of some £818,000 as at 31 December 2015. That is said to be consistent with the estimated deficiency reported in the statement of affairs of a little over £3 million.

The applicant’s primary case, consistently with that of Mr White, is that the true value of those debts was nil. Mr White is said to appear to agree with this because his case at paragraph 21 of the points of defence is that there was never any serious prospect of the paper debts being recovered. In evidence, he qualified that by saying that that was the position once the company had withdrawn financial support from its overseas subsidiaries and associated entities. Mr Colclough points out that that is the logical conclusion from the fact that the debts were simply written off, with the involvement of Mr White, in September 2016. Mr Colclough therefore submits that it follows that the company was balance sheet insolvent, at least at all times after 1 April 2015, or that its assets were sufficiently precarious that the respondent’s duty to creditors was engaged.

Mr Colclough’s submissions on cashflow insolvency are contained at paragraphs 41-44 of his skeleton submissions; and the company’s cashflow position is said to have been even more troubling. At bundle C700 there is a table showing the various claims issued, and demands made, against the company in the period 23 July 2014 to 31 October 2016. This table shows the company being unable to pay its debts as they fell due on thirty-seven different occasions, totalling about £427,000. A total of no less than twenty-six sets of legal proceedings were issued against the company in this period.

Mr Colclough submits that the reason why the company was sued on at least twenty-six different occasions is because it simply did not have sufficient cash to meet its liabilities as they fell due. He points to the cash at bank recorded in the 2014 and 2015 accounts of only £81,534 and £96,590 respectively. This should be viewed in the context of a recorded turnover in excess of £20 million. In fact, the company’s bank accounts were significantly overdrawn throughout that period. As early as April 2015, the bank account was about £158,000 overdrawn although I note that this was reduced to a little over £99,000 on 27 April 2015. Mr Colclough points to the fact that the overdrawn amount exceeded £350,000 in April 2016, although I note again that by 29 April 2016 this overdraft had been reduced to almost £233,000. The RBS account is said to have been little better and to have been overdrawn to the extent of some £223,000 by October 2016.

Mr Colclough pointed in evidence and submissions to a creditors report - the only one, he said, that we have - as at 8 April 2016 (at bundle E, pages 497 through to 507). This showed indebtedness as of 8 April 2016 of £1.7 million, of which some £265,000 (representing some 15.45% of the total indebtedness) had been due and owing in excess of six months.

Mr Colclough submits that the company’s cashflow problems clearly snowballed throughout the period relevant to this claim. By the time it entered into administration, the company owed HMRC a petition debt of £1.2 million, and at least a further sum of almost £1.7 million to various unsecured creditors. Of the creditor figure of a little under £1.7 million, debts of almost £400,000 had been unpaid for more than 210 days. Ultimately, creditor claims were agreed at some £3.5 million.

Mr Colclough invites the court to step back from the detail and to consider two questions. First, was the company insolvent, or likely to become so, after 1 April 2015? He submits that the answer must be that the company was at least cash-flow insolvent throughout. He submits that it is hard to see how it could possibly be contended that, even if technically solvent, the company was not likely to become insolvent. Secondly, the court should ask whether Mr White should have known this. Mr Colclough submits that, as a director, and the company’s controlling mind, for whom the company was his life’s work, and who had access to all the company’s financial and other information, the answer must be yes.

In answer to those submissions, Mr White relies essentially upon the company’s filed and audited accounts. The financial statements for the year ended 31 December 2014 were signed off by Grant Thornton on 28 July 2015. They were approved by the board on 24 July 2015, and were signed by Mr Rabone who was then the financial director and company secretary. There were three other directors, namely, Mr White, Mr Talaat, and Mr Whitehouse.

The company’s financial statements for the year ending 31 December 2015 were signed off by Grant Thornton on 9 September 2016. They were approved by the board on 7 September 2016 and were signed off by the then financial director and company secretary, Mr Smout. They were filed at Companies House on 14 September 2016. The other directors at the time were Mr White, Mr Whitehouse, and one of Mr White’s sons, Mr R. R. White.

Mr White has taken me to Grant Thornton’s audit findings for the year ended 31 December 2015 (at bundle E page 454). At page E 474, it is recorded that, amongst the detailed matters communicated to those charged with the company’s governance, were any significant matters in relation to the company as a going concern. At page E 485 the company’s status as a going concern is marked green. Mr White submits, with apparent full justification, that as of a date as late as September 2016, Grant Thornton clearly had no concerns about the company’s status as a going concern. There were no qualifications in the company’s audited financial statements about the company’s ability to meet its debts as and when they fell due.

