Director’s liability for dividends

The sole director of an insolvent company was unable to provide the liquidator with a full account of the financial dealings of the company, the liquidator having provided a schedule of transactions.

The schedule included payments made to the director by a transfer of cash received by the business, where the cash was not paid into the company’s bank account.

s212 Insolvency Act 1986 enables a liquidator to take action where a director has: “misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company”.

The director’s response to the liquidator’s claim included reliance on her estranged husband being controlling and violent, acting as a de facto director and making financial decisions, including withholding financial information in her maternity absence; asserting that evidence of the business nature of the payments, including receipts, were destroyed in a flood; alleging that loans were made to family members at the direction of the husband and otherwise maintaining the payments were for business purposes.

The law, for policy reasons, lays the burden on the defaulting fiduciary to show that the profit is not one for which she should account. On the evidence the judge concluded that the director was liable to repay sums found to be paid for her direct benefit dressed as dividends that were in fact unlawful, but not the sums wrongfully paid out when her free will had been subjugated to the will of her husband under the threat of violence.

Article written by Jamie Wheatley

Glam and Tan Limited (in liquidation) v Litras [2022] EWHC 855(Ch)

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