CR-2016-001795
Neutral Citation Number [2017] EWHC 3228 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST
IN THE MATTER OF PV SOLAR SOLUTIONS LTD (IN CVL)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 The Rolls Building
Fetter Lane
London
EC4A 1NL

Date: 13/12/2017
Before :

REGISTRAR BARBER

- - - - - - - - - - - - - - - - - - - - -

Between :

(1) TIMOTHY COLIN HAMILTON BALL
(LIQUIDATOR OF PV SOLAR SOLUTIONS LTD)
(2) PV SOLAR SOLUTIONS LTD (IN CVL)
		Applicants	
	-	and –
		
	(1)	PAUL JAMES HUGHES
(2)	MARTYN PAUL WARE 

Respondents	

- - - - - - - - - - - - - - - - - - - - -

Joseph Curl  (instructed by Darwin Gray LLP) for the Applicants
Christopher Brockman (instructed by TLT LLP)  for the First Respondent
The Second Respondent did not attend and was not represented

Hearing dates: 18, 19 and 20 October 2017

- - - - - - - - - - - - - - - - - - - - -

Judgment
Registrar Barber
1.	This an application brought by Mr Timothy Ball as liquidator of PV Solar Solutions Ltd (‘the Company’) and the Company against its two directors, Mr Paul Hughes and Mr Martyn Ware.   
2.	The application is principally brought under Section 212 of the Insolvency Act 1986.  It is alleged that, in causing the Company to enter into arrangements purporting to be a tax avoidance scheme in March 2012 and thereafter applying three unjustifiable credit entries against their directors’ loan accounts with the Company in March, June and December 2012, in an overall sum totalling £750,800, at a time when creditors were being left unpaid, the Respondents acted in breach of their duties as directors of the Company and should be ordered to repay or restore that sum, together with compound interest, on a joint and several basis. 
3.	The application is alternatively brought on the bases either that (1) the Respondents should each be required to repay their loan accounts or that (2) the Respondents should each be required to repay the monetary equivalent of the three Credits pursuant to s241 IA 1986 on the grounds that such Credits comprised or formed part of transactions at an undervalue within the meaning of s.238 IA 1986.
Background
4.	The Company was incorporated on 30 January 2006 but lay dormant for several years.  It traded in the supply and installation of solar panels. Based in Cardiff, the Company operated nationally, but mainly in Wales and the south of England.  
5.	Mr Hughes was a director of the Company from incorporation onwards.  Mr Ware was appointed as company secretary on 22 July 2011 and then as a director from 6 September 2011 onwards.  Each director owned 50 of the 100 issued £1 ordinary shares.  
6.	Mr Hughes was the managing director, responsible for the day to day management of the Company.  Mr Ware was the sales director, responsible for sales and marketing. The Company employed an internal accountant, Mr Glyn Thomas.  He was a chartered accountant and ran a small inhouse accounting team comprising Ms Julie Llewellyn, a trainee accountant and Mr Neil Tritschler, who worked as bookkeeper and accounts assistant.  Mr Glyn Thomas, Ms Llewellyn and Mr Tritschler did not attend trial or give evidence.
7.	The Company had only two full years of trading, being the year ended 30 June 2011 and the year ended 30 June 2012.  In both years, the Company benefited from a form of government support for solar installations known as the ‘feed in tariff’.  The feed in tariff was first introduced on 1 April 2010 pursuant to the Energy Act 2008.  It was originally designed to produce a return on solar PV investment of around 5%.  For the year 1 April 2010 to 31 March 2011, the starting FIT rate was set at 41.3 pence/kWh.   
8.	The Company benefited greatly from feed in tariffs, achieving a turnover of £2 million in its first full year of trading to 30 June 2011 (albeit a profit of only £27,730).  
9.	By the autumn of 2011, however, the tide was turning in the solar panel market.  The FIT initiative had proved far more popular than anticipated.  By August/September 2011, the government had announced that FIT rates for small-scale photovoltaic installations would be reduced from its then current rate, 43.3p/kWh,  to 21p/kWh with effect from 12 December 2011.  Further reductions, to cool the market, were to follow.
10.	It would appear that the Respondents were well aware that these changes were imminent.  In oral evidence Mr Hughes told me with some pride that he had his ‘finger on the pulse’ at this stage and ‘knew what was going on.’
11.	Following a successful challenge in the High Court, the reductions in feed in tariff were delayed, but only until 3 March 2012.  On 3 March 2012, the FIT rate more than halved, dropping to 21p/kWh.  It was due to drop again, to 16p/kWh, on 1 August 2012; and again to 15.44p/kWh on 1 November 2012.
12.	In the meantime, still assisted by the relatively generous FITs of 43.3p/kWh available up to 3 March 2012, the Company achieved a turnover of £6.9 million in its second full year of trading, being the year ended 30 June 2012. 
13.	Neither director had a contract of employment with the Company.  During the financial year ended 30 June 2011, Mr Hughes’ service company, Hughes Consultancy Ltd (a company of which Mr Hughes was sole director and shareholder) was paid £126,569 and Mr Ware was paid £132,549.  These sums were described in the Company’s books and records as ‘management fees’.  In the year ended 30 June 2012, Mr Hughes and Mr Ware each  (in Mr Hughes’ case again via his service company) received a further £161,500 in ‘management fees’.  Whilst all falling within the year ended 30 June 2012 for accounting purposes, the entirety of the said sum of £161,500 was in each case paid by December 2011.  
14.	These ‘management fees’ are not impugned in the instant claim.  Nonetheless, on behalf of the Applicants, Mr Curl invited the Court to note that ‘Mr Hughes and Mr Ware had already had considerable sums out of the Company’ before they embarked on the transactions which form the subject matter of this application.
15.	The focus of challenge in this application was a series of credit entries totalling £750,800 applied against the Respondents’ respective directors’ loan accounts in 2012 in the sums and on the dates as follows: 
(1) 	19 April 2012 (backdated to 20 March 2012): £440,000 (comprising £220,000 each for the Respondents) (‘Credit 1’);
(2)	30 June 2012 : £150,000 (comprising £75,000 each) (‘Credit 2’); and
(3)	4 December 2012: £160,800 (comprising £62,400 for Mr Hughes and £98,400 for Mr Ware) (‘Credit 3’).
16.	The backdrop to Credits 1, 2 and 3 was as follows.
17.	In December 2011, having already paid themselves £161,500 each in management fees over the period 1 July 2011 to December 2011, and knowing that feed in tariffs were about to be halved, the Respondents decided to pay themselves a ‘bonus’ of a further £165,000 each as they ‘could see large profits for [the] year’ (Hughes (1) para 12).  It was initially agreed with Mr Thomas that this bonus would be treated in the Company’s records as a director’s loan ‘which would be converted to a dividend when finalising accounts later in the year’ (Hughes(1) para 12).  This £165,000 ‘bonus’, in each case posted on 12 December 2011, took each director’s loan account from a relatively modest £20,000 to £185,000.  Thereafter, between 13 December 2011 and 20 March 2012, the Respondents each withdrew additional sums (for the most part £6,000 per week each) from the Company’s cash resources.  Over the period 13 December 2011 to 20 March 2012, these additional withdrawals totalled £65,900 in the case of Mr Hughes and £71,400 in the case of Mr Ware.  Each withdrawal was posted to their directors’ loan accounts.
18.	In the meantime, in February 2012, the Company’s in house accountant, Mr Thomas, attended a tax lecture on employer financed retirement benefit schemes (‘EFRBS’).  The lecture was given by a Mr Leighton Reed, a Chartered Accountant and Chartered Tax Adviser who worked as a tax director at Broomfield & Alexander Limited. 
19.	EFRBS schemes were once marketed as an effective form of tax avoidance.  The attitude of HMRC to these schemes has, however, been clear for some time, as is apparent from briefing notes dating back to 2010. Parliament subsequently attempted to eradicate these and other disguised remuneration schemes with legislation, most significantly the Finance Act 2011 (‘FA 2011’).  Notwithstanding the enactment of FA 2011, however, a modified form of an EFRBS known as ‘Lazarus’ was still being marketed by a company called OneE Tax Limited (‘One E’) at the time of the seminar attended by Mr Thomas in February 2012.  
20.	Having made contact with Mr Leighton Reed at the seminar in February 2012, Mr Thomas introduced Mr Reed to the Respondents.  Mr Reed thereafter introduced the Respondents to OneE to explore ‘Lazarus’.  The Respondents decided to put in place a Lazarus scheme and did so in March 2012.
21.	As aptly summarised by Mr Curl of Counsel for the Applicants, the object of Lazarus ‘was to enable directors to extract money from their companies and pay almost no tax on it, despite the terms of FA 2011.’  For the purposes of this application, I am not invited to determine whether or not Lazarus  was an effective tax saving scheme.  Its main relevance, in the context of this application, is that it provided the underlying mechanics by which Credit 1 and Credit 3  (but not Credit 2) came to be effected.  
22.	The Applicants maintain that Credits 1, 2 and 3 cannot be justified, whether viewed through the prism of Lazarus or otherwise.    They argue that by March 2012, when the Lazarus scheme was put in place and Credit 1 came to be effected, the Company was already experiencing cashflow difficulties and its solvency was, at the very least, sufficiently questionable for the interests of creditors to intrude into the proper consideration of the interests of the Company.  The Respondents deny this.
23.	The Applicants further maintain that by June 2012, when Credit 2 came to be effected, the Company’s position had only worsened and it was demonstrably cash flow insolvent.  The Respondents deny this.
24.	The Applicants’ case is that by the time of Credit 3, which was effected in December 2012, the Company was both cashflow and balance sheet insolvent.  The Respondents both denied this but during the course of cross examination, Mr Hughes conceded that Credit 3 could not be justified. 
25.	By March 2013, the Respondents had consulted insolvency practitioners. The Company was placed into administration in May 2013 with an estimated deficiency as regards creditors of in excess of £600,000.  It exited via creditors’ voluntary liquidation on 6 November 2014.  As at 29 February 2016, the estimated deficiency as regards creditors stood in the sum of £819,712.  
26.	Neither director has ever fully completed or signed a statement of affairs. 
The nub of the Applicants’ case
27.	The nub of the Applicants’ primary case is that 
(1)	it is for the directors, as fiduciaries, to justify Credits 1, 2 and 3; 
(2)	the Credits cannot be justified retrospectively as remuneration, as the Company’s articles require directors remuneration to be determined by ordinary resolution and there was no such resolution in this case; 
(3)	the Respondents, as 100% shareholders, cannot rely upon Re Duomatic as
(a) for Re Duomatic to apply, it would have to be shown that the Respondents actually turned their minds to awarding themselves remuneration; far from so doing, they consciously elected not to award themselves remuneration but instead to put in place the Lazarus scheme; and 
(b)	to rely on Re Duomatic, the Respondents would have to prove the company was solvent at the time of the informal decision and have not done so;
(4)	the Respondents, as directors, cannot seek to justify the Credits on quantum meruit grounds, as this is precluded by the House of Lords decision in Guinness v Saunders  [1990] 2 AC 663;
(5)	at all material times from and including the timing of Credit 1 onwards, the solvency of the Company was, at the very least, sufficiently questionable for the interests of creditors to intrude;  in effecting the Credits, the Respondents failed to act in the best interests of the creditors as a whole and thereby acted in breach of s.172 CA 2006; 
(6)	the Respondents could not excuse their behaviour on the grounds that they acted on the advice of OneE, as OneE made clear that they were not advising on anything other than Lazarus itself.  OneE gave express warnings in their letter of engagement that they were not giving any company or insolvency advice and that, if there was or might be any question as to the Company’s solvency, the duty of the directors to act in the interests of creditors may override their other duties and specific advice should be sought on such matters.  If the Respondents wished to run a case that they relied on the advice of any other professionals, it was for them to spell out what that advice was and when it was given.  They had not done so.
28.	The Applicants’ secondary positions are that 
(1)	if the Credits were ineffective to discharge the liability of the Respondents to the Company, then judgment should be entered to the value of the loan accounts; and that
(2)	if the Credits were effective to discharge the Respondents’ liability under their loan accounts, it was ‘axiomatic’ that the incoming consideration provided by the Respondents was ‘significantly less’ than the outgoing consideration provided by the Company (ie £750,800) and a restorative order should be made under section 238/241 IA 1986.  Section 423 was referred to in the Application Notice but not relied upon.
The nub of the Respondents’ case
29.	The nub of the Respondents’ primary case was that 
(1)	the directors’ loan accounts and Credits 1, 2 and 3 were justified as part of a remuneration structure;
(2)	if, under the articles, remuneration had to be determined by ordinary resolution, a written members’ resolution passed on 9 March 2012 was sufficient for this purpose; 
(3)	alternatively, the Respondents relied upon the Duomatic principle as 100% shareholders in the Company; 
(4)	the Respondents did apply their minds to awarding themselves remuneration; it would be wholly artificial to see Lazarus as anything but a remuneration scheme; 
(5)	the accounting information in evidence before the court demonstrated, on a balance of probabilities, that the Company was solvent at all material times  and so the burden of proving solvency at the time of the informal resolution or resolutions was discharged;  
(6)	if necessary, the Respondents would justify the Credits on quantum meruit grounds, relying on Global v Hale [2017] EWHC 2277;
(7) 	the Respondents expressly considered the interests of the Company at all material times, as recorded in the board minutes relating to the Credits; 
(8)	the Company was in good financial health as at the time of Credits 1 and 2 (defence of Credit 3 was dropped) and/or the solvency of the Company at the time of Credits 1 and 2 was not sufficiently questionable for the interests of creditors to intrude in considering the best interests of the Company; and
(9)	the Respondents at all material times acted on professional advice.
30.	In answer to the Applicants’ secondary positions, the Respondents’ case is that the Credits were for remuneration and that no undervalue had been proven.  In addition, they maintained that the Company was neither insolvent at the time of the Credits nor rendered insolvent by them, so the Credits were not effected at a ‘relevant time’ for the purposes of section 238.
The Evidence
31.	For the purposes of this trial, I have read the following witness statements and their respective exhibits:
(1)	First and Second witness statements of Mr Ball dated respectively 30 March 2016 and 2 September 2016;
(2)	Witness statement of  Mr Hughes dated 21 July 2016;
(3)	Witness statement of Mr Ware dated 22 July 2016;
(4)	Witness statement of Mr Leighton Reed dated 21 July 2016.
I have also considered the other documents contained in court bundles prepared for use at the trial, to which documents reference will be made in this judgment where appropriate.
32.	I have had the benefit of hearing oral evidence from Mr Ball, Mr Hughes and Mr Reed in cross examination.
33.	Mr Ware did not attend trial and did not make himself available for cross examination. Given the nature of his witness statement, which largely adopts Mr Hughes’ statement, I am content to admit it in evidence, although his failure to attend for cross examination does affect the weight that may properly be attached to it.  No objection was taken to its admission. Ultimately, his case stands or falls with that of Mr Hughes. 

