Scottish Sheriff Court Decisions

SHERIFFDOM OF GRAMPIAN, HIGHLAND AND ISLANDS AT ABERDEEN

 

A399/11

		JUDGMENT   by   SHERIFF PETER G.L. HAMMOND
		in the case
		McGREGOR GLAZING LIMITED (In Liquidation), a company incorporated under the Companies Acts with the Registered Numbered SC340640 and having its Registered Office at 7 Queen's Gardens, Aberdeen, AB15 4YD.
		Pursuers
		against
		GEORGE McGREGOR, residing at 23 Links Road, Bridge of Don, Aberdeen, AB23 8DD.
		Defender     __________________________

 

 

 

Act: Artis, Counsel

Alt: McCallum

 

 

 

ABERDEEN, 15 May 2013.

 

The Sheriff, having resumed consideration of the cause, Repels the defender's pleas-in-law numbers 1 and 2; Sustains the pursuers' pleas-in-law numbers 4 and 5 and accordingly also the pursuers' pleas-in-law 1, 2 and 3; Quoad Ultra Repels the parties' pleas-in-law and accordingly (1) Grants decree against the defender for payment to the pursuers of the sum of FIFTY ONE THOUSAND ONE HUNDRED AND TWO POUNDS THIRTY FOUR PENCE STERLING (£51,102.34) with interest thereon at the rate of eight per centum per annum from the date of citation until payment; (2) Grants decree against the defender for payment to the pursuers of the sum of FORTY EIGHT THOUSAND SEVEN HUNDRED AND THIRTY NINE POUNDS TWELVE PENCE STERLING (£48,739.12) with interest thereon at the rate of eight per centum per annum from the date of citation until payment; Reserves meantime all question of expenses and sanction for the employment of counsel and appoints parties to be heard thereon within the Sheriff Court House, Aberdeen on 11 June 2013.

 

 

 

 

 

NOTE:

Introduction

[1]      This is an action by the liquidator on behalf of a private limited company against one of the former directors of that company, seeking payment of sums alleged to be due by the defender to the company. There are two aspects to the pursuers' claim. Crave 1 seeks repayment of a sum of money shown in the books of the company as the outstanding balance of a loan account advanced by the pursuers to the defender as a director. Crave 2, craves payment from the defender of sums advanced by the pursuers to his co-director, Denis Stewart. Crave 3 is an esto crave, representing a fall-back position to crave 1 on the basis that if the defender's factual case were correct, the sums for which he claims credit would fall to be regarded as an unfair preference to the prejudice of other creditors.

 

[2]      The defender's position is that he took no part in the day to day running of the business and was neither involved in the financial affairs of the company nor provided with management accounts. He maintains that the sums shown as directors loans in his name are wrongly recorded, and they in fact represent reimbursement by the company of sums expended by him personally on behalf of the company. He maintains that he did not authorise any lending by the company to Mr Stewart and is not responsible to the pursuers for any such lending.

 

[3]      Both parties tabled preliminary pleas, attacking the relevancy and specification of the other's averments, and the debate proceeded in respect of both parties' preliminary pleas.

 

Defender's attack on the relevancy of the pursuers' case

Defender's submissions

[4]      The defender's preliminary pleas are to be found in pleas-in-law numbers 1 and 2. In his submissions, Mr McCallum pointed out that for the purposes of the debate, he only sought to direct his criticisms towards the pursuers' averments in respect of crave 2, namely the loan to Denis Stewart. Mr McCallum invited me to sustain his preliminary pleas to the effect of dismissing the pursuers' crave 2. Mr McCallum accepted that in relation to the pursuers' craves 1 and 3, sufficient averments had been made to enable the case to go to proof.

