Re Mumtaz Properties Ltd
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Aikens,Lord Justice Patten |
| Judgment Date | 24 May 2011 |
| Neutral Citation | [2011] EWCA Civ 610 |
| Docket Number | Case No: A2/2010/2151 & 2905 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 May 2011 |
In the Matter of Mumtaz Properties LTD
And in the Matter of the Insolvency Act 1986
[2011] EWCA Civ 610
Lady Justice Arden
Lord Justice Aikens
and
Lord Justice Patten
Case No: A2/2010/2151 & 2905
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) LEEDS DISTRICT REGISTRY
HHJ SIMON BROWN QC (SITTING AS A HIGH COURT JUDGE
IN THE BIRMINGHAM CIVIL JUSTICE CENTRE)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Paul Chaisty QC (instructed by Ward Hadaway) for the Appellants
Mr Hugh Jory (instructed by Walker Morris Solicitors) for the Respondent
Hearing date: 14 April 2011
Each of the first three appellants has been found liable, as an officer of Mumtaz Properties Ltd ("the Company"), to replace monies owing to the Company on their directors' loan accounts and the loan accounts of other directors. The first two appellants, Mr Saeed Ahmed ("Saeed") and Mr Shafiq Ahmed ("Shafiq"), were shown at the Companies House as duly appointed directors of the Company and they (together with the other appellants) principally appeal on the ground that they should not have been held liable for the directors' loan accounts opened for other persons. The third appellant, Mr Zafar Ahmed ("Zafar"), was not, however, a duly appointed director of the Company. He separately appeals against the judge's finding that he has the same liability as a duly appointed director on the grounds that he was a de facto director, that is, a person occupying the position of a director even though not formally appointed as such. The fourth appellant, Mr Munir Ahmed ("Munir"), whom the judge also found to be a de facto director, separately appeals against a substantial debit of £74,551.37 made against his director's loan account.
This is an appeal from the order dated 3 August 2010 of HHJ Simon Brown QC sitting as a judge of the High Court, in the Leeds District Registry. The proceedings were brought by the liquidator of the Company pursuant to section 212 of the Insolvency Act 1986 for, among other matters, a declaration that the respondents to the proceedings were liable to repay the amount of the directors' loan accounts and compensation for misfeasance and breach of fiduciary duty.
The proceedings were brought against five members of the Ahmed family, the four appellants named above together with Mr Mumtaz Ahmed ("Mumtaz"). Saeed, Ahmed and Munir are the sons of Mumtaz. Zafar is the son of Saeed. The judge held that all of these persons were jointly and severally liable to repay to the Company the aggregate amount due on their loan accounts, totalling £205,211.75, plus interest totalling £121,111.61, save that Mumtaz's liability was limited to £65.30. They were also ordered to pay the liquidator's costs and to make an interim payment on account of costs. There is no appeal by Mumtaz.
The Company was a property development and letting company. The driving force had originally been Mumtaz but he is described by the judge as elderly, and at the relevant time he took a back seat. The Company entered administration on 19 March 2003, and on 8 November 2004 it entered creditors' voluntary liquidation. At that date, the Company had an estimated deficiency as regards creditors of £621,786.54. The shares in the Company were held as to 50% by Munir and as to 50% by his wife.
There are four issues:
i) Did the judge err in holding that Zafar was a de facto director?
ii) Did the judge err in holding that the appellants Saeed and Shafiq were jointly and severally liable for the aggregate amount due in respect of all the directors' loan accounts?
iii) Did the judge err in refusing to allow the appellants to set off the amounts (if any) of the pre-liquidation debts owed to them by the Company?
iv) Did the judge err in finding that the debit balance on Munir's director's loan account included the sum of £75,551.37?
I make no reference to issues raised in the skeleton arguments for which no permission was given or which were not pursued orally.
The liquidator's case
The statement of affairs was sworn to by Saeed and it showed that the five respondents to the proceedings had debit balances on their loan accounts in an aggregate sum of £91,400.77. The liquidator was able to reconcile this amount with the Sage accounts (which I assume meant a trial balance sheet for some period). However, he subsequently became aware that the debit balances in the statement of affairs were incorrect and, basing himself on the balances on such accounts (referred to in the Company's accounting records as "DLAs" or "directors' loan accounts") as shown in the Company's accounting records and information provided by the Company's administrators, he came to the view that the amounts properly due were the following, which formed the basis of his claim in these proceedings:
| "21.1 | Saeed Ahmed (Canada Life) | £1,357.57 |
| 21.2 | Saeed Ahmed | £12,648.23 (credit) |
| 21.3 | Saeed (Personal House Mortgage) | £8,891.33 |
| 21.4 | Munir Ahmed | £171,909.87 |
| 21.5 | Zafar Ahmed | £21,599.75 |
| 21.6 | Shafiq Ahmed | £14,036.16 |
| 21.7 | Mumtaz Ahmed | £65.30" |
The liquidator does not have in his possession any vouchers and papers relevant to this appeal that support the entries in the directors' loan accounts in the Company's accounting records. The liquidator's case, therefore, is that the debit balances there shown are prima facie evidence that the directors are liable for those amounts.
The liquidator does not rely on section 341 of the Companies Act 1985 (now section 213 of the Companies Act 2006), which confers remedies against directors for loans unlawfully made to themselves or authorised by them. It is common ground that it is a breach of fiduciary duty for a director to receive any loan made to them to meet personal expenditure. That liability is expressly preserved by section 341(3) (and section 213(8)). It is, therefore, unnecessary for this court to consider Neville v Krikorian [2006] EWCA Civ 943, in which this court considered the circumstances in which a director could be said to have authorised a loan to another director for the purposes of those sections.
The judge's judgment
The judge's judgment raises a point of general importance. The judge starts his judgment with a section dealing with the factual issues. He gave himself the following direction with regard to his task of fact-finding:
"18. Prior to the commencement of the substantive hearing of the application, Counsel for the parties helpfully agreed the sequential factual questions to be answered upon the evidence, both oral and documentary, before the court.
19. I will take each in turn.
20. In doing so, the Court bears well in mind that this is a case where the events in issue are now between 5 and 10 years ago and the contemporaneous documentation is far from complete. However, the witness statements are relatively recent. This judgment will therefore analyse the issues and the evidence in accordance with the guidance provided in the dissenting speech of Lord Pearce in the House of Lords in Onassis v Vergottis [1968] 2 Lloyds Rep 403at p 431:
"'Credibility' involves wider problems than mere 'demeanour' which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person telling something less than the truth on this issue, or though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by over much discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. [emphasis added] And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.""
By the end of the judgment, it is clear that what has impressed the judge most in his task of fact-finding was the absence, rather than the presence, of contemporary documentation or other independent oral evidence to confirm the oral evidence of the respondents to the proceedings.
There are many situations in which the court is asked to assess the credibility of witnesses from their oral evidence, that is to say, to weigh up their evidence to see whether it is reliable. Witness choice is an essential part of the function of a trial judge and he or...
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