Mr White points to a full credit-backed, sanctioned loan facility that was received from RBS in May and June 2015. The difficulty appears to have been that there was some disagreement between the existing, and the proposed new, bankers as to how part of the loan facility should be applied in relation to the company’s existing banking facility. Mr White also spoke to the concern of RBS Invoice Financing about monies advanced pursuant to any loan facility being used for the purposes of overseas companies which were subsidiaries of, or associated with, the company. Those were matters addressed by Mr White in an interview with the liquidator, Mr Denny, on 14 June 2018, at bundle B pages 310-316.

Having explained (at B 311) that Mr White was paid a yearly salary of £30,000, supplemented by regular monthly drawings of £30,000, Mr White went on (at pages B 314, and following) to explain how the overseas businesses came to be transferred out of the company at the request of the lender, RBS Invoice Financing, and with the full knowledge of the company finance director. He explains that the overseas businesses had not generated cash in recent times, due to the oil price crash; but, historically, they had used to generate good cash, and remit money back to the UK. They had not been forecast to generate any profits at the time they were transferred out of the company. Mr White added that, to his knowledge, there had been no challenge from the auditors about the recoverability or write-off of these balances, and no issues had been raised in the audit report. He recognised that no UK lawyers or accountants had been involved in the transaction, with all agreements being drafted by an Egyptian lawyer, and executed by Mr White on behalf of the company.

I am satisfied by Mr White’s evidence, supported as it is by the Grant Thornton accounts, that there was no reason before September 2016 for Mr White to question the solvency of the company on a balance sheet basis. I am also satisfied, on a cashflow basis, that, notwithstanding the evident delays in effecting payment of creditors throughout the period from April 2015, there was no reason for Mr White to view insolvency as probable at any time until the receipt of HMRC’s response to the repayment proposals on 2 November 2016. I find that, until that time, Mr White did not, and should not, have regarded the company as either insolvent, or probably insolvent.

If the trigger for the duty on directors to consider the interests of the company’s creditors is met by a real risk, as opposed to a probability of, or close proximity to, insolvency - which will be determined by the Supreme Court when it comes to give judgment in Sequana in due course - then I would find that from at least April 2016, the directors, including Mr White, should have taken the view that there was a real risk of insolvency, even though insolvency was not then probable. In that regard, I would rely upon the contents of the report to the directors in April 2016, recording some £1.7 million as then due and owing, of which over £0.25 million, representing some 15.45%, had been outstanding for over six months.

Given the matters identified by Mr White in his discussions with the liquidator, the matters identified by Mr Smout in the letter to HMRC in October 2016, and the various concerns about the company’s downturn in trade, and the difficulties it was experiencing, I am satisfied that Mr White should have appreciated that there was a real risk of insolvency. However, as I find, insolvency was not then probable; it all depended upon the attitude, in particular, of HMRC, which only became known at the beginning of November 2016. However, in my judgment, little really turns on my decision on Mr White’s perception of the solvency of the company on the particular facts of the present case.

The director’s loan account, and its composition, can be traced through the company’s financial statements for the years ended 31 December 2014 and 2015. As at 31 December 2013, as recorded in the 2014 accounts, the company owed Mr White £602,887. During the course of 2013, Mr White received £750,247 from the company, leaving a balance due from Mr White to the company, as of 31 December 2014, of £147,360. During the course of 2014, Mr White injected £385,652 into the company, as a result of which, as at 31 December 2014, the company owed Mr White £238,292.

One then moves on to the accounts for the year ended 31 December 2015. As at that date, the company owed Mr White £238,292. The accounts record that Mr White received from the company £433,042 during the course of 2015, so that, by 31 December 2015, Mr White owed the company £194,750. The difficulty I face is that there is no real explanation as to how the £433,042 that Mr White received from the company during the course of 2015 was made up.

There is a letter at E 587 that was written by Grant Thornton to Mr White’s bank, Coutts & Co, on 18 October 2016. In that letter, the £433,042 in 2015 is described as ‘drawings’, in addition to Mr White’s salary of £30,000. The letter contains the following statement:

“Please note that drawings in this period have been made in relation to preference shares redeemed by the parent company. We understand from management that these amounts represent an equivalent to the salary that would have been paid had the redemption not taken place.”