 

[5]      Mr McCallum reminded me of the parties' positions on Record dealing with the Denis Stewart director's loan. The pursuers sought to hold the defender liable for payment of the amount of the Denis Stewart loan in terms of Section 213(4)(d) of the Companies Act 2006. The pursuers aver that this is a transaction caught by Section 197 of the 2006 Act as it is a loan made to a director of the company which has not been approved by a resolution of the members of the company. Section 213 deals with the consequences of a contravention of Section 197. The effect of Section 213(4)(d) is that where a company enters into a transaction in contravention of Section 197, along with certain other persons, "Any other director of the company who authorised the transaction or arrangement" is liable to indemnify the company for any loss or damage resulting from the transaction or arrangement.

 

[6]      However, in terms of Section 213(7)(b), a director is not liable under sub-section 4(d) if he shows at the time the transaction or arrangement was entered into, he did not know the relevant circumstances constituting the contravention. The defender has put Section 213(7) in issue by pleading a defence to the effect that he was unaware of any loan being made to Denis Stewart.

 

[7]      Mr McCallum's succinct point was that for the pursuers to succeed on this part of his claim, they would have to prove that the defender approved or authorised the arrangement which was entered into with Denis Stewart. In condescendence 2 at line 22, it is averred that the accounts "were seen and approved by the directors". In condescendence 3, line 122, it is stated simply that the defender "had authorised" lending to Denis Stewart. On the basis of these averments, no foundation has been laid to enable the pursuers to lead evidence to bring home a case that authorisation or approval had been given or to show how such approval or authorisation had come about.

 

[8]      Furthermore, the pursuers' position is that no management accounts were approved by the directors after 31 July 2009. The email traffic referred to by the pursuers in condescendence 2 from line 22 onwards was all sent after 31 July 2009 and therefore post-date the point at which the alleged authorisation would have occurred. For that reason, the email traffic referred to does nothing to assist the pursuers in laying out a case that authorisation of this lending to Mr Stewart was given by the defender.

 

[9]      Quite simply, the pursuers' averments that the management accounts were "seen" by the defender and "approved" would seem to imply some further positive act by the defender having taken place, without specifying how exactly such approval was given, the form which it took or when it occurred.

 

 

 

[10]    Mr McCallum also attacked the pursuers' averments in condescendence 3 about a sum of £49,178.68 included within the directors' loans and said to represent sums advanced to a business called The Heritage Window and Door Company Limited. Mr McCallum referred me to the averment at lines 129 - 130 that "That sum was allocated on a 50:50 basis to each of the directors' loans." The pursuer also referred at line 196 to the company's accountants, Ritson Smith, treating the respective sums "rightly" as being equal between the defender and Denis Stewart. In Mr McCallum's submission, however, there are no averments to show why it was appropriate to allocate the sums concerned on a 50:50 basis. In his submission, the pursuers' averments are irrelevant and lacking in specification and failed to give fair notice to the defender. These averments should not be admitted to probation and crave 2 should be dismissed.

 

[11]    Mr McCallum criticised the averments in support of the pursuers' esto case that any sums paid to the defender to reimburse him for personal expenditure on behalf of the company would be caught by Section 243 of the Insolvency Act 1986 as an unfair preference in terms of Section 243. Mr McCallum submitted that the pursuer did not have adequate averments to establish that unfair preferences were granted In particular, there are no averments which would enable the pursuer to lead evidence to prove that there was collusion between the defender and the company. Therefore this case is also lacking in specification and fails to give fair notice to the defender.

 

 

[12]    In relation to the question of the function of written pleadings and the giving of fair notice, Mr McCallum referred me to Macphail, Sheriff Court Practice, paragraph 9.07 at page 295. He further referred me to the cases of Lord Advocate v Johnston 1985 SLT 533, Morrisons Associated Companies Limited v James Rome & Sons Limited 1964 SC 160 and Ward v Coltness Iron Company 1944 SC 318.

