Did you know part of a director’s responsibility is to scrutinise their fellow directors?

Case Study: agreeing that one director is the ‘lead’ for a company’s financial affairs does not remove the other directors from responsibility.

In this case study regarding the duties of directors, we look at a recent case in which the liquidators of TMG Brokers Limited (in liquidation) questioned 2 of the company’s directors over nearly £440,000 of payments. The case went to the High Court, who held that one of the directors of the company was ‘jointly and severally liable’ for payments made by his co-director out of the company’s bank account and that these payments were made without proper authority and, therefore, amounted to disguised distributions of capital.

The key take out from this case is the fact that ignorance is no excuse for directors. The Court decided that although one of the directors claimed that he had placed his trust in the other director for the company’s financial affairs, it did not excuse him from performing his duties as defined in the Companies Act 2006.

What were the payments?

The questioned payments fell in to three categories

  1. Payments totalling £175,053.32 from TMG’s bank account made to Director 2 (D2) between 12 September 2013 to 1 December 2016.
  2. Cash withdrawals of €50,409.11 (£43,182.70) from the bank account, which the liquidator considered were most likely to have been made by D2, and
  3. £213,791.94 that D2 directed one of TMG’s debtors to pay into the account of a connected company, TMG Pay Limited (TPL), under the control of Director 1 (D1) and D2.

The Liquidators claimed that items 1 and 2, above, were either made without proper authority and amounted to disguised distributions of capital, or that in causing or permitting the payments, both directors had acted in breach of the fiduciary duties which they owed to TMG as its directors as stipulated by the Companies Act 2006. The Liquidators also claimed that the payments detailed in 3. above were diverted away from TMG by both directors in breach of their fiduciary duties.

The Directors’ response to the Liquidator’s claims

The defence of D1 was largely based around ignorance. He claimed that he had received a single payment which he believed was salary, and that he had repaid it to the company when he realised it had not been properly accounted for. He also did not deny he had received a sum from TMG’s account and that it was simply a reimbursement of ‘legitimate company expenditure’.

He went on to say that D2 had ultimate control of TMG and that TMG’s finances and all other payments in question had been made without his (D1’s) consent. For that reason, D1 asked the court to release him from liability.

D2 simply denied both that he had wrongly received payments from TMG and that he had breached his duties to TMG.

The Court’s Judgement – Ignorance is no defence

The Court’s judgement was that ‘the payments were made without proper authority and amounted to disguised distributions of capital. The fact that D1 had placed trust in D2 in relation to TMG’s financial affairs did not excuse D1 from performing his duties as a director.’

Even though D1 claimed he did not know, understand or even ask about the payments made by D2, the Court decided that D1 was to be treated as having authorised the payments. The key points were:

In summary, there were several issues that should have put D1 on alert to check that D2 was properly handling matters. Had he checked, it would have been clear that D2 was not doing so. A director with grounds for suspecting the honesty of a fellow director will be liable if they refuse to act on those suspicions. And this was the Court’s judgement in this case.

Our Comment

This decision should serve as a timely reminder to directors of their duty to scrutinise the conduct of their fellow directors at all times and that ignorance is no defence. This case shows that agreeing that one director will primarily be responsible for a company’s financial affairs does not absolve the other directors from responsibility in such matters. As a result, the directors involved did not escape liability for the payments made.

How Can an Insolvency Practitioner Help?

Directors need to make the right decisions when facing insolvency, especially in relation to their duties as directors, and these decisions need to be properly recorded. Here at Antony Batty & Company, our team of Licensed Insolvency Practitioners and Business Recovery and Restructuring Specialists can help Directors to ensure they fulfil their duties with practical measures and advice that can create a framework for managing a company in difficulty.

This advice can help to ensure that the Directors can avoid criticism at a later stage, if insolvency is the outcome, reducing the risk of a Liquidator’s claim or even director disqualification investigation. Such advice can also be crucial in directors keeping control of the decision-making process, helping to prevent HMRC, banks, landlords or creditors influencing the outcome.

Contact us or call us on any of the numbers below for help and advice on insolvency and the possible issues regarding the duties and responsibilities of directors, including director disqualification. The initial discussion is FREE.

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