That statement is not explained in evidence. My suspicion is that the redemption of the preference shares was an accounting treatment in order to achieve some sensible tax treatment, although there is no evidence to that effect, and it is, essentially, speculation. What is clear however, is this: the applicant has undertaken an analysis of Mr White’s drawings during the nine months from 1 April 2015; those drawings so analysed amount to £302,247. If one adds to that £90,000 representing three months’ drawings for each of January, February, and March, up to 1 April 2016, the total drawings would amount to £392,000. That is less than the £433,000 that Mr White is recorded in the director’s loan account as having received from the company. But, in addition, it is clear from the document that the applicant has prepared at C 677 that, in fact, Mr White paid £128,000 into the company.

A comparison of C 677 with an analysis of the bank statements at C 667 suggests that £5,000 that was paid into the company by Mr White has been omitted. On this basis, Mr White would have paid £133,000 into the company. If that is deducted from the £392,000 drawings, Mr White would have received a net payment from the company of only some £259,000, yet £433,000 is recorded in the accounts as having been received by Mr White during 2015.

Mr White, in his evidence at paragraph 8 of his second witness statement, says that he was allocated a modest annual car allowance, and any excess cost was reconciled by the company’s auditors, Grant Thornton, at the year end and applied to his loan account. Mr White reiterated that evidence in the course of cross-examination; and he also said that other payments that he had received on account of his own personal expenditure had also been reconciled in the year end accounts.

Given that there is a substantial discrepancy between the sums received from the company by way of drawings, and paid into the company by Mr White, according to the applicant’s own researchers, and the sum of £433,042 recorded as having been paid to Mr White by the company during the course of 2015, I find, on the balance of probabilities, that all items of expenditure recognised by Mr White as representing personal expenditure borne by the company had, in fact, been included within the reconciliation in the 2015 accounts. To the extent that Mr White received sums from the company in respect of drawings and other personal expenditure which he recognised to be such, I am satisfied that these have already been reflected in the terms of his director’s loan account up to 31 December 2015. Against that background, I turn to the various payments claimed by the applicant.

For Mr Colclough, the starting point is that, viewed objectively, the various payments made were not in the best interests of the company. Spending company money on two Bentley motor vehicles, two Lamborghinis, a Porsche, a helicopter, a race truck and trailer, two trucks and a telehandler, all for the respondent’s personal use, was plainly not in the interests of the company. It follows that spending company money on maintaining those same vehicles and the helicopter was also not in the company’s best interests.

Using company money on the respondent’s own home at Shenstone Court in Lichfield was plainly not in the company’s interests. Spending company money on holidays for the respondent and his family was plainly not in the company’s interests. Paying a total of £620,000-odd directly to the respondent, by way of drawings, in circumstances where no dividends having been declared, and no salary having been agreed, so that the respondent had no entitlement to that money, was plainly not in the company’s interests. Paying rent on a flat at 65 South Park Road, occupied by the respondent’s son and his partner, was plainly not in the company’s interests. Spending company money a Porsche for the respondent’s wife was plainly not in the company’s interests.

Mr Colclough also submits that funding a motor racing team, and supporting a local political association by attending social events in each of the years 2015 and 2016, was plainly not in the company’s interests. The respondent may have been passionate about motor racing, and he may have wished to attend these sponsored events, but he was not entitled to confuse his own passions with the company’s interests. Mr Colclough submits that it is for a director to account for property received or applied by him. That is for the obvious reason that the payments were not made for the company’s benefit, but were, in fact, made for the direct or indirect benefit of the respondent and members of his family.

I have already addressed Mr Colclough’s arguments that the company was insolvent, and that the respondent knew or ought to have known this. If I had found that that submission was made out, then I would have accepted that Mr White owed duties to act in the best interests, not only of the company, but also of its creditors. However, I cannot see that it makes any difference whether one is considering the interests of the company, with or without the interests of its creditors, on the facts of this particular case.

Mr Colclough submits that Mr White gave no proper consideration to the interests of the company or its creditors because, had he done so, he could not possibly have concluded that spending huge sums of money on the various matters I have identified was in their interests. On that basis, the question of whether Mr White breached his section 172 duty should be treated as an objective one, and can only be answered by a finding that, objectively, this expenditure was not in the best interests of either the company or its creditors.

Even if the test were a subjective one, it is simply not credible for the respondent to assert that he believed that these payment were in the best interests of the company or its creditors. On that footing, Mr White is liable for breach of duty; and, according to Mr Colclough, he should compensate the applicant, as assignee of the claims of the company and its liquidators, for the company’s losses. He should be ordered to pay the amount that was wrongly paid out, in the sum of some £1.53 million. Directors of companies are not entitled to use its assets to pay their personal expenses.