 

Pursuers' submissions in reply

[13]    Counsel reminded me of the tests to be applied when scrutinising a party's averments to decide if they are relevant and give fair notice to an opponent. An action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuers' averments are proved (Jamieson v Jamieson 1952 SC (HL) 44). Although it is incumbent upon a pursuer to give fair notice of matters requiring proof, it is not necessary to aver in the pleadings every point of evidence (Lord Advocate v Johnston 1985 SLT 533, at page 534). The pleadings should be read broadly (McMenemy v James Dougal & Sons Limited 1960 SLT (N) 84). I was reminded that the test is whether the other party is prejudiced in his preparation for proof (Avery v Hew Park School for Boys 1949 SLT (N) 6).

 

[14]    In approaching the pursuers' averments, due allowance should be made for the degree to which the facts and circumstances are peculiarly within the defender's knowledge. In regard to the issue of approval or authorisation of the loan to Denis Stewart, the defender had a considerable advantage over the pursuers in terms of his personal knowledge of how the company was managed and what he did in relation to lending to the directors.

 

[15]    In counsel's submission, the pursuers have given fair notice of the essential elements to bring themselves within Section 213 of the Act. At condescendence 3, line 4, the pursuers offered to prove that the defender authorised the lending. With regard to the question of how the loans were authorised, matters did not simply rest on what the defender could be proved to have actually done. Some factual matters which are averred, and which are not in dispute, enable inferences to be drawn as a matter of law and which assist the pursuers in relation to the sufficiency of their averments. It is admitted that the defender and Denis Stewart were the directors of the pursuers' company. The pursuers offer to prove that the company operated directors' loan accounts without the necessary members' resolution, Mr Stewart borrowed money and the directors approved the accounts (which are incorporated and founded upon) in which the lending is disclosed. In response to the defender's averment that he was not involved in the company's financial affairs, the pursuers aver, in detail, correspondence to which he was privy and which discusses the accounts and the lending to Mr Stewart.

 

[16]    Counsel submitted that it was not open to a person in the position of the defender to escape liability for the sums advanced to Mr Stewart on the basis that he did not have actual knowledge of the payments to him. Even a non-executive director "knowingly allows a practice" when he abrogates his responsibilities so as to allow a practice to develop (Neville v Krikorian [2006] BCC 937). In these circumstances, if proved, it could be inferred that the defender, as a director, approved the directors' loans including those to Mr Stewart. Counsel submitted, for these reasons, that fair notice had been given.

 

[17]    With regard to the allocation of the sums paid to Heritage, counsel submitted that why any sums were allocated 50:50 to each of the directors' loans is not a matter that bears on relevancy, if it was a fact that they were so allocated. In any event, in condescendence 3, the pursuer explains that the defender and Mr Stewart each held one share in Heritage and that the sum paid to Heritage was treated as directors' loans in proportion to their respective shareholdings in Heritage.

 

[18]    In relation to the pursuers' esto case of unfair preference, counsel submitted that it was not necessary for the pursuers to prove collusion under Section 243(1) of the Act. A transaction is challengeable as an unfair preference whenever it "has the effect of creating a preference in favour of a creditor to the prejudice of the general body of creditors, being a preference created not earlier than six months before the commencement of the winding-up of the company...".

 

[19]    Counsel submitted that the relevancy of a case of unfair preference (and the defences against it) may be judged by reference to the nature of the payment being a voluntary one undertaken in the face of circumstances in which the paying company is at the time insolvent. In Articles 2 and 3 of condescendence, the pursuers aver accrued losses and a deficit in net assets at 31 July 2009. They aver that by that date lending had accrued and continued to increase. In answer, the defender avers that the company was in financial difficulties throughout its trading (Answer 3, page 9 from line 250). Counsel submitted that to make payment in such circumstances is prima facie to grant an unfair preference. I was referred to the case of Leslie v White [2012] CSOH 124. In counsel's submission therefore, the pursuers have made sufficient averments to instruct Sections 243(1) and (4) of the 1986 Act.

 

[20]    Counsel developed his submission by explaining that in any event the pursuers were entitled to aver collusion based on the circumstances in which the payment to Mr Stewart was made. The averment of collusion is properly one of "believed and averred" (page 6, line 145). It is an inference which is appropriate to draw from the averments of primary fact that the payments were made when the company was practically insolvent and had a deficit in net assets.

