Queensway Systems Ltd ((in Liquidation)) v Walker

JurisdictionEngland & Wales
Judgment Date28 September 2006
Neutral Citation[2006] EWHC 2496 (Ch)
Date28 September 2006
CourtChancery Division
Docket NumberNo. 7349/2004

[2006] EWHC 2496 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

No. 7349/2004

In The Matter Of The Companies Act 1985

And In The Matter Of The Insolvency Act 1986

And In The Matter Of Queensway Systems Limited (in Liquidation)

Between:
(1) Queensway Systems Limited (in Liquidation)
(2) Gary Pettit
(3) Peter Windatt
(as Joint Liquidators Of Queensway Systems Limited (in Liquidation))
Claimants
and
(1) David Walker
(2) Helen Walker
Defendants

Introduction

1

Queensway Systems Limited ("the Company") went into creditors voluntary liquidation on the 12 October 200By these proceedings the Company and its two liquidators, Mr Gary Pettit and Mr Peter Windatt, seek to recover from the two Defendants, directors of the Company, sums said to have been paid to them or for their benefit between the 3 April 2000 and 12 October 2001, on the grounds that such payments were made in contravention of section 330 of the Companies Act 1985, or alternatively were a misapplication of the Company's funds in breach of duty.

2

The two Defendants were at all relevant times the only directors of the Company, and they were also the only shareholders, each of them being the registered holder of one of the two issued shares. Until the final breakdown of their relationship in May 2001, the Defendants had lived together as man and wife for approximately 15 years; and although they had never married, the Second Defendant, Helen, took the First Defendant's surname. I shall refer to the First Defendant as "Mr Walker" and, since the Second Defendant was with her consent referred to during the hearing as "Mrs Walker", I shall refer to her in the same way in this Judgment. Until the 24 April 2006 Mr Walker was represented in these proceedings by Nicholsons solicitors; but on that day he gave notice that thenceforth he would be acting for himself, and he appeared before me in person. Mrs Walker appeared before me by solicitors and Counsel.

3

The claim against Mr and Mrs Walker, as amended pursuant to the order of Mr Registrar Simmonds of 21 July 2005, was for repayment of the sum of £304,091.73 plus interest, or such other sum as the Court might determine; but the amount in issue (excluding interest) has subsequently been agreed at £147,208.76 between an accountant Mr Lomas on behalf of the Claimants, and Mr Pocock, who acted as the Company's accountant during 2001 before it went into liquidation; and that agreement is recorded in a joint statement from them made on 8 May 2006. Each of the parties confirmed to me at the hearing their agreement to that figure.

4

Part of the Defendants' answer to the claim is that, they say, on or about 27 March 2001 a dividend in the sum of £190,000 was declared which extinguished, or should be treated as extinguishing, any liability which otherwise might be owed by them to the Company. And part of the relief sought by the Claimants in the action is directed to establishing that Mr and Mrs Walker cannot rely upon that dividend.

5

If unable to rely upon the dividend, both Defendants accepted in principle that the sum of £147,208.76 should be repaid to the Company, but it was in issue what proportion of that liability should fall upon each of them. The Claimants contended that Mr and Mrs Walker should be jointly and severally liable for the entirety of the sum (plus interest). Mr Walker contended that if he were to be found liable at all, then there should be excluded from his liability to the Company any sums which were paid to or for the benefit of Mrs Walker. Mrs Walker's primary case was that she should have no liability to the Company; but if any liability were to be found against her, it should be limited to those sums which were shown to have been paid to or for her benefit.

6

In addition, in circumstances to which I shall return below, Mr Walker appears to have directed that from the £190,000 dividend which he and Mrs Walker say was declared, £40,000 should be applied in partial discharge of a debt of approximately £43,000 owed to the Company by Westfield Estates Limited ("Westfield"), a company of which Mr Walker was a director and shareholder. It was not in issue that at the time of the declaration (or purported declaration) of the dividend Westfield owed at least £40,000 to the Company, and nothing turns on precisely how much more than that sum Westfield owed. In the event that the dividend is invalid, the Claimants also seek to recover from Mr and Mrs Walker a further £40,000 referable to the application of the dividend in partial discharge of Westfield's debt (which further claim for £40,000 I shall refer to as "the Westfield £40,000").