As Mr Miles QC said at [87] of Gillman & Soame Ltd v Young [2007] EWHC 1245 (Ch), companies are separate legal persons, and the creditors who deal with a company, and its shareholders, are entitled to require the directors to apply corporate assets for proper purposes, and in its interests.

In fairness to Mr White, he accepts that any items of personal expenditure should have been the subject of reconciliation by way of adjustment in his director’s loan account at the company’s financial year end; and he says that such adjustment would have taken place had administration not intervened in November 2016. Thus, Mr White would accept that any excess vehicle costs above a modest car allowance should have been reconciled in his director’s loan account by way of adjustment thereto when the accounts for the year end at 31 December 2016 had been prepared by the auditors.

I am satisfied, for the reasons I have given, that there was an appropriate adjustment in the 2015 account; but it is common ground that there was no such adjustment in the 2016 accounts. In my judgment, the applicant has made out its claim in relation to the Bentleys, the Lamborghinis, Mr White’s own Porsche Cayenne, and also the Timberwolf tractor which was used by Mr White. All those sums for the year 2016, in the total sum of £152,420.56, should properly be brought into account.

The same goes for the expenditure on Shenstone Court which, in the year 2016, amounts to £8,927.80. I am satisfied that the expenditure on Shenstone Court the previous year was part of the adjustment effected to Mr White’s loan account in the financial year ended 31 December 2015. I am satisfied that the same applies for the rental subsidy for the son’s flat. The claim in respect of 2016 should therefore be upheld. In his adjusted closing summary of payments, Mr Colclough has calculated this as £7,800. As I understand it, the level of subsidy on a rent of £1,800 a month, to which a monthly reimbursement by the son and his partner of £1,100 was made, produces a monthly subsidy of £700 which, over eleven months, should be £7,700 rather than £7,800; but if there is some other explanation for the £7,800 figure, I am content to receive it.

So far as the travel expenses are concerned, the position is somewhat unsatisfactory. In his witness statements, there was no suggestion by Mr White that any element of this expenditure was referrable to business travel. Mr White accepted that that was the case when this was put to him by Mr Colclough in cross-examination. However, in the course of his evidence in cross-examination, Mr White did point to the fact that certain of the journeys at least were attributable to business travel. That applied to Mr White himself and also to his wife and to their young son, who was then between one and two years of age. It was said that his wife, who was involved in the Egyptian business, was unable to travel to Egypt without taking their young son. I am prepared to accept that explanation.

Looking at the expenditure on holidays for Mr White himself in 2015, I am prepared to accept that the expenditure on Cairo in the sum of £1,703.46 and £65 was a legitimate business expense, but the two sums for the travel to Malaga were not. In the case of Mr White for 2016, I am prepared to accept that the expenditure of £1,330.65 and £1,757.28 for travel to Cairo and Dubai were a legitimate business expense; but I find that none of the other items of travel and holiday expenditure were legitimate business expenses. On the balance of probabilities, I accept that the 2015 expenditure was probably included in the reconciliation of the director’s loan account in 2015, but that leaves the claim for the 2016 expenditure outstanding.

Turning to the travel and holiday expenditure for Mr White’s family, I find that the expenditure, both for Mr White’s wife and his very young son, Adam, to Cairo and Dubai were legitimate business expenses, but the expenditure for travel to Barbados, Antigua and the Maldives was not, and the expenditure for members of the family other than Mrs White and Adam was not a legitimate business expense. I am not satisfied that any of those items of expenditure were taken into account. On the balance of probabilities, I am prepared to accept that the expenditure in 2015 was included in the reconciliation in the director’s loan account; but clearly it was not reconciled in 2016, and therefore the sums for the expenditure on travel, otherwise than to Cairo and Dubai, for Mrs White, and also for Adam, should be properly recoverable by the applicant. I have found that the direct payments to Mr White during 2015 were included within the reconciliation for his director’s loan account in that year; but clearly the direct payment of £317,836.63 in 2016 is properly due from Mr White. It was no part of his agreed salary, and it was never a declared, or intended to be a declared, dividend.

