Joint liability – a warning for company co-directors

Some people say ignorance is bliss. While that may be true in some situations, the sentiment certainly lacks universal applicability. This outlook recently led to a significant liability for a director who was held joint and severally liable for monies his co-director had pocketed from the company. The case is a stark reminder for company directors to remain involve in all aspects of the business; even at the very least, on an observational basis.

Re TMG Brokers Ltd (In Liquidation) [2021] EWHC 1006(Ch) – the background

Mr S and Mr M were co-directors of TMG Brokers Limited, a company which provided online credit card payment processing services. After the company was wound up, its liquidator established a catalogue of cash withdrawals initiated and received by Mr M. Mr M maintained the monies were reimbursement of expenses however, no records or receipts were provided to substantiate the position.

At trial, the judge found that the cash withdrawals were a breach of Mr M’s duties as a director and therefore, the company was entitled to be reimbursed. He was then asked to determine whether Mr S should be held joint and severally liable to repay the same.

According to Mr S, he never had access to the company’s bank account. He had no idea the cash withdrawals had been made. Mr S stated that he had little involvement with the company’s finances; he trusted Mr M and therefore had no reason to interfere.

Judgment

During the trial, it became clear that Mr S had allowed a practice in which Mr M could make payments/withdrawals from the company bank account, without being questioned or challenged as to the legitimacy of those payments.

Mr S had never called for management or other accounts to be prepared on enquiry, to check, at least once, that the only person in control of the company’s finances, was properly handling them.

In the circumstances, the judge held Mr S’s behaviour was a breach of his duty as a director to exercise reasonable skill, care and diligence in accordance with the Companies Act 2006. This meant that Mr S was held joint and severally liable for the monies received by Mr M.

Conclusion

This case is a reminder to directors that they are unable to abrogate their duties and responsibilities by relying on the fact that their co-director/s have assumed primary responsibility for the same. Directors should remain involved in all aspects of the business, even if simply on a checks and balance basis.

While this case relates to an insolvent company, we are seeing an emerging trend of director disputes particularly because of the Covid-19 pandemic. It comes to as no surprise that in these unprecedented times, directors aren’t necessarily pulling in the same direction when it comes to declaring dividends, increasing salaries or the use of a directors loan account.

If you are facing similar difficulties, it is strongly advised to act early and seek appropriate advice. Ongoing disputes are not only more difficult to resolve, but they can also be incredibly damaging to the business.