 

[21]    Counsel also submitted that the issue of whether a payment was collusive arises only where the creditor relies on Section 243(2)(b) to the effect that the payment was in cash for a debt which, when it was paid, had become payable. It would be incumbent upon the defender to put that in issue. However, the defender has no such averments that, when paid, the debts had become payable. He merely avers that they were paid.

 

Decision

[22]    In relation to the defender's lack of specification and fair notice points, the pursuers offer to prove that the company operated directors' loan accounts without the necessary members' resolution. Mr Stewart borrowed money. In support of the pursuers' averments that the directors approved the accounts, the accounts are incorporated in the pleadings and founded upon, and these accounts disclose the lending which the pursuers now seek to recover. The defender admits that he and Denis Stewart were the directors of the pursuers. The pursuers further refer in detail to email correspondence referring to these accounts and the lending to Mr Stewart.

 

[23]    I accept the pursuers' submission that in these circumstances it would be open to be inferred that the defender, as a director, approved the directors' loans, including those to Mr Stewart. In the case of Neville v Krikorian, Chadwick LJ at page 951E said "And to my mind, it can properly be said that a director who knowingly allows a practice to continue under which lending by the company to his co-director is treated as acceptable has authorised the individual payments which are made in accordance with that practice notwithstanding that he did not have actual knowledge of each individual payment at the time when it was made." In those circumstances, say the pursuers, a director who abrogates his responsibilities and allows a practice to develop to the prejudice of the company cannot escape liability on the basis that he did not have actual knowledge of the transactions carried out. The defender's argument was that the pursuers' pleadings should not be read as offering to establish the defender's liability by default. According to Mr McCallum, the pursuers' pleadings should be read as seeking to establish liability on the defender by way of a positive act on his part, but which positive act is not specified. Mr McCallum invited me to distinguish the case of Neville v Krikorian in the absence of averments of a course of dealing between the parties in this case.

 

[24]    Having regard to the authorities and bearing in mind the substantial degree to which the facts and circumstances ought to be peculiarly within the defender's knowledge, I prefer the pursuers' submissions. I am satisfied that the pursuers have averred sufficient material to entitle him to a proof of these averments.

 

[25]    In relation to the allocation of sums paid to Heritage, I am satisfied that the averments in condescendence 3 at pages 7 and 8 of the Record explain the basis upon which it is alleged that the sums paid to Heritage were allocated on a 50:50 basis to each of the directors' loan accounts. These averments are therefore also apt to go to proof. In relation to the unfair preference case, it seems to me that the circumstances averred in articles of condescendence 2 and 3 in relation to the date of the lending and the company's financial difficulties are circumstances in which it would be open to the court to come to the view that to make a payment in such circumstances would be prima facie to grant an unfair preference by reference to the case of Leslie v White. Again, in this matter I prefer the pursuers' submissions that their averments are sufficient to instruct the application of Sections 243(1) and (4) of the 1986 Act.

 

[26]    For the foregoing reasons, I have come to the view that the pursuers' averments in support of crave 2 are sufficient to survive the defender's challenge and accordingly I will repel the defender's 1^st and 2^nd pleas-in-law.

 

 

 

Pursuers' attack on the relevancy of the Defences

 

Pursuers' submissions

 

[27]    Counsel submitted that the defences were irrelevant and should be refused probation. He invited me to sustain the pursuers' preliminary pleas-in-law numbers 4 and 5, and grant decree de plano in terms of craves 1 and 2.

 

[28]    Counsel took me through the defender's position on Record, and drew my attention to a number of material admissions within the defences. The defences tabled by the defender are (a) that the defender took no part in the day-to-day running of the business and was unaware of the loans being recorded against him; (b) the entries bearing to show the defender had loans are erroneous. He provided facilities to the company whereby he expended his own money to facilitate the company's trade; the company being in financial difficulties from the outset and (c) the money paid to Heritage was an advance to Heritage and not to him.

