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A timely reminder to directors on statutory duties

A timely reminder to directors on statutory duties

29th January 2021 - Published by Kuits Restructuring & Insolvency team

A recent High Court case provided a useful reminder to company directors about their statutory duties under the Companies Act 2006 in the context of directors’ loans. Kuits Head of Restructuring and Insolvency, Richard Palmer explains the details.

The case

The case in question was ‘Manolete Partners plc v Matta and Others [2020] EWHC 2965 (Ch)’.

Dr Amir Matta, the first respondent, is the sole director and majority shareholder of Saint George Investment Holdings Limited.

The Company went into administration in October 2016; at that time its director’s loan account (DLA) was overdrawn by over £1m. In addition, between 2015 – 2016, the Company made other significant payments that were considered challengeable upon the insolvency of the Company.

The Applicant firstly submitted that Dr Matta acted in breach of the duties he owed to the Company under sections 171 to 176 (inclusive) of the Companies Act 2006, by drawing down on the DLA and by permitting the other significant payments that were unjustified and unexplained. An application was also brought that these payments were either transactions at undervalue or preferences.

Dr Matta had used the DLA on a long term basis predominantly to purchase personal items of luxury, including the acquisition and maintenance of a yacht. Such items were not associated with the Company’s business and were not in the interests of the Company. Dr Matta had submitted that the Company made the payments when it could afford them, and it was intended to convert the DLA into dividends, but that was not possible as the Company had entered administration. This may have been difficult as according to the Administrators’ proposals filed shortly after the start of the administration, the Company’s assets totalled c£1.78m, including the directors’ loan, but its liabilities totalled £6.98m.

The decision

Dr Matta was found to be in breach of his obligation to exercise reasonable skill, care and diligence in carrying out his duties under sections 171 to 176 of the Companies Act and ordered to pay the outstanding DLA debt. In the judgment, the Court stated:

“A director’s powers to authorise payments from a company’s funds are not granted to enable directors to pay for or fund very significant personal items of expenditure on a long term basis. I also accept that authorising such payment on a continuing basis, and taking no steps to regularise the position is a breach of duty to act in a way most likely to promote the success of the Company.”

Dr Matta’s argument had been that payments were actually made when the Company could afford them. The court held that in not correcting the position over many years, Dr Matta was in breach of his obligation in carrying out his duties.

In respect of the payments to other recipients, the Court concluded that it did not have enough evidence to order repayment by the recipients as it could not be concluded that the Company was insolvent at the time they were made. However, the Court did conclude that one of the payments was authorised by Dr Matta in breach of his duties and ordered that he was liable to repay it.

What does this case tell us?

The case highlights the clear and important statutory duties directors owe to their company under the Companies Act 2006. The use of a DLA for personal expenditure, not in furtherance of the company’s interest, is almost certainly in breach of the duties set out in the Companies Act 2006. In addition, directors also ought to be mindful that historic transactions should be properly documented, for fair value, justified in the context of the Insolvency Act 1986 and reconciled as soon as possible.

To pay directors, many companies make loans to directors which are then converted to dividends upon reconciliation at the end of the company’s financial year. This is tax efficient for the director. Dividends cannot be awarded where the company is insolvent. In the current economic climate, many companies are deemed insolvent on either a cash flow or balance sheet basis, so companies that are presently utilising this method of payment to directors need to proceed cautiously and with appropriate legal and financial advice.

Get in touch with a Restructuring and Insolvency solicitor in Manchester

If would like advice on the duties set out for directors in the Companies Act 2006, please contact Head of Restructuring and Insolvency Richard Palmer on 0161 503 2996 or email richardpalmer@kuits.com.

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