Summary

The liquidators of a construction company succeeded in their claim against its director for monies outstanding in relation to a subscription of company shares and for the proceeds of sale of a property belonging to the company, which the director had misappropriated.

Facts

A construction company, acting through its liquidators, claimed against the respondent director for some £830,000 allegedly due to it. The director counterclaimed for around £290,000 which he contended the company owed him.

The company's trade had slowed in 2007/08 and it struggled to pay its debts. At the end of 2007, it proposed to raise £10 million by a placement of shares. Throughout 2008 there were serious cash flow and debt problems. In May 2008, the director subscribed for 1.5 million shares at a consideration of £750,000. Later that month, the directors certified that the company was a going concern subject to the placement of the shares. They were allotted to the director in September 2008. His liability to pay £750,000 was recorded in a financial statement. Around the same time, the director instructed the company's solicitor to transfer £75,000 from the proceeds of sale of one of the company's properties to his personal bank account. Shortly afterwards, a creditor presented a winding up petition. Administrators were appointed in January 2009 and in January 2011, the company was ordered to be wound up. The director admitted owing the company £500,000 for shares but denied the remaining £250,000. He asserted that there had been an agreement at a board meeting in April 2008 to sell the remaining shares. He denied using the £75,000 for his personal liabilities and asserted that he had used it to discharge a valuation fee incurred by the company. He also maintained that he had made loans to the company, which remained unpaid, and that he was owed a £100,000 under a personal guarantee, unpaid salary, unpaid bonus, and compensation for wrongful dismissal.

Held

(1) On the evidence, the company had been insolvent from the end of 2007 (see paras 22 of judgment).

(2) The director's contention that he only owed £500,000 for the shares was not credible. There was no evidence of an agreement to sell the remainder and no record of any discussion about share subscriptions at the April board meeting. A letter to shareholders in May 2008 informed them of the director's share subscription, and confirmed that it would be fully paid. If a side agreement had been in place, that letter would have been misleading. It was also difficult to see why such an agreement would be in the company's interests, and how the other directors would have agreed to it. A person liable to pay monies due on a subscription for shares in a company in the context of a liquidation could not set off against that obligation monies owed to him by the company. He had to first pay the subscription monies before he could receive anything due to him under the liquidation, West Coast Gold Fields Ltd, Re [1906] 1 Ch. 1 applied. Therefore, regardless of the director's counterclaim, he was liable to pay £750,000 in respect of the share subscription (paras 32-33, 35-40, 52).

(3) There was no evidence of the company's liability to pay a valuation fee. The £75,000 transfer was simply a misappropriation by the director of the company's monies. He owed the company fiduciary duties to safeguard its assets. Misapplication would require him to make good the assets in the same way as if he were a trustee. He was therefore liable to repay the £75,000. He was also required to pay £5,044 in respect of architectural services supplied by the company. Interest would be at 1.5% from the date of the letter before action (paras 44-45, 49, 51, 112-113 of judgment).

(4) Regarding the director's counterclaim, he could not claim in respect of any loans to the company because they were made, not by him, but by companies associated with him. Nor was he entitled to claim £100,000 by way of indemnity because there was no evidence of an indemnity or personal guarantee. In paying the £100,000, he had acted without the board's express agreement or acquiescence to indemnify him (paras 53, 81, 87-93).

(5) The director was entitled to one month's salary which had been unpaid at the date of the administration. There was a dispute as to the amount of his salary, the company asserting that it could not afford to pay him any more than the contractual sum of £150,000 per annum and the director arguing that he had, in fact, been paid £276,000 per annum, reduced in June 2008 to £248,000. This was a substantial company carrying out large business projects, with some very experienced businessmen on its board. In 2008, despite its parlous financial affairs, it had still been carrying on business in a substantial way. In the absence of expert evidence as to what it should have paid the director, whose remuneration was fixed by a remuneration committee, the company had not discharged the burden of proving that the salary of £248,000 was excessive (paras 95-104). The director was not entitled to a bonus payment of £150,000. The directors had acted outside their fiduciary duties in awarding it, and the director should have known that it could not be justified and should have declined it (para.109). The director was entitled to 12 weeks' salary by way of wrongful dismissal and a redundancy payment of £4,950 (para.114).

Claim upheld, counterclaim upheld in part