 

[29]    In Answers 2 and 3 it is admitted that the defender and Mr Stewart were the pursuers' directors. The defender admits the pursuers' averments of trading from 8 September 2008 and of the accounts disclosing a net loss, a deficit in net assets and a net cash outflow for the period from then until 31 July 2009. In relation to Heritage, the defender admits that he owned Heritage together with Mr Stewart, each having one share, £15,000 was paid to Heritage as "capital introduced" and that additional sums were paid as shown in the pursuers' books as nearly £50,000. He admits that this sum was treated as directors' loans. Finally, the defender admits having made no claim in the pursuers' liquidation in respect of any debt owed by him.

 

[30]    In Answer 4, the defender has responded to the pursuers' averments that no resolution of the company approved any loan to the directors by stating "not known and not admitted" without any explanation as to why such matters are not known. As it is admitted that the defender was one of only two directors, the defender's position lacks candour.

 

[31]    In counsel's submission, there were a number of inconsistencies in the averments of fact contained in the defences, and according to the weaker alternative rule the relevancy of the defences is to be tested by the weaker alternative. The test for allowing inconsistent averments is one of substantial justice (Smart v Bargh 1949 SC 57). However, the alternative averments can only stand when either line of defence is relevant (per Lord Cooper in Smart v Bargh at page 60). In the present case, the defender has advanced alternative and inconsistent lines of defence but he is not entitled to any latitude because his alleged ignorance of the company's affairs cannot be excused, and the alternatives are each irrelevant. In relation to both his own borrowing and Mr Stewart's borrowing, the defender avers on the one hand that he had no involvement with the company's day-to-day management; and on the other hand, that he expended his own money on behalf of the company. These averments are directly contradictory and are truly inconsistent alternatives. Both of these alternatives are irrelevant when looked at individually.

 

[32]    The defender's position is that he was a non-executive director and had no role in the day-to-day management of the company. Counsel submitted that this was no defence to a claim of the present kind. The duties of a company director are set out in the Companies Act 2006. They include the duties to exercise independent judgment (Section 173(1)). He must also exercise reasonable skill, care and diligence. (Section 174). There is no distinction made for non-executive directors. A non-executive director may not have the same responsibilities as an executive director, but he still has the same duties. (Dorchester Finance v Stebbing [1989] BCLC 498 per Foster J at page 505). Someone who has allowed himself to be a mere nominee cannot complain if he is then found bound by what he is allowed others to do (Norman v Theodore Goddard [1992] BCC 14 per Hoffman J at page 22).

 

[33]    Counsel also referred me to the case of Re. Westmid Packing Services Limited (No. 3) [1998] BCC 836. These cases show that a director's responsibility cannot be delegated. It is no answer at all for the defender to disclaim liability for borrowing, either his own or that of his fellow director, on the basis that he took no interest in the company's financial affairs. In light of the authorities referred to, even if he proved that he took no part and was wholly ignorant of the borrowing, that defence must fail. The irrelevancy of this weaker alternative was likewise fatal to the defence that the defender expended his own money for the company.

 

[34]    Counsel then turned his attention to the defender's alternative version of the facts, namely that the sums shown in the company records as the director's loan to himself was wrongly recorded and it truly represents expenditure by the defender on behalf of the company. That case was similarly irrelevant because it is wholly lacking in specification. The only averments in support of this case are to be found in answer 3 to the effect that the defender used his own funds to pay monies into the pursuers' bank account and to personally pay various bills on behalf of the company. Counsel argued that these matters are wholly within the defender's knowledge and the pursuers can only go by the accounting entries. For that reason, it was incumbent upon the defender to aver and give fair notice in respect of each and every entry and what it is said to represent. There is no specification at all of what the "various bills" were. No facts are averred which would entitle an inference to be drawn that particular entries are wrong. This line of defence rests on no more than bare assertion, and is fatally lacking in specification and irrelevant. The incorporation of the nominal activity sheets from the company's records do not address this want of specification.