Mr Ball
34.	 Mr Ball struck me as an honest witness. As an office holder investigating the Respondents’ conduct after the event, Mr Ball’s evidence was not directed as his recollection of contemporaneous events.  Nonetheless, he took care to listen to the questions put to him and answered them thoughtfully and with precision.  I have every confidence in the veracity of his answers.
Mr Reed
35.	Mr Reed is a chartered accountant and chartered tax adviser.  In his statement he says that he has ‘specialised in tax’ since 1993.  He heads up the tax team at Broomfield and Alexander Limited (‘B & A’) and lectures on tax planning mechanisms.  
36.	It was through one such lecture, attended by Mr Glyn Thomas in February 2012, that Mr Reed came to be introduced to the Respondents and in turn  introduced the Respondents to One E.  Mr Reed’s own role is described at paragraph 7 of his statement as follows: 
‘One E Tax provided the tax advice to the company in relation to the EFRBS and the corporate tax deductibility of the EFRBS contributions…. My role was to ask One E tax pertinent questions on behalf of the company and to help collate the various documents required to implement the planning.’  

37.	Following Mr Reed’s introduction to the Company, Mr Reed’s firm, B & A, were appointed as the company’s auditors.  Mr Reed confirmed to me in oral evidence however that he was not personally involved in any audit work undertaken for the Company; others at his firm dealt with that.  This is hardly surprising given that Mr Reed had specialised in tax since 1993. In the event, B & A did not even complete one audit.  They were engaged as auditors in connection with the Company’s accounts for the year ended 30 June 2012, but they did not complete the audit and the accounts for that year were never signed off. 
38.	From Mr Reed’s statement, it is clear that Mr Reed was not personally involved in the preparation of any draft or management accounts, or profit forecasts, for the Company.  His evidence was that the Company itself dealt with that.  At paragraph 5 of his statement, he confirmed that ‘the directors provided management accounts to support the significant company profit at that time [in context, February/March 2012] and to support the forecast profit to 30 June 2012.’  It will be noted here (and elsewhere in Mr Reed’s statement) that the emphasis is placed on ‘profit’.  Mr Reed did not exhibit to his statement the management accounts with which he had been provided – or any other documents, for that matter. 
39.	Mr Reed’s lack of involvement in preparation of the figures was again stressed at paragraph 14 of his statement, which provided 
‘As stated above, in February 2012 and March 2012 the company had clearly demonstrated significant profit sufficient to absorb the EFRBS contributions based on management accounts prepared by the finance team headed by Mr Glyn Thomas who is a chartered accountant.  The company’s day to day finances were also handled by this team.  I had no reason to doubt the profitability of the company at that time.’
40.	It is not clear from his statement whether Mr Reed was involved in any meaningful way in the events leading up to Credit 2 or the decision to effect it. Paragraph 15 of his statement, which addresses Credit 2, is very cautiously worded and lapses into the impersonal more than once. It reads as follows:
‘15. In relation to the next contribution in June 2012, given the significant profit made as shown by the management accounts, it was felt that a further EFRBS contribution could be made. I cannot recall having any discussions with the company at this time or during the following months leading up to August 2012 on cash-flow problems. On the contrary, I recollect that our discussions about the company’s prospects and profit were very positive and this is why a second contribution was made.’

