CR-2024-000675 - [2025] EWHC 2069 (Ch)

I have already covered the specific points raised by the Respondents in favour of characterising the Category A payments as shareholder loans. Mr Davies KC also addressed me on the following more general points.

First, that the Respondents would say that they are all the shareholders of the Company and shareholders can ratify breaches of duty. As Mr Davies pointed out, there are four caveats to that:

Second, the Respondents will allege that they operated a DLA properly so-called and that neither Hazlewoods nor anyone else informed them that it was invalid or not being operated properly, although the Liquidators would contend in response that any argument that the Respondents seek to rely on based on s.1157 CA 2006 (statutory defence of acting honestly and reasonably) would fail, see Haq at [88]-[93]. They can also point to authorities where the courts have recognised a high degree of informality in relation to DLAs: see e.g.: Ciro Citterio Menswear Plc v Thakrar [2002] 1 W.L.R. 2217 (Mann J).

Mr Davies KC acknowledged there was some force in the Hazlewoods point because directors tend to follow advice from accountants, especially where there is a high degree of informality.

In response, the Liquidators would say that Hazlewoods expressed discomfort and never really got to grips with the Company’s situation. In that regard, Hazlewoods resigned due to their inability to verify the Respondents’ dealings with the Company’s property and there is no positive corroborative evidence supporting an allegation that the Respondents received informed professional advice to the effect that the DLAs were properly constituted and/or reflected a running account of authorised debits and credits which were in the interests of the Company. As to permitted degrees of informality, context is everything and the overall abuse here is relying on the Company as a personal cash cow.

Furthermore, however informally a director’s loan account is being operated, a reconciliation is required at year end, otherwise no-one can know what the financial position of the Company is. There are no reconciliations which are consistent with the case the Respondents are now running, and I was reminded of the underlined words at the end of the quote from Lord Walker which I cited above.

Third, as already mentioned the main dispute concerns the 6 Alleged Capital Injections in Category A. In the very detailed section 2 of the response to the LBAs from RD Capital dated 18 October 2024, the Respondents assert stridently that the Alleged Capital Injections (Category A payments) obviously came from the First Respondent. They assert that, as a result, the Company owes a net sum of £68,980.38 to the First Respondent.

However, as explained in paragraphs 11 to 62 of HF’s response dated 20 December 2024, the liquidators’ team have analysed these payments to the Company and concluded, based on contemporaneous records and evidence, that none of them was treated as a capital injection by the First Respondent. In each case, they have identified the source of the payment, which is inconsistent with the Respondents’ case, and noted the lack of any contemporaneous evidence supporting a case of shareholder loans.

In sections 1 to 9 of their (even longer) response dated 24 February 2025, various general and specific points are made to the effect that Category A payments were shareholder loans. Their general points are that the burden is on the liquidator to show that the Category A payments were not shareholder loans and also that the liquidators have not shown any entitlement of the Company to any of the Category A payments. As I have already mentioned, the liquidators’ case is that it is emphatically for the First Respondent to demonstrate that he lent these funds to the Company and, if so, on what terms. The question whether the Company was entitled to receive these funds from other entities and, if so, on what terms, is not probative because this would not avail the First Respondent of the personal rights of set off that he asserts.

More generally, the liquidators’ case is that the payments out in the other categories were made in breach of fiduciary duty and must be restored because the Respondents were on notice of the facts that gave rise to the breaches and therefore acquired no beneficial interest in the funds. In such circumstances, the existence of a claim in debt is no answer to a proprietary claim - i.e. there can be no set off in respect of the Category A or E payments in any event, see  Zemco Ltd v. Jerrom-Pugh [1993] B.C.C. 275, at p.279B: “what is clear is that there is a general rule that … there can be no set-off for a simple debt against a proprietary claim” (approved on appeal by Hoffmann LJ at p.280E, following Guinness plc v. Saunders [1988] 1 W.L.R. 863).