Between September 2013 and July 2014 Northampton Borough Council (“NBC”) advanced three loans totalling £10.25m to Northampton Town Football Club Limited (“NTFC”) for the sole purposes of allowing NTFC to upgrade its stadium and redevelop some adjoining land. The first defendant (D1) and the second defendant (D2) were two of the directors of NTFC, with D2 being the Managing Director. Ds had been majority shareholders in NTFC since 2002.
During 2014 and 2015 NTFC was often late in paying the principal and interest due under the loans. On 24 September 2015 NBC made formal demand for £10.3m in respect of two of the loans. On 25 November 2015 the Ds sold their shares in NTFC for £1 and resigned as directors.
NBC became aware that sums loaned had been used other than for the developments and, rather than sue NTFC, took an assignment of NTFC’s claims against, among others, D1 and D2 on 10 December 2015. NBC alleged that D1 and D2 had acted in breach of their fiduciary duties to NTFC. NBC also sought to set aside the transfer of D2’s 50% share in his matrimonial home (“Cheriton”) to his wife (D3) on 03 July 2015 as a transaction defrauding creditors pursuant to s.423 of the Insolvency Act 1986.
NTFC had entered into agreements with third party companies to carry out the development work. The Heads of Agreement made with the third party developers included an undocumented agreement for the provision of works up to £750,000 on Cheriton; that the profits from the development would be split between D1 and D2 and the third parties; and that D1 and D2 would receive an Exclusivity Fee from the third parties. These were all material conflicts of interest.
Both D1 and D2 had made substantial loans to NTFC and when they sold their interests in the club they agreed to write off their directors’ loans as they stood in the company’s books of £5.1m.
Following draw down of funds from NBC, NTFC paid funds to the developers who then transferred £2.05m to D1. These payments were not accounted for in NTFC’s books and, despite D1’s contention that they were treated as repayment of his director’s loan, His Honour Judge Simon Barker QC had no hesitation in finding the receipts by D1 to be in breach of his duties as a director of NTFC and that D2 was aware of the diverted payments and therefore also in breach.
The judge reached similar conclusions in relation to payments to D1 of £140,000 in July 2014 and £600,000 in November 2014, which were not accounted for in D1’s loan account, which he also found that D2 must have been aware of.
The judge was satisfied that at all material times NTFC was on the verge of or actually insolvent and found D1 liable to pay NBC £2.79 million (subject to reduction for amounts shown to have been repaid) by way of compensation.
As to the transfer of Cheriton, the judge rejected D2 and D3’s assertion that the transfer of the property was pursuant to a promise of D2 made in 2008 and given the surrounding circumstances found that the transfer was at an undervalue and that D2’s purpose was to place his share in the property beyond the reach of his potential creditors. He also found D2 liable to compensate NBC for the cost or value of works carried out at Cheriton effectively funded by NTFC.
The judge was unwilling to accept Ds evidence save where it was corroborated by independent documents and, in his assessment of the reliability of the witnesses, said, of D1 “D1's demeanour as a witness was urbane and engaging. However, his demeanour is a front for a person who, at least in business and in litigation, is thoroughly untrustworthy and unreliable.”, whilst of D2 he commented “D2 is proud to be viewed as a man in his father's image. He readily admitted that, like his father, he believes that lying and suppressing the truth is part and parcel of doing business.”
The judge found that “The evidence as to D1's and D2's conduct as directors points only to them, at all times, treating NTFC as their own corporate vehicle and disregarding NTFC's status as a separate legal entity owed duties extending beyond furtherance of D1's and D2's personal interests. They regarded their majority control, D1's funding and D2's position as sufficient justification to behave as they thought in their best interests when directing NTFC's affairs and business and when dealing with NTFC's assets, including in particular money.”
This case illustrates the risks of directors running companies in their own interests especially when they are insolvent.
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