41.	Mr Reed does not give any details about the ‘discussions’ referred to, when they took place (the drafting leaves this open) or what documents he had sight of for the purposes of such discussions (as indicated, his statement does not exhibit any documents).
42.	There is absolutely no mention at all in Mr Reed’s statement of Credit 3.
43.	Mr Reed’s written evidence was that he was ‘not aware of the serious cash-flow issues affecting the company’ until March 2013 (paragraph 16). According to his statement, it was only in March 2013 that the Respondents requested a meeting with him and then ‘explained the Company’s position’ to him. At this stage it became apparent to Mr Reed that the Company had ‘severe trading difficulties’ and he recommended that the Respondents speak to Mazars LLP for insolvency advice.
44.	From the written evidence, Mr Reed’s role in relation to the Company over the period 2012 to 2013 appears to have been rather limited. He introduced the Company to One E but thereafter both he and Mr Hughes by their written evidence confirmed that it was OneE who advised the Respondents to set up an EFRBS (Hughes (1) para 13) and who provided tax advice to the Company in relation to the EFRBS (Reed (1) para 7).  Mr Reed’s role was ‘to ask One E  tax pertinent questions’ and to ‘help collate the various documents required to implement the planning’  (Reed (1) para 7).  He appears to have been ‘cc-d’ into email correspondence passing between One E, the Trustees and the Company concerning the EFRBS but from the correspondence in evidence took a passive role in that correspondence.
45.	By his written evidence Mr Hughes does not state, in terms, that the Respondents ever asked Mr Reed to advise them on the financial health of the Company.  Similarly, in his statement, Mr Reed does not state that he was asked give, or gave, such advice.  
46.	Even by March 2013, it is clear from the evidence that Mr Reed was not being asked to review the Company’s solvency position or to advise upon it.  The Respondents ‘explained the Company’s position’ to him – not the other way round (Reed (1) para 16).
47.	Given the limited nature of Mr Reed’s role and given also the rather bland and unparticularised nature of his statement, Mr Curl chose not to cross examine him at great length.  The result of this is that I saw little of Mr Reed in oral evidence.  From his relatively short cross examination however, I am satisfied that Mr Reed did his best to answer such questions as were put to him truthfully to the best of his recollection, albeit without reference to his files, which were not produced in evidence. 
48.	On behalf of the First Respondent, Mr Brockman seized on the brevity of Mr Reed’s cross examination and in closing proceeded to read out, at some length, all of the passages in Mr Reed’s statement that had not been directly challenged, word for word, in cross examination.  
49.	In answer, Mr Curl flagged the rather vague and generalised nature of much of Mr Reed’s statement which, coupled with the fact that Mr Reed had not been told by the Company of any cashflow or trading difficulties until March 2013, limited its probative value, he argued.  
50.	Mr Curl also referred me to the guidance of Arden LJ in Re Mumtaz Properties [2012] 2 BCLC 109.  At paragraph 41 of her judgment, Arden LJ  considered paragraphs 143 to 144 of the decision of the Court of Appeal in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116.  Arden LJ continued: 
 ‘while it is not open to a party to invite a judge to find, or for a judge to find, that the evidence of a witness which he has not challenged was given in bad faith or negligently or irrationally or was false for the reason that the witness had not had an opportunity of dealing with those points, the judge still has to consider whether to accept the evidence in the context of other evidence in the case and to decide how much weight to give it.  Accordingly these paragraphs do not, in my judgment, prevent the judge from preferring other conflicting evidence or attaching a different significance to facts than the witness did if in the course of his evaluation of the evidence the judge thinks that the witness must be incorrect.’

Mr Hughes
51.	Mr Hughes is clearly a very able and quick witted individual.  He told me that he had known full well when the reduction in feed in tariffs was to occur as he had his ‘finger on the pulse’ and ‘knew what was going on’.  
52.	Mr Hughes was quick to blame others around him for any errors or delays, however.  He blamed Glyn Thomas, for example, for the fact that Credit 1 was not entered into the books and records of the Company until 19 April 2012.  When it was pointed out to him that there were no transactional documents in evidence for Credit 2, he blamed the solicitors.  When asked why he had not completed and signed off a statement of affairs at any stage since the Company had first gone into administration (a statement of affairs being particularly important in this case, given that the audit of the Company’s accounts for the year ending 30 June 2012 had never been completed and the accounts had not been signed off), he embarked upon an entirely irrelevant story about a member of the Administrators’ team known as Keith Morgan.  He had no real answer for his failure to comply with his statutory duty as a director to complete a statement of affairs.
53.	He was largely unapologetic for having failed to pay key suppliers such as Risen for consignments of solar panels supplied to the Company.  He had no meaningful explanation for having failed to pay Risen for these consignments,   whilst making clear on several occasions that, from any such consignment, supplied by Risen at a price to the Company of £90,000 odd, he could realise a retail price of £450,000.  That, coupled with his oral evidence that the Company did not place orders for consignments until it had a ‘need’ for stock, suggested a worrying trading model.
54.	Mr Hughes appeared to see nothing wrong with trading in this way.  He was unabashed at having exploited the goodwill of suppliers such as Risen by negotiating extensions of time on payment for supplies.  He showed no remorse for ultimately having left Risen with an unpaid bill of over £265,000, having enjoyed the benefit of its stock.  When asked why he did not have regard to credit exposure, he responded that he was ‘looking to what lines of credit could produce in terms of cash’.   Save for a late concession regarding Credit 3, he was defiant at the levels of cash which he and his fellow director had extracted from the Company.  
55.	Mr Hughes was also evasive at times in his oral evidence. He was resistant to admitting the existence of a particular outstanding Risen invoice (referred to as ‘Risen 1’ in this judgment), asking to see a copy, knowing full well that no copy of that invoice was in evidence.  He was goading Counsel by this request. It was only when he was taken to contemporaneous email correspondence making clear reference to Risen 1 that he had to acknowledge that it existed.  He went on to give detailed evidence about that invoice from memory.  
56.	When asked about One E’s outstanding bill, he sought to deflect questioning, saying that it may have been paid.  It was only when he was taken to documentary evidence demonstrating clearly that it hadn’t been paid that he abandoned the suggestion that it had.  He also gave a pointless excuse for its non payment, suggesting that the Company had been waiting for OneE to supply a VAT invoice before paying it.  On his own evidence however, a VAT invoice had been supplied by June/July 2012 at the latest. OneE’s bill still hadn’t been paid by the time the Company entered into administration in May of the following year.
57.	He was resistant to admitting that, by June 2012, Risen was not willing to trade further with the Company without payment of prior invoices, notwithstanding being taken to emails from the Company to Risen attaching proof of payment of a prior invoice when placing fresh orders. 
58.	He defended Credit 3 throughout the proceedings up to day 2 of the trial.  His witness statement, bearing a statement of truth, defended Credit 3 along with the other Credits.  He caused his own counsel, on day 1, to cross examine Mr Ball about Credit 3.  Yet part way through his own cross examination on day 2, he simply dropped his defence of Credit 3, saying that it couldn’t be justified.  He showed not a flicker of regret or embarrassment about abandoning part of his case in this way.  He did not seek to justify his earlier stance, or to highlight any matters which had caused him to revisit his earlier position.  He gave the impression that he simply knew at that moment that he was not going to ‘get away’ with Credit 3 and so dropped his defence of it without a backward glance.
59.	Overall, whilst Mr Hughes’ evidence was undoubtedly truthful and accurate in certain respects, I was left with the distinct impression that he was fully prepared to deviate from the truth when it suited his purposes. This, coupled with the inconsistencies in his evidence and the other factors highlighted in this judgment, has led me to conclude that his evidence was not entirely reliable.
The Legal Framework
60.	For the purposes of its s.212 claim, the Applicants placed reliance upon the following duties, as now (to some extent at least) codified in the Companies Act 2006. 
‘171	Duty to act within powers
A director of a company must – ….
(b)	only exercise powers for the purposes for which they are conferred.
172 	Duty to promote the success of the company
(1)	A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to –
(a)	the likely consequences of any decision in the long term,
(b)	the interests of the company’s employees,
(c)	the need to foster the company’s business relationships with suppliers, customers and others,
(d)	the impact of the company’s operations on the community and the environment, 
(e)	the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)		the need to act fairly as between members of the company.
….
(3)	The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
				….
174	Duty to exercise reasonable care, skill and diligence
(1)	A director of a company must exercise reasonable care, skill and diligence…

175	Duty to avoid conflicts of interest
(1)	A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company….’
61.	Mr Curl relies in particular on the qualification concerning creditors in s.172(3), which he maintains is of considerable importance in the instant case, not only in the context of s.172 but other duties as well.

