Deborah Nigh, an Insolvency Partner at Howes Percival, looks at the Judgment of Wow Internet Limited –v- Qasim Majid [2020] EWHC 2890 (Ch) and discusses what this means for similar cases.
A Judgment handed down on 29 October 2020, and being described as “an important Judgment” on the same date, is certainly of great importance to the insolvency team at Howes Percival because the Judgment of Deputy I.C.C. Judge Stuart Frith vindicates our approach to the cases that we work through on a daily basis where:
- Howes Percival and the office holders review, principally, bank statements (which are often the only reliable records available) and note payments and withdrawals which haven’t been recorded and/or which don’t, on the face of it, appear to be for the benefit of the company; and
- The Directors protest that payments were for legitimate company expenditure and/or were debited against their outstanding director’s loan account (of which there is no, or no up to date, record) and/or the payments were in lieu of salary (but weren’t declared as such to HMRC) and/or cash withdrawn was utilised for a multiplicity of genuine reasons for the benefit of the company; and
- There’s a distinct lack of accounting records, although I’ve noticed that some always seem to come to light (in the hands of the director who claimed most vehemently that he’d handed everything over to the Official Receiver or the Liquidator when the company was placed into liquidation) during the course of the proceedings or even, in this case, on the day of the Trial.
This case differed slightly from the above insofar as the Director (“D”) continued to withdraw, in cash, all payments made into the Company bank account after it had been placed into liquidation and claimed that he used the cash to pay the first Liquidator’s fees and expenses (ignoring the fact that the Liquidator should have been in control of the bank account) and a favoured creditor in Dubai whose name failed to make it on to the list of creditors on the original Statement of Affairs.
The Company was a digital marketing company. D was the sole director. The Company traded for less than 4 years before it was placed into CVL. The major creditor was HMRC. In response to all requests for information made by or on behalf of the Liquidator D asserted and maintained that he had nothing as everything had been delivered up to the first incumbent liquidator, Gagen Sharma (“G”).
The claim brought by the Liquidator sought recovery of various payments made from the Company bank account which did not appear to be for the benefit of the Company. Whilst conceding that some of these payments were not for the benefit of the Company (D couldn’t explain the vet’s bills as the Company didn’t employ a guard dog) D did not at any stage offer to pay or repay any sums to the Company preferring, instead, to claim an entitlement to offset these payments against an outstanding sum of £12,000 which he alleged was due to him by the Company. D conceded, at trial, that this was a “guestimated” figure arrived at during discussions with G prior to her appointment as liquidator which, unsurprisingly, was entirely unsupported by any independent evidence by way of contemporaneous records or documents.
The Judge also noted:
- The extent of the cash withdrawals from the Company bank account in the 6-8 week period prior to the Company being placed into liquidation and D’s inconsistent and inadequate explanations as to how this was dissipated; and
- That the Liquidator conceded claims where appropriate upon being presented with documents that suggested that the payments in issue may, in fact, have been for the benefit of the Company. The Liquidator’s approach should have flagged up that D needed to provide more of the same in order to successfully defend the proceedings; and
- D could not claim to have acted honestly and reasonably (raised for the first time by Counsel for D in closing submissions) because he acted upon advice from G, the relative modesty of the payments in issue, the fact that D did not apparently enjoy a lavish lifestyle drawing a salary of only £8,000 per annum from the Company and/or the transactions in issue didn’t cause the Company’s insolvency.
The comprehensive Judgment recognises and reinforces (in addition to the statutory duties set out in ss171 – 177 Companies Act 2006):
- A director’s obligation to maintain accurate accounts pursuant to s339(3) Companies Act 2006;
- A liquidator’s statutory duty to carry out enquiries and investigations into the conduct of the directors of insolvent companies;
- A director’s obligation to provide full disclosure of all relevant information to the liquidator when requested to do so and that the Court will draw the appropriate inferences from an absence of contemporaneous documents and records;
- The fiduciary duties owed by directors, particularly a duty to provide proper explanations for all payments made from the company bank account, however small, which mean that the director won’t be relieved from liability because they haven’t profited personally from the breach;
- Directors cannot rely upon a lack of accounting records to defend a challenge by the liquidator and they are at risk of being penalised if their approach to record keeping is informal at best or hopelessly deficient at worst;
- That creditor interests become paramount once the company is at risk of becoming insolvent.
The Judgment sum isn’t big but the Judgment packs a punch and will, no doubt, be referred to and relied upon in the myriad of similar cases that we work on every day.
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