So far as the Porsche Cayenne for Mrs White is concerned, Mr White has consistently maintained that this was part of an arrangement dating back, I think, to 2012, whereby his wife provided economical sales and marketing consultancy services at a rate of £1,500 per calendar month, plus the expenses of a vehicle: see paragraph 9 of Mr White’s second witness statement. I did interrogate Mr White about this, in terms of why there was no documented evidence of any salary payments to Mrs White, and why there was no evidence from her. I am satisfied with Mr White’s explanations. I find that the expenses on Mrs White’s Porsche Cayenne, for both 2015 and 2016, were legitimate business expenses. As such, they would not have been included within the 2015 reconciled director’s loan account; but there was no need for them to be so. I dismiss the claim in relation to those two items.

So far as the telehandler is concerned, Mr White maintains that that vehicle, which he describes as a telescopic boom forklift, was a company asset used in its day-to-day operations. I see no reason to doubt Mr White’s evidence in that regard, and therefore those two items were not properly items of personal expenditure.

I come then to the helicopter. It is clear that the company resolved to enter into a finance agreement in relation to the helicopter in or about April and May 2016. At paragraph 10 of his second witness statement, Mr White states that the helicopter was approved by the company’s internal and external accountants as a legitimate business expense by reason of the geography of the company’s operations, and the general advantage of such mode of travel. Mr White states that the helicopter was sold following administration, but the respondent believes the logbook may still be in the officeholder’s possession. Mr White points to an email from the then finance director, Mr Robert Rabone, dated 11 May 2015, to his successor and then assistant, Mr Richard Smith, which was copied to Mr Smout at E 231. It reads:

“Following on from our conversation this morning, I can confirm the following to be the case with regards to the planned purchase of the helicopter.

Cost: 450,000 plus VAT.

Advance from Lombard: 324,400.

Deposit to be paid by Ian White: £50,000 has already been paid transacted through director’s loan account.

Terms with Lombard: 5 years at £3,485 per month for 60 months followed by final payment of £170,000 in month 61. The helicopter will be held in the company’s name. The monthly payment, £3,485, will obviously not have any noticeable impact on the financial status of the company.”

Mr Colclough submits that the helicopter was essentially not purchased for the company’s business, but for Mr White’s personal use. He points to the fact that the helicopter was apparently based at an aerodrome in Northampton, that there is no evidence of it being used to transport directors from one location to another, and that there was considerable expenditure of company monies on flying lessons for Mr White, and for landing fees and ‘touch and go’ fees.

Mr White’s evidence about the helicopter was in my judgment wholly unsatisfactory. He never really engaged with Mr Colclough’s questioning. When it was suggested that the primary use of the helicopter was for Mr White’s personal flying, Mr White disputed this and said: “It was used to transport our directors e.g. from the North East to Birmingham. All the board of directors agreed to buy it. I agreed with the board of directors.” He was asked, “Do you believe, given the financial circumstances of the company in 2015 to 2016, that the purchase of the helicopter was in the best interests of the company?” Mr White’s answer was, “The board was satisfied that there was sufficient funding.” He was asked, “How was it in the best interests of the company to spend over £200,000 to ferry board directors around?” His answer was, “It was more efficient and cheaper. The board of directors, with the support of the financial director, considered there was sufficient headroom to finance the purchase.” Mr White was asked, assuming that the company could afford it, how was it nevertheless in the company’s best interests?; and Mr White’s answer was that he deferred to the decision of the board.

I am entirely satisfied that the purchase and maintenance of the helicopter was a decision led by Mr White, as evidenced by the fact that the email records that the deposit was to be paid by Mr White, and transacted through his director’s loan account. I am satisfied that the purchase of the helicopter was not in the company’s best interests, and that Mr White did not subjectively consider that it was. It was a project for the personal benefit of Mr White. In relation to the 2015 year, in the light of the email, I consider, on the balance of probabilities, that the costs were treated as a personal benefit for Mr White, in the course of reconciling his director’s loan account, and therefore that the expenditure on the helicopter in 2015, both in terms of the leasing costs, and the maintenance costs, was taken into account, and is not as a result recoverable; but all of the costs for 2016, both in terms of the leasing and the maintenance, the flying lessons, and so forth, these must all be properly recoverable from Mr White.

So far as the costs are concerned, the costs of the helicopter in 2016 amount to £34,850. The costs of maintaining the helicopter, by my calculations, in 2016 amount to £20,098.36. I have taken the figures from Mr Colclough’s schedule E, and deducted the sums for the Bentley service of £749.99 and £750, the Lamborghini UK tour of £2,400, and the car insurance of £4,644.83. That produces a net figure, by my calculations, of £20,098.36. The vehicle servicing costs and insurance in 2015 have already been included in the reconciliation and are therefore not recoverable; but they are personal expenses that Mr White accepts would have been included in the 2016 reconciliation had it taken place, and therefore the sum referable to those cars in 2016, which I calculate to be £6,144.82, is properly recoverable from Mr White. I find that the Lamborghini UK tour of £2,400 was also a personal expense, and is recoverable accordingly.