Duty to act bona fide in the best interests of the Company and its creditors: Section 172 CA 2006  
62.	It was common ground that the Respondents were each under a duty to act bona fide in the best interests of the Company: Section 172 CA 2006.   The Respondents’ duties under Section 172 fall to be interpreted and applied in the same way as the previously applicable common law rules and equitable principles: s.170(4) CA 2006.  The duty is fiduciary in character.  
63.	The fiduciary character of this obligation impacts upon the evidential burden of proof.   As Mr Curl rightly submitted, a fiduciary is obliged to account for his dealings with trust property.  In the context of payments to directors (or to parties connected to them), once a liquidator has established that a director is the beneficiary of a transaction, the evidential burden shifts to the director and it is for the director to show that the payment was proper.
Duty to act in the best interest of creditors
64.	Where the company is insolvent or of dubious solvency, the duty to act in the best interests of the Company is regarded as a duty to act in the interests of its creditors as a whole. At this stage, the interests of the company are regarded as the interests of the creditors alone; their interests become paramount: Re HLC Environmental Projects Limited [2013] EWHC 2876 Ch at paragraphs 91 to 93: West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA) at 252h-253b.
65.	On behalf of the Applicants, Mr Curl submits that the interests of a company’s creditors intrude into a proper evaluation of a company’s interests whenever there is a ‘question mark’ over the company’s current or future solvency.  In this regard, he referred me to the following formulations of the circumstances in which a director’s duty to his company extends to the need to have regard to the interests of the company’s creditors, as helpfully cited with approval by Mr John Randall QC (sitting as a deputy high court judge) in Re HLC: 
‘where the company is insolvent, or even doubtfully solvent’: per Nourse LJ in Brady v Brady (1987) 3 BCC 535 (CA), 552;
‘where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors’ money which is at risk’: per Mr Leslie Kosmin QC in Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd (2003) BCC 885, para 74;
‘where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question… the directors must consider [creditors’] interests if there is a real and not remote risk that they will be prejudiced by the dealing in question’: Giles JA in Kalls Enterprises Pty Ltd v Balaglow (2007) 25 ACLC 1094, para 162.
66.	 Having cited these and other authorities, Mr Randall QC in Re HLC added at para 89:
‘It is clear that established, definite insolvency before the transaction or dealing in question is not a pre-requisite for a duty to consider the interests of creditors to arise.  The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors’ prospects of being paid, without first having considered their interests rather than those of the company and its shareholders.  If, on the other hand, a company is going to be able to pay its creditors in any event, ex hypothesi there need be no such constraint on the directors.  Exactly when the risk to creditors’ interests becomes real for these purposes will ultimately have to be judged on a case-by-case basis.’ 
The learned deputy in HLC later concluded (at para 99 of his judgment) that when the duty to consider the interests of creditors is triggered under s.172, it is also triggered under s.171.
67.	On behalf of the Applicants, Mr Curl submitted that the passage quoted from HLC indicated that any doubt at all about future viability would be enough for creditors’ interests to intrude.  He said that this was evident from Mr Randall’s conclusion that a company must be able to pay creditors ‘in any event’ for the interests of creditors to be absent from a proper consideration of the company’s interests.  I think that is setting the standard a little too high.  Such a reading would not be consistent with the need for a ‘real and not remote risk of insolvency’.
68.	I was also taken to the analysis of Briggs J (as he then was) In re Cheyne Finance Plc (No 2) [2008] Bus LR 1562 in considering the meaning of s.123 IA 1986.  Having cited with approval various Australian authority to the effect that the question whether or not a company could pay its debts as they fell due (the ‘going concern’ test) included future debts, Briggs J concluded (at p1272E-F):
‘I can see no reason why the developed understanding in Australia of the nature of the exercise required by the phrase ‘unable to pay debts as they become (or fall ) due should not be recognised when the same phrase is, for the first time, deliberately inserted into the English insolvency test [in s123 IA 1986].  The Australian approach makes commercial sense, whereas the blinkered approach of ignoring the future does not’ 
 
The analysis of Briggs J was approved by the Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] 1 WLR 1408 at 1423A-E.
69.	The Applicants maintained that there was reason to think at all material times that the Company’s solvency position was not secure.  It followed, Mr Curl submitted, that Mr Hughes and Mr Ware could only discharge their duties to the Company by having regard to the interests of the Company’s creditors.  Instead, he argued, Mr Hughes and Mr Ware had regard only for their own position.
70.	On behalf of the First Respondent, Mr Brockman referred me to the judgment of Lewison LJ in Re Casa Estates (UK) Ltd [2014] 2 BCLC 49, submitting that the list in HLC was ‘refined’ by Lewison LJ in Re Casa.  I do not accept that submission.  Re Casa Estates was concerned with the test for balance sheet and cash flow solvency for the purposes of ss.123(1)(e) and s.238 IA 1986.  It was not concerned with s.172 CA 2006. 
71.	Nonetheless, the approach adopted by Lewison LJ in Re Casa Estates on the issue of ‘cashflow solvency’ for the purposes of s.123 and 238 IA 1986 is informative.  At paragraph 27 of his judgment, Lewison LJ confirmed that for such purposes, the cash flow test looks to the ‘reasonably near future’ as well as the present, adding that ‘what is the reasonably near future will depend on all the circumstances, especially the nature of the business… The test is flexible and fact-sensitive…’  
This echoes the need identified by Briggs J (as he then was) not to ignore the future.
72.	Overall, the approach to be adopted by the court in the context of s.172 is clear. The key is the underlying principle identified by the learned deputy judge in Re HLC.  The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors’ prospects of being paid, without first having considered their interests rather than those of the company and its shareholders. The point at which the risk to creditors’ interests becomes real for these purposes must be judged on a case-by-case basis.
73.	References in certain formulations of the test to be applied under s.172 to a company being of ‘dubious’ or ‘doubtful’ solvency must be seen in the context of the underlying principle.  The ‘doubt’ in this context is not whether, arithmetically, the numbers add up on a given day.  It is not a snapshot analysis.  The test is wider than that: the court must ask itself, in the context of a given company, whether, at the time of (or as a result of) the director’s actions, there is a real risk of the company’s creditors being left unpaid.  In some cases, this may involve consideration of  the wider context in which the company in question operates; of  known significant trading events, at or around the time of the director’s actions, for example, which it is reasonably foreseeable will impact materially in the near future  on the trading viability of the company using its existing trading model.  This wider context may in some cases affect the level of risk to which creditors are exposed by a director’s actions.  There are some cases in which it cannot be ignored.

Objective/Subjective
74.	The duty imposed on directors to act bona fide in the interests of the company (or, in cases of insolvency or dubious solvency, its creditors) is ordinarily regarded as a subjective one.  As put by Jonathan Parker J in Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 at paragraph 120:
‘The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently.  Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company.  The issue is as to the director’s state of mind.  No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; that that does not detract from the subjective nature of the test.’

75.	The general principle of subjectivity is however subject to three qualifications: Re HLC Environmental Projects Limited [2013] EWHC 2876 Ch (per Mr John Randall QC sitting as a deputy high court judge) at paragraph 92.  These are as follows. 
76.	First, where (as in cases of insolvency or dubious solvency) the duty extends to consideration of the interests of creditors, their interests must be considered as ‘paramount’.  
77.	Second, the subjective test only applies where there is evidence of actual consideration of the best interests of the company.  Where there is no such evidence, the proper test is objective, namely, whether an intelligent and honest man in the position of a director of the company could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company.  
78.	Third, where there is a very material interest, such as that of a large creditor (in a company which is insolvent or of doubtful solvency) which is without objective justification overlooked and not taken into account, the objective test must equally be applied. 
Duty to exercise reasonable care, skill and diligence: Section 174 CA 2006
79.	Again, it was common ground that the Respondents were each under a duty to  exercise reasonable care, skill and diligence: Section 174 CA 2006.  The Respondents’ duties under Section 174 fell to be interpreted and applied in the same way as the previously applicable common law rules: s.170(4) CA 2006.

Duty to avoid conflicts of interest and unauthorised personal profits:      Section 175 CA 2006
80.	It was common ground that the Respondents were at all material times under a duty to avoid conflicts of interests and unauthorised personal profits.  

Documentation
81.	In respect of the claims generally, Mr Curl submitted that to the extent that the documentation is less extensive than it might have been, any doubt should be resolved in favour of the Applicants. In this regard he referred me to Re Mumtaz Properties Ltd [2012] 2 BCLC 109 at paragraphs 14 and 17 per Arden LJ:
‘[14] In my judgment, contemporaneous written documentation is of the very greatest importance in assessing credibility.  Moreover, it can be significant not only where it is present and the oral evidence can be checked against it.  It can also be significant if written documentation is absent.  For instance, if the judge is satisfied that certain contemporaneous documentation is likely to have existed were the oral evidence correct, and that the party adducing oral evidence is responsible for its non-production, then the documentation may be conspicuous by its absence and the judge may be able to draw inferences from its absence….
[17] Put another way, it was not open to the respondents to the proceedings in the circumstances of this case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator.  Moreover, persons who have conducted the affairs of limited companies with a high degree of informality, as in this case, cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available.’

82.	On behalf of the First Respondent, Mr Brockman reminded me that the absence of documentary evidence does not necessarily lead to a default position of liability, referring to me in closing to the case of In re Wolverton Investments Ltd (unrep 18 May 2015, Chief Registrar Baister at para 59-60, citing Re Idessa UK Ltd [2012] 1 BCLC 80 at paras 24-28).   
83.	At paragraph 28 of her judgment in Re Idessa, Lesley Anderson QC, sitting as a deputy judge of the High Court, had put the matter thus:
‘I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate that Mr Aslett is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question.  Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the court to conclude that there was no proper justification for the payment.  However it seems to me to be a step too far for Mr Aslett to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors.  In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes.’
84.	Commenting on this passage, Chief Registrar Baister in Re Wolverton stated (at paragraph 60):
‘….what is important is the adequacy of the fiduciary’s evidence as an explanation for the transactions with which the court is dealing.  Such evidence may take different forms: it might justify a transaction which is ‘readily … explained or accounted for by the documents or the ordinary motives of people’ (paragraph 24), or its justification ‘may be clear from .. other evidence’ (paragraph 28).  There is no absolute default position.  Unsurprisingly, then, the court must look at the evidence and the facts quite closely and in the round.’

Hindsight
85.	Mr Brockman also rightly reminded me that the Court’s assessment of the directors’ conduct must be made without the benefit of hindsight. In this regard he referred me to in Re Living Images Limited [1996] BCC 112 at 116H per Laddie J:
‘I should add that the Court must also be alert to the dangers of hindsight.  By the time an application comes before the Court, the conduct of directors has to be judged on the basis of statements given to the official receiver, no doubt frequently under stress, and a comparatively small collection of documents selected to support the official receivers and respondents’ respective positions.  On the basis of this the Court has to pass judgment on the way in which the directors conducted the affairs of the company over a period of days, weeks or, in this case, months.  Those statements and documents are analysed in the clinical atmosphere of the courtroom.  They are analysed, for example, with the benefit of knowing that the company went into liquidation.  It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming.  The court must be careful not to fall into the trap of being too wise after the event.’

