Breach of directors’ duties and wrongful payments

Nov 1, 2020

The recent case of Wow Internet Limited (acting by its Liquidator, Mr Stephen Hunt) against Mr Qasim Majid [2020] EWHC 2890 (Ch) is of interest to insolvency practitioners since it reaffirms the importance of directors ensuring proper record keeping, and that when investigating the conduct of a director(s):

The recent case of Wow Internet Limited (acting by its Liquidator, Mr Stephen Hunt) against Mr Qasim Majid [2020] EWHC 2890 (Ch) is of interest to insolvency practitioners since it reaffirms the importance of directors ensuring proper record keeping, and that when investigating the conduct of a director(s):

1) adverse inferences may be drawn from the absence of contemporaneous documentation and/or other sources of evidence to show that a payment was in the company’s best interests; and

2) in the absence of clear evidence one way or the other about whether a payment was for the company’s benefit, the payment should be treated as if it were not for the company’s benefit / the benefit of any doubt is to be given to the Liquidator.

In the Wow case, Deputy Insolvency and Companies Court Judge Firth found that Mr Majid (as sole director of Wow Internet Limited (in liquidation)) had failed to show that payments were more likely than not for the company’s benefit, and had therefore wrongfully withdrawn sums from the company’s bank account in breach of his statutory and fiduciary duties.

Deputy Judge Firth reached his decision based on the following legal principles:

a) Liquidators are obliged by virtue of the office they hold to investigate the conduct of directors with a view to ensuring that they compensate the company for any failure to comply with their fiduciary and statutory duties. This necessarily involves full disclosure by the director of any information that is relevant.

b) It is the obligation of a director once payments have been identified to demonstrate what those payments were for, and why they were legitimate, so that an appropriate assessment can be made.

c) A director’s explanation for a payment should be tested by reference to contemporaneous documentation. A director ought to be able to explain a payment by reference to contemporaneous documentation since under section 386 of the Companies Act 2006, every company must keep accounting records which show entries from day to day of all sums of money received and expended by the company and the matters in respect of which receipt and expenditure takes place.

d) The absence of documentary records does not preclude a director from leading evidence to explain a payment from other sources, such as his own oral evidence or evidence from the company’s accountant. However, if financial records are deficient in a material way, adverse inferences may be drawn, and any doubt resolved, against the director.

Adverse inferences may also be drawn if, in the absence of documentary evidence, the director does not lead evidence from other sources that would be expected to have knowledge of the relevant transactions, such as the company’s accountant.

e) It may be that some payments are legitimately for the company’s benefit, but if there is no evidence to support this on the balance of probability, it is not possible to take a broad-brush approach to this assessment.