7

Accordingly five main issues arose before me, as follows:-

(1)Whether the dividend of £190,000 relied upon by Mr and Mrs Walker was validly declared.

(2)If so, whether the declaration of the dividend and/or its application against the £147,208.76 which would otherwise be repayable to the Company was (or would have been) either a wrongful preference contrary to section 239 Insolvency Act 1986 or otherwise a breach of duty by Mr and Mrs Walker to the Company. A claim that the declaration of the dividend and/or its application against the £147,208.76 was a transaction at an undervalue within section 238 Insolvency Act 1986 was not pursued before me.

(3)If Mr and Mrs Walker cannot rely upon the dividend, what were their respective liabilities to repay the sum of £147,208.76.

(4)If Mr and Mrs Walker cannot rely upon the dividend, whether one or both of them are also liable for the Westfield £40,000.

(5)Whether either or both of Mr and Mrs Walker should be relieved under section 727 of the Companies Act 1985 from any liability which they otherwise might have.

8

In addition, each of Mr and Mrs Walker has issued a Part 20 claim against the other of them, seeking contribution in respect of any liability which he or she may be found to have to the Claimants; and those contribution claims also came before me.

9

Before turning to deal with the issues which I have identified and with the contribution proceedings, I must however explain the background in more detail, which, insofar as there was any dispute, I find to have been as follows.

The background

10

The Company was incorporated on 20 October 1993 and from and after April 1995 it traded as an importer into the United Kingdom of vacuum cleaners from the United States. It imported the vacuum cleaners from a company called Filter Queen Inc. a Delaware company (which the notes to the Company's audited financial statements for the year to 31 March 1999 record as being wholly controlled by Mr and Mrs Walker). The vacuum cleaners so imported were then sold by the Company on a wholesale basis within the United Kingdom (to "agents" as Mr Walker described them, or franchisees as Mr Pettit described them). The Company's main income consisted of the proceeds of those sales and for commission received in relation to finance arrangements entered into by customers of the "agents" for the acquisition of the vacuum cleaners concerned.

11

Apart from wages of £300 per week which Mrs Walker was paid by the Company from February 2001 (for which Mrs Walker frankly accepted in oral evidence she did no work for the Company) neither Mr Walker nor Mrs Walker were paid any remuneration by the Company either in the form of wages or salary, or as directors' fees. Instead, the evidence from Mr Pettit in paragraphs 10 and 11 of his witness statement dated 10 November 2004, which was not materially challenged by the Defendants, is that throughout the Company's trading history it paid out very significant sums during each financial year, which were treated in the Company's accounts as loans made jointly to Mr and Mrs Walker. In many but not all years, a dividend was declared following the end of the financial year which was set off against the then outstanding amount of the loan. Mr Walker accepted that this was the practice (both orally and in his witness statement of 8 February 2005). He confirmed in cross-examination that the Company's money was drawn on to pay his and Mrs Walker's private living expenditure, either by payments to him, to Mrs Walker (which he described as rare) or by payments being made direct out of the Company's account to suppliers of goods and services. Examples of payments to third parties which he gave to me were payments made to the gardener, and in respect of holidays. Mrs Walker did not, as I understood her position, challenge that the Company's money was used in this way to pay for Mr Walker's and her living expenditure, but she disputed how much she knew about it and how much of the Company's money was paid to her or for her benefit (points to which I shall return).

12

The first set of the Company's accounts in evidence are those for the year ended 31 March 1999. They are audited and signed by the Company's auditors Sexty & Co. and are also signed by Mr Walker as having been approved by the board on 28 January 2000. The notes to those accounts record that during that financial year interest free loans to the directors jointly were made totalling £171,443, leaving a balance due to the Company from the directors at the 31 March 1999 of £434,349. The notes reveal that the outstanding amount in 1998 had been £395,523. The same accounts also indicate that for that financial year a dividend of £650,000 was declared after the year end and was applied in extinguishing the sums due from the directors at 31 March 1999. There was no suggestion before me that that dividend, or any previous dividends, were not validly declared.

13

Accounts, or draft accounts, for the year ended 31 March 2000 are also in evidence, exhibited to Mr Pettit's witness statement dated 10 November 2004. The copy in evidence bears an auditors' report which is dated 23 October 2000 but not signed (page 37 of the bundle). The accounts are also dated as having...

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