86.	Mr Brockman also referred me to a passage from Professor Goode’s ‘Principles of Corporate Insolvency Law’ (2011) (4th Edn) at page 141, which provided as follows:
‘It is necessary to be particularly cautious in applying hindsight to cases involving personal liability, e.g. for wrongful trading, or the setting aside of a preference.  Business life is neither static nor certain. Information has constantly to be updated, predictions made about a range of uncertain events, snap judgements formed, rapid decisions taken and adaptations continually made in the light of the shifts in customer demand, tax changes, industrial actions, political events, international relations, and the like.  Just as it is all too easy for historians to pick their way leisurely across the battlefields of Waterloo identifying Napoleon’s errors in the confusions engendered by blazing guns, cavalry charges, mud, darkness, uncertainty as to the current arrivals or dispositions of troops and ignorance of the intentions of the enemy, so also a professional acquainted with subsequent events in a company’s life is all too readily beguiled into the view that he would have done things differently, that what is now apparent was obvious from the start.’

87.	Naturally I accept the importance of guarding against hindsight.  In the context of the present case, however, the conduct under scrutiny is not a decision to carry on trading at a given point, or to pay off a pressing trade creditor.  The conduct under scrutiny is a series of decisions taken by the Respondents in March, June and December 2012 to write off debts which they themselves owed the Company on their directors’ loan accounts.  As fiduciaries, it falls upon the Respondents to justify those decisions.

The Mechanics of the EFRBS and Credits 1, 2 and 3

88.	At this stage, it would be helpful to address the mechanics by which the EFRBS came to be set up and by which Credits 1, 2 and 3 each came to be applied.  
89.	As part of its service, One E provided draft deeds and related documents, including draft board minutes.  
90.	The first step was to set up the EFRBS.  This was considered by the board of directors of the Company on 9 March 2012.
91.	In summary, according to the board minutes of a board meeting on 9 March 2012,
(1) the board (comprising the Respondents, with Mr Glyn Thomas also in attendance) considered (a) a proposal for Company members specifically to authorise certain directors’ conflicts for the purposes of section 175 CA 2006 (b) the establishment of a discretionary Employer Financed Retirement Benefit Scheme to be known as ‘The PV Solar Solutions Ltd 2012 EFRBS’ and (c) the appointment of OneE Trustee Services (Cyprus) Limited as the sole corporate trustee of the proposed EFRBS;
(2)  each director declared the nature and extent of his interest in the proposed EFRBS, confirming that they and their family members would be potential beneficiaries of the same;  
(3)  the meeting was then adjourned briefly to allow the circulation to members (comprising the Respondents) of a draft ‘written resolution’ which (if passed) would specifically authorise certain matters in relation to the directors which may otherwise give rise to a conflict or potential conflict of interest under section 175 CA 2006.  
92.	The written members’ resolution under consideration provided that, for the purposes of s.175,
‘the matter listed in the attached schedule marked A … (‘the Schedule’) which may, but for this resolution, result in the relevant director infringing his duty under section 175 of the Act … be and it is hereby authorised, and previous matters of this nature are hereby ratified, to the fullest extent permitted by law….. (a) that the authority granted by virtue of this resolution shall not be limited in time..’.  

The ‘matter giving rise to potential conflict’ set out in Schedule A was described as 
‘the adoption by the Company of an employer financed retirement benefit scheme, as detailed in the minutes dated 9th March 2012 into which the Company would contribute funds or other assets for the purposes of incentivising its employees and/or the subsequent entering into of any funding (or asset contribution) arrangement in connection with the scheme’;
93.	The written members’ resolution was passed.  
94.	Following the passing of the written resolution, the board meeting resumed.  According to the board minutes, there was produced to the meeting a draft Agreement, Arrangement and Deed of Settlement (‘the Settlement Agreement’) between the Company and OneE Trustee Services (Cyprus) Limited (‘the Trustee’) under which 
‘the Company would, in order to motivate and incentivise its employees and for the benefit of its trade, create with a payment of £200 (‘the Sum’) a trust to be known as ‘the PV Solar Solutions Ltd 2012 EFRBS’ which would constitute an Employer Financed Retirement Benefit Scheme’

95.	The board then ‘noted that the Proposed EFRBS would be a discretionary trust.  Thus, while the board could make recommendations to the Trustee as to how the trust fund and the income should be applied, neither the board nor the Company would have the power to direct the Trustee as to the manner in which it should exercise its discretions under the terms of the Proposed EFRBS’.
96.	After what is described in the minutes as ‘due and careful consideration’, it was then resolved that 
‘a) in the opinion of the directors the matters considered at this meeting are most likely to promote the trade of the Company;
b)	the board of directors be and is hereby authorised to establish the Proposed EFRBS on behalf of the Company in substantially the form of the Settlement Agreement produced to the meeting;
c)	the Settlement Agreement be and is hereby approved and Paul Hughes and Martyn Ware be and are hereby authorised to sign, execute and deliver as a deed the Settlement Agreement on behalf of the Company;
d)	the Sum [of £200] be transferred to OneE Trustee Services (Cyprus) Limited in accordance with the terms of the Settlement Agreement; and
e)	any subsequent substantial contributions to the Proposed EFRBS would be made to incentivise and motivate employees only by reference to the services during the accounting period to which the subsequent substantial contributions relate.’

97.	Shortly thereafter, with the assistance of  One E, the Company set up an EFRBS  by deed dated 14 March 2012 made between the Company of the one part (described therein as ‘the Settlor’) and a corporation established under the laws of the Republic of Cyprus known as One E Trustee Services (Cyprus) Limited (‘the Trustee’) of the other part.  The initial settled property comprised £200 sterling.
98.	By a deed of appointment dated 14 March 2012 made between (1) One E Trustee Services (Cyprus) Limited (‘the Trustee’) and (2) Martyn Ware and Paul Hughes (together ‘the Protector’), a sub-fund was created with an initial deposit of £50 (‘the sub-fund appointment’).  Under the terms of the sub-fund appointment, 0.5% was appointed to an employee by the name of Richard Roberts (a relation of Mr Hughes) absolutely, 0.5% was appointed to Mr Hughes absolutely, and remaining 99% was placed on discretionary trusts for the benefit of the Respondents and their respective families.
99.	Shortly thereafter, the Respondents, with the assistance of One E, set about putting the machinery in place to wipe out or significantly reduce the sums standing due on their respective loan accounts as at March 2012.
100.	As at 17 March 2012, Mr Hughes’ director’s loan account stood at £250,900.  The bulk (all but £20,000) of this debt had been run up since 12 December 2011, by way of a lump sum payment of £165,000 on 12 December 2011, followed by weekly payments (usually of £6,000) from January 2012.  Mr Ware’s loan account followed a similar pattern.  As at 13 March 2012, Mr Ware’s director’s loan account stood at £250,400.  Again, the bulk (all but £20,000) of this debt had been run up since 12 December 2011, by way of a lump sum of £165,000 on 12 December 2011, followed by weekly payments (usually of £6,000) from January 2012. 
101.	There does not appear to have been a huge amount of science applied by the Respondents in calculating the sums to be credited to their respective loan accounts at this stage. By email dated 28 February 2012 from Mr Hughes to Mr Dominic Slattery of One E, for example, Mr Hughes wrote
‘Hi Domonic [sic],
We are thinking of doing £220,000 each.’

The Mechanics of Credit 1 
102.	In relation to Credit 1 (which totalled £440,000), the mechanics underlying the credit of £220,000 applied to  each director’s loan account with effect from 20 March 2012 were as follows.  
103.	First, a board meeting was held on 16 March 2012.  According to the board minutes (which were an adaptation of pro forma documents supplied by OneE), the board meeting was attended by Mr Ware in person as chair, Mr Hughes by telephone (with a copy of the relevant documents to hand) and Mr Glyn Thomas in person,
104.	In summary, the board minutes of the meeting of 16 March 2012 provided as follows:
(1)	the chairman noted that the purpose of the meeting was to consider and if thought fit to enter into a Deed of Covenant with OneE Trustee Services (Cyprus) Limited (‘the Covenantee’);
(2)	the chairman reminded the directors to consider their general duties, including those contained in ‘the Act’ (presumably intended as a reference to CA 2006), in considering the matters put to the meeting;
(3)	each director declared the nature and extent of their interest in the proposed transaction for the purposes of s.177 CA 2006 and the Company’s articles of association; 
(4)	it was noted that any conflict or potential conflict of interest that the directors may have under section 175 of the Act in relation to the EFRBS and the proposed transaction to be considered at the meeting had already been authorised by way of a written resolution passed by the shareholders on 9 March 2012;
(5)	the chairman noted that the Deed of Settlement of 14 March 2012 (‘the Settlement’) between the Company and OneE Trustee Services (Cyprus) Limited (as ‘the Trustee’) had been executed and delivered as a deed by both the Company and the Trustee;
(6)	there was then produced to the meeting a draft deed of covenant 
‘under which the Company would covenant with the Covenantee, which happened to be the Trustee under the Settlement…, to pay it a sum of money [£440,000] with interest on the amount from time to time remaining unpaid’;
(7)	the Board considered the draft and noted its precise terms.  It was pointed out to the Board 
‘that the company in whose favour the covenant would be made would hold the benefit of it on trust for the Company.  Thus, the execution of the deed would not entail the Company in any expense.  However, its existence could be useful if the Board decided in future to make a contribution to the Trustee under the Settlement…’
(8)	After what is described as ‘due and careful consideration’, it was resolved  that the draft deed of covenant be approved and that the Respondents be authorised to execute it on behalf of the Company.

