Re Leitch (William C.) Brothers Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 1932 |
| Date | 1932 |
| Year | 1932 |
| Court | Chancery Division |
Company - Winding-up - Fraud by Director - Liability of Director -
By s. 275, sub-s. 1, of the Companies Act, 1929: “If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any of the directors, whether past or present, of the company who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.”
By sub-s. 6: “…. where the declaration under subsection (1) of this section is made in the case of a winding up in England, the declaration shall be deemed to be a final judgment within the meaning of paragraph (g)of subsection (1) of section one of the Bankruptcy Act, 1914.”
Held, (i.) that the declaration of liability should state the amount for which the director is liable;
(ii.) that a company carrying on business and incurring debts when to the knowledge of the directors there is no reasonable prospect of the debts being paid may, in general, be properly inferred to be carrying on business “with intent to defraud creditors” within the meaning of sub-s. 1.
Semble, s. 275 is a punitive provision, and the Court, on making a declaration in the winding-up of a company that a director is personally responsible for all or any of the debts or other liabilities of the company, may in its discretion make an order not limiting his liability to the amount of the debts due to creditors held to be defrauded within the meaning of the section.
SUMMONS IN THE WINDING-UP.
By this summons the liquidator of William C. Leitch Brothers, Ld. (hereinafter called “the company”), asked for declarations that William Cleghorn Leitch, governing director of the company (hereinafter called “the respondent”), having been knowingly a party to carrying on the business of the company with intent to defraud its creditors, was personally liable for all the company's debts and was liable also to contribute to the company's assets specified sums as compensation for specified acts of misfeasance.
The company was incorporated on December 19, 1926, to acquire the respondent's business of a perambulator and furniture manufacturer and merchant at four addresses in Manchester. The agreement for the sale of the business to the company, dated January 13, 1927, provided that in consideration of the sale the company should pay the respondent 5000l., to be satisfied by the allotment to him or his nominees of 1000 fully paid 1l. ordinary shares in the capital of the company and by the issue to him of a debenture for 4000l., bearing interest at 6 per cent. per annum, secured by a charge on all the property of the company, both present and future, including uncalled capital, and should take over the debts and liabilities of the respondent's business, amounting to 769l. 11s. 4d. The company's articles of association provided that the respondent should be the first governing director of the company, with power to fix his own remuneration and to appoint other directors.
The company issued the debenture to the respondent on January 15, 1927. A balance-sheet made up from the respondent's books showed the alleged value of the assets of the respondent's business sold to the company as being, as at September 30, 1926, 3964l. 2s. 1d., excluding goodwill, which was not entered in the books. After the sale of the business to the company, some of the premises remained vested in the respondent. The directors of the company, the respondent and his brother, after the formation of the company, appointed the respondent managing director at a salary of 1000l. a year, and the company was debited with 1000l. as his salary from September 30, 1926, to March 31, 1927, the first six months of the company's existence, being 500l. more than the amount due to him in respect of that period. During those six months the company, after the 1000l. had been credited to the respondent, made a net loss of 2550l. 14s. 9d. For the year ending March 31, 1928, the company made a profit of 677l., for the following year a loss of 215l., and from March 31, 1929, to May 9, 1930, a loss of 1057l. The respondent and his brother, as directors, purported to pay 21l. 2s. as dividend from January 15, 1927, to March 1, 1928, to a preference shareholder, and 250l. 8s. as dividend for the year ending March 31, 1928, upon ordinary shares which had been allotted to themselves.
Towards the end of 1929 the company was in financial difficulties which by March, 1930, had become so serious that the company was unable to pay its debts as they became due. By March 1, 1930, the company to the knowledge of the respondent owed about 6500l. for goods which had been supplied to it and had no means of paying these debts. The respondent ordered goods to an amount of...
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