Liquidator fails to recover payments to directors

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A liquidator sought to recover payments of over £1.2 million made to two directors. The company (BHL) was formed as a vehicle to purchase a textile company (1877) which had a large turnover.

In May 2011 BHL purchased the shares in 1877. Most of the purchase price was raised from monies advanced to 1877 under a factoring agreement in respect of its book debts.

The respondents used a bank account in BHL’s name for 1877’s business transactions. Between May 2011 and January 2013 over £1.2 million was paid to the respondents from the bank account. They were also directors of 1877. They contended that the payments were remuneration for their services to 1877.

The liquidator claimed that the payments were not authorised by BHL's articles; made when BHL was insolvent and in breach of their duty to have proper regard to the interests of BHL’s creditors; and were transactions at an undervalue.

In order to succeed, the liquidator had to show that, although BHL never traded and the payments were essentially made from funds advanced to 1877 under the factoring agreement, they were made from BHL’s assets or can somehow be treated as having been made from assets at BHL’s free disposal. The liquidator’s claim was dismissed. 

The liquidator had failed to establish that the payments were made with BHL's monies. While the payments were made from a bank account in BHL’s name, the bank account had been entirely funded from monies paid to or for the benefit of 1877, which retained a beneficial interest. The monies were to be treated as an asset of 1877, not of BHL, held on trust for 1877 and at its direction.

The liquidator's claim would have failed in any event on the basis that the payments would be deemed to have been approved by BHL's directors in accordance with the model articles of association, they were not made in breach of duty and did not amount to transactions at an undervalue.

Brookmann Home Ltd (In Liquidation), Re [2021] EWHC 2610 (Ch)

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