105.	By a Deed of Covenant (‘the deed of covenant’) made on 16 March 2012 between the Company and One E Trustee Services (Cyprus) Limited (as ‘the Covenantee’),  (1) the Company covenanted to pay to the Covenantee £440,000 on or before 1 April 2022 with interest calculated at rates provided therein (‘the Covenant’) and (2) the Company and the Covenantee declared that the Covenantee held the benefit of the Covenant (including the right to receive interest) upon trust for the Company absolutely.
106.	The next relevant board meeting took place on 19 March 2012.  Again, the board minutes were adapted from a pro forma set supplied by One E. According to these board minutes, the board meeting was attended by Mr Ware in person as chair, Mr Hughes by telephone (with a copy of the relevant documents to hand) and Mr Glyn Thomas in person.
107.	In summary, the board minutes of the meeting of 19 March 2012 provided as follows:
(1)	the chairman noted that the purpose of the meeting was to consider and if thought fit to approve a substantial addition to an appointed sub-fund of ‘The PV Solar Solutions Ltd 2012 EFRBS’ (‘the EFRBS’);
(2)	the chairman reminded the directors of the need to consider their general duties, including those contained in the Act, in considering the matters put to the meeting;
(3)	each director declared the nature and extent of their interest in the proposed transaction to be considered at the meeting in accordance with section 177 CA 2006 and the Company’s articles, the directors confirming that they and their respective family members were potential beneficiaries of the sub fund of the EFRBS;
(4)	it was noted that any conflict or potential conflict of interest that the directors may have under section 175 in relation to the EFRBS and the proposed transaction to be considered at the meeting had already been authorised by way of a written resolution passed by the shareholders on 9 March 2012 for the purpose of, inter alia, adopting the EFRBS;
(5)	it was reported (1) that the sub fund appointment had been executed by the Protector and Trustee of the EFRBS and (2) the deed of covenant had been executed and delivered as a deed by both parties to it;
(6)	there was then produced to the meeting ‘a draft deed of addition and contribution agreement between (1) the Company (2) the Trustee of the EFRBS and (3) the company which happened to be the sole trustee of the EFRBS, but in its capacity as covenantee under the deed of covenant.’;
(7)	it was explained to the Company 
‘that the effect of this deed of Addition and Contribution would be to transfer to the EFRBS the beneficial right to enforce the deed of covenant, which right would be comprised in the sub-fund created by the Deed of Appointment; thus, in entering into the deed of addition, the Company would be making a substantial contribution to the EFRBS; while it would not need to pay any cash immediately, it would become the debtor of the EFRBS, it would need to pay interest at the specified rate on so much of the covenanted sum as had not for the time being been paid and would need to pay the entire covenanted sum on or before the due date of payment’
(8)	again, after what is described as ‘due and careful consideration’, it was resolved that: 
‘(a) the execution of the deed of addition would, in the opinion of the directors, be for the benefit of the trade of the Company, and thus of the Company, and in consequence (b) the draft deed of addition be and is hereby approved and Martyn Ware and Paul Hughes be and are hereby authorised to sign, execute and deliver it as a deed on behalf of the Company.’

108.	By a deed of addition and contribution dated 20 March 2012 made between (1) the Company (2) One E Trustee Services (Cyprus) Limited (as ‘Trustee’) and (3) One E Trustee Services (Cyprus) Limited (as ‘Covenantee’), the Company assigned its beneficial interest in the Covenant to the Trustee and directed the Trustee to hold the Covenant upon the trusts of the Settlement as an accretion to the sub fund created by the deed of appointment.  
109.	It will be noted that, by entering into the deed of addition and contribution on 20 March 2012, the Company became exposed to a debt of £440,000 plus interest to the Trustee of the Settlement.
110.	The next relevant board meeting took place on 20 March 2012.  Again, according to the board minutes (which were again an adaptation of a pro forma set supplied by OneE), the meeting was attended by Mr Ware, Mr Hughes (by telephone with relevant documents to hand) and Glyn Thomas.  Mr Ware took the chair and noted that the purpose of the meeting was to consider and if thought fit to approve the two Tripartite Deeds between the Company, OneE Trustee Services (Cyprus) Limited and Mr Ware and Mr Hughes respectively.
111.	The board minutes of 20 March 2012 provided inter alia as follows:
‘2.1	The Chairman reminded the directors of the need to consider their general duties, including those contained in the Act, in considering the matters put to the Meeting.
2.2	Each director present declared the nature and extent of their interest in the proposed transaction to be considered at the meeting in accordance with the requirements of section 177 of the Act and the Company’s articles of association (‘the Articles’) as follows:
.	Paul Hughes declared that by entering into the Tripartite Deed, his debt to the Company, in the amount of £220,000 would be repaid;
.	Martyn Ware declared that by entering into the Tripartite Deed, his debt to the Company, in the amount of £220,000 would be repaid; …
2.4	It was further noted that certain matters in relation to the directors which may otherwise give rise to a conflict or potential conflict of interest under section 175 of the Act (including their position as potential beneficiaries of the EFRBS) has been [sic] specifically authorised by way of a written resolution passed by the shareholders of the Company during an adjournment of the board meeting held on 9th March 2012 for the purpose of, inter alia, adopting the EFRBS.
3.	PRODUCTION AND APPROVAL OF DOCUMENTS
3.1	The Chairman noted that the Deed of Addition and Contribution Agreement whereby the Company was to make a further contribution (in the form of its beneficial interest under the Deed of Covenant executed by it) to the EFRBS, the execution of which on behalf of the Company had previously been authorised, had been duly executed and delivered by or on behalf both parties on 20th March 2012
3.2	the Chairman noted that Paul Hughes was indebted to the Company in the amount of £220,000 and that Martyn Ware was indebted to the Company in the amount of £220,000
3.3	There was produced to the meeting a draft Tripartite Deed between (1) the Company (2) OneE Trustee Services (Cyprus) Limited as Trustee of the EFRBS (the ‘Trustees’) and (3) Paul Hughes (the ‘Borrower’) under which
-	Paul Hughes as Borrower would become obliged to pay the Trustees £220,000
-	indebtedness of that amount from the Borrower to the Company would be repaid and
-	the Company would be released from its obligation under the deed of Covenant so far as concerns that amount.
3.4	 There was produced to the meeting a second draft Tripartite Deed between (1) the Company (2) OneE Trustee Services (Cyprus) Limited as Trustee of the EFRBS (the ‘Trustees’) and (3) Martyn Ware (the ‘Borrower’) under which
-	Martyn Ware as Borrower would become obliged to pay the Trustees £220,000
-	indebtedness of that amount from the Borrower to the Company would be repaid and
-	the Company would be released from its obligation under the deed of Covenant so far as concerns that amount.
3.4	After duly considering its terms the Chairman noted that execution of the Tripartite Deeds would be in the interests of the Company and resolved that they should be executed and unconditionally delivered as deeds on behalf of the Company with Martyn Ware and Paul Hughes authorised to execute them and unconditionally deliver them as deeds on behalf of the Company.’ 

112.	By two tripartite deeds between (1) the Company (as Settlor), (2) OneE Trustee Services (Cyprus) Limited (as Trustee of the Settlement) and (3) (variously) Mr Hughes or Mr Ware (described in each case as ‘the borrower’), 
a)	the borrower (ie Mr Hughes or Mr Ware) confirmed that he was indebted to  the Company in the sum of at least £220,000 (‘the Loan Amount’); 
b)	the borrower (ie Mr Hughes or Mr Ware) agreed with the Company that, in consideration of the borrower procuring the Trustee to undertake to pay to the Company an amount equal to the Loan amount, the Company would accept such consideration as repayment of the Loan Amount owed by the borrower to the Company; 
c) 	the borrower agreed with the Trustee that, in consideration of the Trustee entering into that undertaking to pay the Company an amount equal to the Loan Amount, the borrower would pay the Trustee an amount equal to the Loan Amount in 10 years’ time (‘the Payment Date’), plus interest;  and
d)	the Company and the Trustee agreed that, in consideration of the Trustee releasing the Company from its obligation under the Deed of Covenant to pay to the Trustee an amount equal to the Loan Amount, the Trustee would be discharged from its obligation to pay to the Company an amount equal to the Loan amount.

113.	Standing back and viewing the transactions summarised in paragraphs 102 to 112 of this judgment as a whole, it will be seen that the Respondents caused the Company to incur a liability of £440,000 plus interest (the covenant) out of thin air, so that it could then be set off, via the series of steps listed above, against £220,000 owed by each of the Respondents to the Company on their respective loan accounts. 
114.	This set off process was completed on 20 March 2012.  It is for this reason that, whilst Credit 1 was not entered into the Company’s books and records until 19 April 2012, it was backdated to 20 March 2012.