 

[35]    Counsel further argued that the defender's reliance on the accounts is wholly inconsistent with his defence that they are wrong. The defender both approbates and reprobates the accounts with no explanation of why one sheet is right and the other is wrong. In any event, this argument does not answer the case based on lending to Mr Stewart, and is wholly contradicted by the defender's averments that they took no part in the financial affairs of the company. For these reasons, counsel argued that the line of defence based on erroneous entries and reimbursement should be refused probation.

 

[36]    Counsel then dealt with the defender's esto defence that the defender was unaware of the loans recorded against his name in the company's books (Answer 3 at page 9). The defender was, in effect, saying "I had no loan, but if I had, I didn't know about it". That position could not be reconciled as a defence in law with the position that the defender had no directors' loans because he borrowed no money. He either had loans or he did not. His knowledge of loans being recorded is irrelevant. Being irrelevant, that is the weaker alternative; with the result that the defences as a whole on this line must be found irrelevant and refused probation.

 

[37]    Counsel also criticised the defender's averments dealing with the money paid to Heritage. They are lacking in specification and therefore irrelevant but are also wholly lacking in candour. The defender's admitted position is that he is a shareholder of Heritage and a director of both the pursuers' company and Heritage. The defender has no averments entitling him to go to proof on the basis that the accounting treatment of the Heritage payments was wrong.

 

[38]    In relation to the defender's defence that he did not authorise Mr Stewart's borrowing, counsel argued that the bare averment at Answer 3 (page 9, line 239) that at no time did he authorise a directors loan to Mr Stewart is wholly inconsistent with his admission that he was one of the two directors of the pursuers, and his positive averment that he took no part in the financial affairs of the company. The clear position from the authorities is that what the defender has allowed to prevail he must be taken to have authorised as a matter of law. As authorisation by omission is a matter of law, and not fact, it does not depend upon the defender having done any positive act of giving permission or consent, because he has consented to what he has allowed to take place. Accordingly, the defender's averments on this line of defence should also be refused probation. According to counsel, the consequence of there being no relevant challenge to the accounting entries disclosing the lending to the directors, the lending falls to be repaid on demand (Nielson v Stewart 1991 SC (HL) 22, per Lord Jauncey of Tullichettle at page 40. The pursuers' accounts contain the acknowledgement of the defender's debt. There being no relevant challenge to that, the defender's own borrowing falls to be repaid as a matter of law, whether under Section 213 or at common law. Similarly, there being no relevant challenge to the acknowledgement of lending to Mr Stewart, and the defender having as a matter of law authorised that lending, there is no relevant challenge to liability under Section 213 in respect of the lending to Mr Stewart.

 

[39]    For all these reasons, counsel submitted there was no relevant defence to the action in law and decree de plano should be pronounced in terms of craves 1 and 2.

 

Defender's submissions

 

[40]    In responding to counsel's attack on the defences, Mr McCallum did not accept that there was any contradiction in the defender's position on Record. The defender's position was that he was not responsible for the day-to-day running of the company's business and took no part in the record keeping or financial affairs of the company. Mr McCallum argued that such a position was not inconsistent with the defender using his own funds to pay monies into the pursuers' bank account and also to personally pay various bills on behalf of the company. These were not mutually exclusive propositions, but were different and discrete aspects of the defender's relationship with the company. It was necessary to look closely at what the defender was saying on Record about the running of the business, and this was set out in Answer 2 at page 5 of the Record.

 

[41]    The defender's position in making payment of certain sums for the benefit of the company was entirely consistent with his role in the company. The defender's argument is that he took no part in the record keeping or financial affairs of the company. From the averments on Record, the defender sets out that he was not involved in the book-keeping of the company. The company employed a book-keeper, Debbie Robertson. She dealt with the inputting of the various entries in the Sage Accounting System which was used to generate these management accounts. The defender did not deal with these inputs. He left it to Debbie Robertson to put them through the accounts and his point is that he was unaware how these sums of money were treated in the books.