That, I think, deals with the disputed vehicles, and the helicopter, and their expenses. That leaves the expenditure on the two sponsored events organised by the local branch of the Conservative Party and the motor racing team. So far as the sponsored event with the Conservative Party is concerned, I accept that Mr White honestly considered that this was of benefit to the company, in terms of corporate hospitality, and therefore the sums for that are not properly recoverable. The two events took place in May 2015 and July 2016. Had it been necessary to consider the interests of creditors, I am satisfied that it would have been unnecessary, on my findings, to have considered the interests of creditors in May 2015; but if the test is a lesser one than probability, it would have been necessary to consider the interests of creditors in July 2016. Since I am satisfied that Mr White did not do so, I would have found that it was not in the interests of creditors to have paid £25,000 for a sponsored Conservative Party event in July 2016. However, unless and until the Supreme Court adopts a different test to trigger the duty to creditors, the sum of £25,000 in July 2016 is not properly recoverable.

That leaves then just the motor sponsorship and associated vehicle costs. I accept that at the time the motor sponsorship was entered into, Mr White genuinely considered this to be in the best interests of the company. Once the sponsorship had been entered into, it seems to me that expenditure on the vehicles associated with that is a proper company expense, irrespective of the date when such expenditure was incurred, because the liability for it had already arisen. Had it been necessary to consider the interests of creditors, I would not have considered the expenditure in May 2016, August 2016 and September 2016 to have been in the best interests of creditors. I am satisfied that Mr White did not consider their interests at that time; and, therefore, if the Supreme Court were to endorse a different test as the trigger for the duty to creditors becoming engaged, those sums would fall to be recoverable from Mr White; but, as the law presently stands, those sums would not. On any view of the law, I do not consider that expenditure on, and associated with, the motor racing sponsorship in 2015 would have been recoverable because I am satisfied that at that time the duty to creditors was not engaged, and that Mr White considered this to be in the best interests of the company.

Moving on, finally, to the other matters, I agree with Mr Colclough that no separate issues arise in respect of the section 238 claims. I do not consider that they in any way add anything to the claims for breach of duty, or would lead to any different result. I am satisfied that the inter-company loans were of no value ,and that the company suffered no loss by their writing-off. I am satisfied that once the invoice financing section of RBS indicated that all the support for the overseas companies was to be withdrawn, then the overseas companies were effectively no longer solvent; and therefore there was no loss to the company in writing-off the loans due to the company from them.

So far as the director’s loan claim is concerned, I am alive to the need to avoid any element of double counting or double recovery. If I had not found that the 2015 payments had been included within the reconciliation in the 2015 accounts in arriving at the balance due from Mr White as at 31 December 2015, then I would have dismissed the claim in respect of the director’s loan in order to avoid any double recovery based upon the expenditure founded upon the sums Mr White had received in 2015. However, I have found that the claims in respect of personal expenditure for Mr White had already been included within the reconciliation which produced the figure said to be due from Mr White to the company as at 31 December 2015. Therefore, it seems to me that there is no question of double recovery in allowing a claim by the applicant in respect of Mr White’s director’s loan account. The sum shown in the accounts was £194,750, but the applicant has identified a total of £118,596 as having been paid into the company by Mr White during 2016. That is consistent with what is reported to HM Revenue & Customs in the letter from Mr Smout, to which I have already referred. On that basis, and giving credit for that sum, the amount properly due under the director’s loan account is £76,154. That has not been the subject of any reconciliation, so there is no question of any double counting or double recovery. I find that that sum is due to the applicant.

I would invite Mr Colclough and Mr White to attempt, at some stage, to calculate the full amount that I have found to be due to the applicant from Mr White, and to record that in the order which I will invite Mr Colclough to attempt to agree with Mr White. If there are any difficulties over that, then what I would suggest is that I am sent a tracked copy of any draft order, clearly identifying the positions for which the applicant and Mr White respectively contend, and then I can attempt to resolve any differences over that on the papers.

That I think addresses all of the issues that were outstanding and so concludes this extemporary judgment unless there are any points about which I have failed to address matters properly, or there are any matters on which clarification is sought.