Ball (liquidator of PV Solar Solutions Ltd) and another v Hughes and another  EWHC 3228 (Ch)
The High Court has considered whether directors will be deemed to be in breach of their fiduciary duties under section 212 Insolvency Act 1986 (“IA 1986”) for credits made against director’s loan accounts whilst a company is insolvent. This ruling is of particular interest given that it involves an ‘employer finances retirement benefit schemes’ (“EFRBS”). Such schemes have already caused a number of insolvency and are likely to be a catalyst for many insolvencies over the next few years in light of the Finance Bill 2017 which introduced the “2019 loan charge” for loans owed to Employee Benefit Trusts.
The case however did not comment on whether the EFRBS was effective to avoid tax, but turned on whether the directors (without contracts of employment) were allowed to (a) withdraw remuneration and (b) make credit entries, based on the EFRBS. The liquidator made an application under section 212 of the IA 1986 and alleged that in causing the company to enter into the EFRBS in March 2012, and thereafter applying three credit entries against their director’s loan accounts with the company in March, June and December totaling £750,800 (a) without justification and (b) at a time when creditors were being left unpaid, the directors had acted in breach of their duties.
Based on the evidence, the Registrar Barber was satisfied that an intelligent and honest man in the position of a director of the company could not reasonably have believed that the credits were for the benefit of the company’s creditors. Registrar Barber held that
- The directors had acted in breach of their fiduciary duty to act in the best interests of the creditors of the company, contrary to s172 of the Companies Act 2006 (“CA 2006”) by making 3 credit entries against their directors’ loan accounts;
- The directors had failed to exercise their powers for proper purposes, contrary to CA 2006 s171 as they misapplied the company’s assets for their own benefit;
- The above resulted in misfeasance for the purposes of IA 1986 s212;
- The directors were ordered, jointly and severally, to repay the sum of £758,020 to the company, together with interest.The case is further interesting because Registrar Barber rejected an argument that the credits to the directors’ loan accounts received approval by way of the Duomatic principle (the directors held 100% of the issued share capital). Further and on the evidence, Registrar Barber was not persuaded that the directors had taken any advice on the insolvency or company law implications of using the EFRBS.This case is of interest to Insolvency Practitioners who may have corporate insolvencies which include EFRBS/employer benefit trust schemes and supports that misfeasance claims are likely to assist in the recovery of sums paid by directors to such schemes. IA s423 may of course provide an alternative cause of action which could leave recipients of the loans with both a liability to the company and loan charge.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.