 

[42]    Mr McCallum submitted that the defender's position on Record should be looked at broadly as a whole. The defender is saying that he did not authorise any borrowing in the first instance. His complaint relates to book-keeping. He offers to go to proof on the basis that the Sage entries are not correct or are at least incorrectly allocated in respect of material matters. The information in the Sage records formed the raw data given to the accountants, Ritson Smith from which they prepared the management accounts. The simple proposition, according to Mr McCallum, was that if the financial information input into the accounting system was not properly allocated, then the management accounts would not necessarily be accurate either. In effect, the pursuers were saying that just because the money concerned was shown in the management accounts as loans due for repayment then the information in the accounts must be accurate. In Mr McCallum's submission, this was not the case, and it must be a matter for proof whether the relevant information in the accounts is accurate or not and have been correctly treated and allocated.

 

[43]    Mr McCallum submitted that the same position applies in respect of the treatment of the Heritage payment. Counsel's attack on the defender's averments about the treatment of the Heritage payments was on the basis of lack of specification. However, the defender sets out in Answer 3 at page 10 that if this sum has been included as part of the directors' loans, then this has been done in error. The defender's position is that the Heritage payment has been put into the wrong section. Ritson Smith have allocated that sum into two directors' loan columns, but contrary to what the pursuers argue, the allocation of these sums may not be correctly treated as loans and allocated on a 50:50 basis to each of the directors. This is a matter to be explored at proof.

 

[44]    In Mr McCallum's submission, the correct approach would be to look at the defender's case as a whole, on the basis that what we have is an accounting exercise but we do not know if this has been done correctly. In particular, it is disputed that the sums shown in the accounts are in fact loans and evidence must be heard.

 

[45]    In conclusion, Mr McCallum invited me to uphold his submission in relation to the pursuers' crave 2 and dismiss that crave, thereafter allowing a proof in respect of crave 1.

 

Decision

 

[46]    There is no distinction in law between the duties of executive and non-executive directors. A director must exercise independent judgment (Companies Act 2006, Section 173(1)), and exercise reasonable skill, care and diligence (Section 174). In my opinion, the authorities make it clear that such a director has inescapable personal responsibilities and having no role in day-to-day management of the company is no defence to a claim of the present kind. In Dorchester Finance v Stebbing, the signing of blank cheques was held to be negligent in allowing a fellow director to do as he pleased. In Re. Westmid Packing Services Limited (No. 3), the board of directors of a company allowed one of their number to get his own way, dominate the company and manipulate his fellow directors. Although the court accepted that the other directors may have been "dazzled, manipulated and deceived" by the delinquent director, they were in breach of their own duties in allowing this to happen. That case is particularly instructive although it is concerned with company director's disqualification. The Judge found that the delinquent director consistently treated the company's assets as if they were his own. In particular, he used the company's money for the liabilities and purposes both of other businesses he allowed the company to trade at a time when it was insolvent, creating losses for the creditors and bringing benefits only for the delinquent director. In that case, the court dismissed the argument that directors could avoid responsibility by claiming to have had no role in day-to-day management of the company. I have discussed earlier the decision in Neville v Krikorian and the passage quoted form the judgment of Chadwick LJ, which seems to me to be apt in this case For these reasons, I am persuaded that it is not a valid defence to the present claim for the defender to disclaim liability for borrowing, either his own or Mr Stewart's, on the basis that he took no interest in the company's financial affairs. I have come to the view that even if the defender proved that he took no part in the running of the company and was wholly ignorant of the borrowing, that defence must fail. This chapter of the defence is accordingly irrelevant.

 

[47]    With regard to the reimbursement/erroneous entries defence, I am of the view that the defender's averments in this regard are wholly lacking in specification and irrelevant. There is weight in counsel's observation that at this stage the pursuers can only approach the company's finances by going on the accounting entries which exist. The matters contained within these accounting entries, and any facts pointing to these accounting entries being wrong, are wholly within the defender's knowledge. In these circumstances, by way of fair notice, the pursuers are entitled to look to the defender to give fair notice of the proper details of all entries which the defender claims should properly be classified as reimbursement of expenditure on behalf of the company.