The Mechanics of Credit 2
115.	I was not taken to any transactional documentation relating to Credit 2.  Naturally I remind myself of the guidance given in Re Mumtaz, Re Idessa, and Re Wolverton, summarised previously in this judgment.
116.	Having considered all of the evidence, both written and oral, with some care,  I have come to conclude  that no transactional documents of the Lazarus variety (that is to say, no deed of covenant, no deed of addition and contribution, and no tripartite deeds in the same or substantially the same terms as those executed in connection with Credit 1) were executed in relation to Credit 2 in the lead up to that credit being effected.   
117.	Mr Hughes produced one signed board minute, bearing the date 29 June 2012, said to relate to Credit 2.  This was the day before Credit 2.  
118.	According to the board minute of 29 June 2012, the meeting was attended by Mr Hughes (as chair), Mr Ware and Mr Thomas.  The minute continued inter alia as follows (with emphasis added):
‘The Chairman noted that it is proposed that the Company set aside amounts to reward employees with a view to those amounts becoming repayable to an Employer Financed Retirement Benefit Scheme (‘EFRBS’).
Declaration of Interests & Conflicts of Interest
Each director present declared the nature and extent of their interest in the proposed transaction to be considered at the meeting in accordance with the requirements of section 177 of the Companies Act 2006 (‘the Act’) and the Company’s articles of association, as follows:
.	Paul Hughes declared that himself and his family members would be potential beneficiaries of the EFRBS
. Martyn Ware declared that himself and his family members would be potential members of the EFRBS
It was noted that the directors would give due consideration to the provisions of the Act before entering into any transactions that were resolved upon during the meeting.
Resolution to make awards to employees involving an EFRBS
The chairman proposed that value equal to £150,200 should be set aside by the company for awards to be made to reward employees in respect of their service during the accounting period to 20th June 2012.  The awards will be paid to an EFRBS created or to be created for the benefit of key employees of the company and their families (and other persons related to or connected with them).  The proposed list of key employees is:
Paul Hughes
Martyn Ware
The chairman noted that, at this stage, no final decisions were being made on the allocation of the sum set aside for employee awards between different employees and their families etc as the Board wished to give further thought to the matter.  The Board also reserved the right to add employees and their families etc to the list and in extreme cases to delete names from the list, but at this stage the Board was content that the employees named in the list were the most appropriate.  However, as a result of this Resolution the Board accepted that it would be creating a present constructive obligation to make a payment to the structure, once established, of value equal to £150,200 and that a transfer of economic benefits would be required to settle that obligation.
After due consideration of the above proposed, IT WAS RESOLVED that in the next accounting period a payment of value totalling £150,200 will be made in respect of the services provided by employees in the current year ended 30th June 2012, such payment being made or otherwise becoming payable to a sub-fund of the EFRBS created for some or all of the key employees of the company.  Alternatively the payment will be made or covenanted to other parties on the condition that the amounts will at some future time become payable to someone chosen by the trustees of the EFRBS.’ 

119.	This is a very curiously drafted minute. It is more a statement of intent than anything.  It bears little resemblance to the minutes drafted by One E in connection with the ‘step by step’ Lazarus transactions which gave rise to Credit 1.  Moreover read as a whole, this board minute does not give rise to (or even evidence) an absolute entitlement on the part of £75,000 each to the Respondents.  That is to say: it does not explain, still less justify, Credit 2.
120.	Credit 2, as entered in the directors loan account ledger of each Respondent, bears the date ’30 June 2012’ and the entry ‘EFRBS 2’.  Yet as indicated, there is no transactional documentation of the sort present in relation to both Credit 1 and Credit 3 to demonstrate how, as a matter of mechanics, Credit 2 came about – other than the simple entry in the loan accounts. 
121.	 The First Respondent maintained that transactional documentation had been executed for Credit 2 in the same way as that executed for Credits 1 and 3 and was simply missing.  I do not accept his evidence on this issue.  The board minutes and transactional documents produced in connection with Credit 1 spanned a period of over one week, culminating in the execution of the tripartite deeds on 20 March 2012.  Yet in the context of Credit 2, the one board minute produced dates from 29 June 2012, only one day before Credit 2.  Even then, the board minute itself is couched in prospective terms and lists a number of possible options.  Unlike the board minutes produced in relation to Credit 1, the board minute of 29 June 2012 does not refer to any transactional documentation.  Moreover, whilst I am quite sure that One E would have been able to produce all of the relevant draft board minutes and draft transactional documentation within a short time span if so required, I would expect a plethora of urgent emails in evidence if it had done so within one day for Credit 2.      I would add that, from other email correspondence from One E in evidence, Mr Hughes was one of several named addressees, as was Mr Reed. There should have been several sets of the relevant emails and draft transaction documents readily available to Mr Hughes therefore, had they existed.  
122.	It is also of note that in the proof of debt lodged by One E, details are given of a letter of engagement dated 27th February 2012 and two separate letters of engagement dated 21 November 2012 (generating two different fees of £11,250 and £8,040 plus VAT).  There is no mention of a letter of engagement dated in May or June 2012.  
123.	In cross examination, Mr Reed stated from memory that he believed there to have been three EFRBS sub-trusts.  He also made reference in his statement to a second ‘contribution’ in June 2012. His evidence was, however, rather vague on this matter and he adduced no documentation in support, notwithstanding, as I have indicated, that he was regularly cc’d into email correspondence passing between the Company and One E.  On the evidence as a whole, I do not accept that a second EFRBS sub-trust was set up in June 2012 or that transactional documentation of the Lazarus variety was executed in the run up to Credit 2. To the extent that Mr Reed’s evidence suggests otherwise, it is outweighed by other evidence.  
124.	Mr Brockman for the First Respondent sought to rely upon the draft accounts for the year ending 30 June 2012, which appear, from a date appearing at the top of each page, to have been printed out on 29 August 2012.  From Mr Hughes’ statement, it is clear that these draft accounts were prepared by the Company’s in-house team.  These draft accounts make reference to total EFRBS contributions in the year ended 30 June 2012 in an amount roughly according with the total of Credit 1 and Credit 2.  
125.	These were simply in-house draft accounts, however.  They were never finalised or signed off by the auditors.  
126.	Moreover, even if the draft accounts were taken at face value for the sake of argument, ultimately they do not assist the Respondents on this issue.  I say this because, even if a contribution in an amount equivalent to Credit 2 had been made by the Company to the (or an) EFRBS on or about 30 June 2012, that does not lead inexorably to the conclusion that transactional documentation was executed for Credit 2 in the same way as that executed for Credits 1 and 3.
127.	I would add that, whilst the notes to the draft accounts make reference to ‘Scheme contributions’ made to ‘the PV Solar Solutions Ltd 2012 EFRBS (‘the scheme’) totalling £584,120, the same notes go on to confirm that ‘Because the value created in the scheme is held on terms which are discretionary and no earmarking has yet taken place, it is nit [sic] considered that these amounts can be regarded as directors’ remuneration and therefore, these amounts have [not] been included from the overall figure above and the remuneration of the highest paid director.’  
128.	Even if there had been a contribution of £150,200 to the EFRBS in or about June 2012, therefore, that contribution, of itself, would not assist the Respondents as (1) there had been no earmarking within the EFRBS for their benefit and (2) as I have found, none of the tortuous run of transactional deeds designed to extinguish given amounts on the director’s loan accounts by way of set off ( as there was with Credit 1) had been executed.
129.	In relation to Credit 2, then, we are left with bare credits being applied to the Respondents’ directors’ loan accounts, without even the fig leaf of Lazarus.

The Mechanics of Credit 3 
130.	The transactional mechanics of Credit 3 follow in broad terms those of Credit 1 and again appear to have involved drafts supplied by One E.  In summary the key components comprised: 
(1)	a board meeting on 26 November 2012 to consider a deed of covenant between the Company and One E Trustee Services (Cyprus) Limited (‘the Covenantee’);
(2)	a deed of appointment dated 26 November 2012 creating a further sub-fund;
(3)  	a deed of covenant made on 27 November 2012 between the Company and One E Trustee Services (Cyprus) Limited (as ‘the Covenantee’), by which (1) the Company covenanted to pay to the Covenantee £150,000 on or before 1 December 2022 with interest (‘the Covenant’) and (2) the Company and the Covenantee declared that the Covenantee held the benefit of the Covenant (including the right to receive interest) upon trust for the Company absolutely;
(4)	a further board meeting on 29 November 2012 to consider a deed of addition and contribution;
(5)	a deed of addition and contribution dated 29 November 2012 made between (1) the Company (2) One E Trustee Services (Cyprus) Limited (as ‘Trustee’) and (3) One E Trustee Services (Cyprus) Limited (as ‘Covenantee’), by which the Company assigned its beneficial interest in the Covenant to the Trustee and directed the Trustee to hold the Covenant upon the trusts of the Settlement as an accretion to the sub fund created by the deed of appointment (again, at this stage, it will be noted that by entering into this Deed, the Company was exposed to a debt of £150,000 to the Trustee of the Settlement);
(6)	a further board meeting on 29 November 2012 to consider the execution by the Company, One E Trustee Services (Cyprus) Limited and (variously) Mr Hughes and Mr Ware of two ‘Tripartite Deeds’, at which both Respondents, for the purposes of Section 177 of the Act and the Company’s articles of association (‘the Articles’):
‘.	Paul Hughes declared that by entering into the Tripartite Deed, his debt to the Company, in the amount of £75,000 would be repaid;
.	Martyn Ware declared that by entering into the Tripartite Deed, his debt to the Company, in the amount of £75,000 would be repaid’;
(7)	two tripartite deeds made on 30 November 2012 between (1) the Company (as Settlor), (2) One E Trustee Services (Cyprus) Limited (as Trustee of the Settlement) and (3) (variously) Mr Hughes or Mr Ware (described in each case as ‘the borrower’), by which
(a)	The borrower (ie Mr Hughes or Mr Ware) confirmed that he was indebted to  the Company in the sum of at least £75,000 (‘the Loan Amount’); 
(b) the borrower (ie Mr Hughes or Mr Ware) agreed with the Company that, in consideration of the borrower procuring the Trustee to undertake to pay to the Company an amount equal to the Loan amount, the Company would accept such consideration as repayment of the Loan Amount owed by the borrower to the Company; 
(c)  the borrower agreed with the Trustee that, in consideration of the Trustee entering into that undertaking to pay the Company an amount equal to the Loan Amount, the borrower would pay the Trustee an amount equal to the Loan Amount in 10 years’ time (‘the Payment Date’), plus interest;  and
(d)  the Company and the Trustee agreed that, in consideration of the Trustee releasing the Company from its obligation under the Deed of Covenant to pay to the Trustee an amount equal to the Loan Amount, the Trustee would be discharged from its obligation to pay to the Company an amount equal to the Loan amount.
131.	Again, as with Credit 1, standing back and viewing the transactions summarised in paragraph 130 of this judgment as a whole, it will be seen that the Respondents caused the Company to incur a liability of £150,000 (the covenant) out of thin air, so that it could then be ‘set off’, via the series of steps listed above, against £75,000 claimed to be owed by each of the Respondents to the Company on their respective loan accounts.  In the event, in fact more than a total of £150,000 was applied as credits against the Respondents’ loan accounts by Credit 3;  a total of £160,800 was applied. 

