The Court of Appeal has held in the case of Neville
v Krikorian (2006), that where a director knew that his company operated
a loan account in favour of another director in breach of section
330 of the Companies Act 1985, he was jointly and severally liable
to repay all sums loaned after he became aware of the existence of
the loan account.
Background
Section 330 of the Act contains a general
prohibition on the ability of a company to make loans to its directors.
Where a company enters
into an arrangement with a director in contravention of Section
330, that director and any other directors who authorise the
transaction
are jointly and severally liable to indemnity the company for
any loss resulting from the arrangement (section 341(2)(b)). It is
a defence if the director can show that he did not know the
relevant
circumstances at the time the arrangement of transaction was
entered into.
Avo Krikorian and his son were the only directors
of Unireg Ltd (Unireg). Mr Krikorian became less active in the company’s
affairs from the mid-1990s onwards. In 1996, Unireg opened a loan
account in favour
of Mr Krikorian’s son and opened another account for
Mr Krikorian in 1998. The loans were disclosed in the company’s
annual accounts.
When Unireg went into
administration, the administrator
claimed against both Mr Krikorian and his son on the basis
that they
had received
credit from Unireg on their loan accounts. He applied for summary
judgment, arguing that both Mr Krikorian and his son were jointly
and severally liable for each other’s indebtedness, in
accordance with section 341(2)(b) of the Act. Although Mr Krikorian
accepted
liability for the amount due on his own account, he denied
knowledge of his son’s loan account.
High Court decision
The judge granted summary judgment
in favour of the administrator on the basis that the claim to joint
and several liability
had been made out. Mr Krikorian was ordered to pay the
outstanding balance
on both his own loan account and his son’s loan account
from the date each ceased to be directors.
The appeal
Mr Krikorian appealed against the decision.
He maintained that he had become less involved with Unireg over
time and had not
attended the board meetings at which the accounts were
considered. However,
the administrator was able to point to a minute from
a board meeting, signed by Mr Krikorian, his son and the
company
secretary, which
confirmed that Mr Krikorian had been in receipt of
financial accounts over the period in which his son had held the
loan account. Mr
Krikorian
asserted that he had no recollection of the board minute
and was not aware of the contents of the accounts.
The
Court of Appeal dismissed Mr Krikorian’s appeal (although
it did vary the quantum of his liability for his
son’s
debt). Since Mr Krikorian had not challenged the
authenticity of the board
minute he was taken to have known about the company’s
practice of lending to his son via the loan account.
A director who knowingly
allowed such a practice to continue was to be taken
as having authorised the individual payments even
though he did not have actual knowledge
of each individual payment at the time that it was
made. Consequently, Mr Krikorian was liable to indemnify
Unireg for the loss resulting
from that lending. Mr Krikorian was also under a
duty to put a stop to the practice of lending to
and recover
the indebtedness; he has,
however, failed to do so, despite the loan being
described as repayable on demand.
POINTS TO CONSIDER
The decision is an important
reminder of the liability of directors for loans to directors that
fall foul
of section 330 of the
Act. If a director ignores his duty to put a
stop to the practice of loans to directors and does
not take
steps
to
recover the
indebtedness,
he may suffer joint and several liability even
where he has no
actual
knowledge of the individual payments made under
the loan. In particular, it is a warning for those directors
who
are effectively
a “sleeping
partner” in the business that they perhaps
need to keep a closer eye on what those directors
managing the business are up to.
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