 

[48]    There is no specification at all of what the various bills were. As counsel points out, the defender's approach to the accounts is inconsistent, in that he seeks to found on certain parts of the accounts and challenge other parts without proper explanation. For these reasons, I prefer the pursuers' submissions and I have come to the view that this line of defence is also irrelevant and the defender is not entitled to put the pursuers to proof in that regard.

 

[49]    Turning to what counsel describes as the "unaware borrower defence", there is weight in counsel's submission that the defender's alternative case (that he was unaware that the loans had been recorded against him) cannot be reconciled as a defence in law with a position that they had no director of loans because he borrowed no money. In my view, it is self-evident that the defender either had loans or he did not. This line in itself is accordingly irrelevant. Furthermore, I agree that, as the weaker alternative, the defences as a whole on this line must be found irrelevant.

 

[50]    With regard to the money paid to Heritage, as noted earlier, the pursuer has averments explaining the 50:50 treatment of these loans (as directors' loans in proportion to their equal shareholding in Heritage). In answer to that, the defender simply avers (Answer 3, page 10, lines 285 to 287) that the pursuer is called upon to explain the basis upon which the 50:50 apportionment was carried out. I agree with counsel that the defender has insufficient averments entitling him to proof that the accounting treatment of the Heritage payments was wrong. This line is also irrelevant.

 

[51]    Turning to the defender's position in relation to Mr Stewart's borrowing, the defence is that he did not authorise any such borrowing by Mr Stewart. Mr Stewart is apparently now sequestrated. Section 197 of the Companies Act 2006 provides that a company may not make a loan to a director of the company unless the transaction has been approved by a resolution of the members of the company. From Answer 3 (lines 2230 -232 on page 9) it is apparent that the defender is unable to show that Mr Stewart did not have a director's loan account. Nor is he in a position to show that the transactions were approved by resolution of the members for the purposes of section 197 (Answer 4 lines 325 - 328 at page 12). It follows that the loans were advanced in breach of section 197, and the provisions of section 213 dealing with the consequences of such a breach are accordingly triggered. The effect of sections 213 (3) and (4) is that, in this situation, any other director of the company who authorised the transaction incurs joint and several liability (with any other liable person) to indemnify the company for any loss or damage resulting from the transaction.

 

[52]    The defender relies on the section 213(7) defence whereby liability is avoided if he shows that, at the time the transaction was entered into, he did not know the relevant circumstances constituting the contravention. However the defender's position is one of mere ignorance. He does not aver that the situation was concealed from him, or that any form of fraud or deception was used to prevent him discovering the loans. If he had troubled to look at the records in which the liquidator discovered the loan entries, he would have been aware of the position. The cases founded on by the pursuers demonstrate a consistent strand of judicial authority to the effect that passive ignorance will not protect the director who has through inactivity, lack of enquiry or the abdication of his own responsibilities, allowed other directors to act to the prejudice of the company. In my opinion, more than this needs to be averred to justify enquiry into a defence based on section 213(7). For the reasons given earlier, I am satisfied on the authorities that the defender's position in law as a director fixes him with liability in respect of borrowing by his co-director, and accordingly a defence based on the pursuer failing to prove any positive act of giving permission or consent is irrelevant.

 

 

 

Conclusion

 

[53]    For the foregoing reasons, I am satisfied that there is therefore no relevant defence to the action. I will accordingly repel the defender's preliminary pleas-in-law 1 and 2, sustain the pursuers' pleas-in-law 4 and 5 and grant decree de plano against the defender in terms of craves 1 and 2 .

 

[54]    The parties invited me to reserve the question of expenses and certification of the cause as suitable for the employment of junior counsel until publication of my decision on the merits. The case will accordingly be put out for hearing on these matters at a later date.

 

 

 

 

 

Sheriff of Grampian Highland and Islands at Aberdeen