The Respondents’ justification for the Credits
132.	On behalf of the First Respondent, Mr Brockman described the directors’ loan accounts as part of a ‘remuneration structure’ (skeleton argument, para 8).  He argued: “the remuneration structure of the Respondents will be familiar to the Court; they drew a monthly amount which was booked to their DLAs as an interim measure.  It was never intended that these sums would be repaid.  At the year end, and following consultation with the Company’s accountants they would decide how these sums were to be treated.’
133.	I pause here to note that Credit 1 was hardly ‘at year end’.  Year end was 30 June 2012.  Credit 1 was effected on 19 April 2012 and backdated to 20 March 2012.
134.	That aside, is it open to the Respondents to claim that the Credits represented remuneration?  Mr Curl argues not. 
Were the Respondents entitled to draw remuneration?
135.	The Respondents were each registered directors.  They did not have contracts of employment with the Company.  They had discussed a PAYE package with the in house accountant but had decided against it. 
136.	The Company’s Articles imported paragraph 82 of Table A.  This provides as follows:
‘The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day.’

137.	The only ‘members resolution’ in evidence is the written resolution of 9 March 2011, quoted at paragraph 92 of this judgment. This resolution was expressly ‘for the purposes of section 175’.  There is no reference to Article 82.   
138.	That aside, it is difficult to read the resolution as determining the remuneration to which each director should be entitled.  The matters giving rise to the actual or potential conflict forming the subject matter of the written resolution were stated to be (a) the adoption by the Company of a specific EFRBS, namely, that ‘as detailed in the minutes dated 9th March 2012’, into which the Company would contribute funds or other assets for the purposes of incentivising its employees and (b) ‘the subsequent entering into of any funding (or asset contribution) arrangement in connection with the scheme’.   The EFRBS forming the subject matter of the members’ resolution is noted at paragraph 3.2 of the minutes as ‘a discretionary trust’ and whilst the Respondents were potential beneficiaries, they were not the only potential beneficiaries. Paragraph 3.2 of the board minutes of 9 March referred to in the members’ resolution makes clear that ‘neither the Board nor the Company would have power to direct the Trustee as to the manner in which it should exercise its discretions under the terms of the proposed EFRBS.’
139.	Against that backdrop, it would require a rather tortured reading of Article 82 to conclude that the members’ resolution of 9 March, of itself, ‘determined’ the remuneration that each director should be entitled to.  Given the discretionary nature of the EFRBS, the resolution cannot even be taken to be a determination of entitlement of any given director to remuneration in principle, it seems to me. Under the terms of the EFRBS settlement deed, absent any appointment in their favour, the directors might receive nothing.  The default beneficiary (absent appointment) was stated to be Cancer Research. 
140.	I was taken to no other evidence of a members’ resolution authorising the Respondents to draw remuneration.  I conclude that there was no such resolution.  Prima facie therefore, any withdrawal of remuneration by the Respondents from the Company was in breach of the Company’s articles.
141.	Mr Brockman submits that, even if there was no members resolution expressly authorising the Respondents to withdraw sums by way of remuneration, the Respondents together held 100% of the issued share capital in the Company and as such, having arranged the transactions giving rise to Credits 1, 2 and 3 must be taken to have approved of them, by way of an informal resolution by analogy of the principles established in Re Duomatic Ltd [1969] 2 Ch 365.  
142.	As rightly submitted by Mr Curl however, the Duomatic principle will only come to the aid of persons seeking to uphold a transaction if, as a substitute for a resolution at a general meeting, the shareholders had actually applied their minds to the question whether to ratify the transaction: In re Duomatic [1969] 2 Ch 365 at 373 B to C; In re Queensway Systems Ltd [2006] EWHC 2496 at paragraph 30.  Here, he argued, there was no evidence that the Respondent’s had applied their minds to the question whether to ratify the transactions in question; quite the contrary.
143.	Mr Curl submitted that in this case, there was positive evidence that the directors had considered and had decided against awarding themselves remuneration, leaving absolutely no room for Re Duomatic to come to their aid.  In this regard, Mr Curl relied upon Mr Hughes clear oral evidence that he had discussed matters with Glyn Thomas and had concluded with him ‘that I shouldn’t be paid by a service contract’, because of the PAYE implications.  I consider it a legitimate inference that a similar conclusion was reached with regard to Mr Ware.  Mr Hughes gave evidence that the Respondents also considered with Glyn Thomas the possibility of ‘some salary and some dividend’.  But eventually, in February or March 2012, the Respondents decided not to go down such paths, but to go down the Lazarus path instead. 
144.	With regard to Credit 1, the Respondents executed deeds confirming that they each owed the Company at least £220,000 on 20/3/12. They arranged for those debts to be set off against debts which they caused the Company to incur.  Whilst Mr Curl does not formally rely upon estoppel by deed for the purposes of this application, he does rely on the transactional documentation as a contemporaneous record of what took place. These transactions, he maintains, are studiously designed not to be an award of remuneration.  In the light of that, he argues that the Court should be slow to ‘read into’ such transactions a members’ blessing of the Re Duomatic variety of an award of remuneration of £220,000 each.  
145.	With regard to Credit 2, the Respondents resolved at a board meeting on 29 June 2012 to ‘set aside’ £150,000, but expressly avoided deciding what should become of it.  Other than the minute of 29 June 2012, the draft accounts referred to previously in this judgment and the bare credits applied to the Respondents loan accounts on 30 June 2012, I was taken to no documentary evidence relating to the decision to apply Credit 2.  It is difficult to read into the minute and the draft accounts a Re Duomatic decision on the part of the members to award themselves remuneration in any figure. Indeed, the notes to the draft accounts considered suggest that the sums of £440,000 and £150,000 were not being treated as remuneration.
146.	With regard to Credit 3, as with Credit 1, the Respondents executed deeds stating that they each owed the Company £75,000 as at 30 November 2012. They arranged for those debts to be ‘set off’ against debts which they caused the Company to incur.  Once again, whilst estoppel by deed is not relied upon for the purposes of this application, Mr Curl does rely on the transactional documentation as a contemporaneous record of what actually happened. Again, he submits, the transactions were studiously designed not to be an award of remuneration.  In the light of that, he argues that the Court should be slow to ‘read into’ such transactions a members’ blessing of the Re Duomatic variety of an award of remuneration of £150,000, or indeed any other sum.
147.	I accept Mr Curl’s submissions on this issue. On the evidence before me, I am not persuaded that the Respondents ever applied their minds to the question whether to ratify Credits 1, 2 and 3 as remuneration. Quite the contrary.  Their efforts were focused on extracting the monies by other means.
148.	Moreover, even if I am wrong in that conclusion, it was common ground that the Duomatic principle does not apply where the company is insolvent, or is rendered insolvent by the impugned transaction: West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.  It was also common ground that it is for the party who seeks to invoke the Duomatic principle to prove, if it be disputed, that the company was solvent at the material time: Lexi Holdings Plc (In Administration) v Shaid Luqman and others [2007] EWHC 2652 per Briggs J at para 193.  On present facts the burden is therefore on the Respondents to satisfy me on a balance of probabilities that the Company was solvent at the material times.
149.	On the evidence before me, for the reasons explored more fully below
(1)	 applying the cash flow solvency test espoused by Lewison LJ in Re Casa Estates (UK) Ltd [2014] 2 BCLC 49,  the Respondents have failed to satisfy me on a balance of probabilities that the Company was cash flow solvent at the time of Credit 1; quite the contrary, on the evidence which I have heard and read, I am satisfied that by the time of Credit 1, the Company was insolvent on a cashflow basis;
(2)	the Respondents have failed to persuade me on a balance of probabilities that the Company was cashflow solvent at the time of Credit 2; again, quite the contrary, on the evidence which I have heard and read, I am satisfied that by the time of Credit 2, the Company was insolvent on a cashflow basis; and
(3)	the Respondents have failed to persuade me on a balance of probabilities that the Company was either cashflow or balance sheet solvent by the time of Credit 3; on the evidence which I have heard and read, the Company was both cash flow and balance sheet solvent by the time of Credit 3.
150.	It follows that it is not open to the Respondents to rely upon Re Duomatic to justify Credits 1, 2 and 3.

The Company’s solvency position as at Credit 1
151.	The balance sheet solvency of the Company as at the time of Credit 1 was not in issue.  I shall therefore consider the cash-flow position.  In considering this, I remind myself of the guidance given by Lewison LJ in  Re Casa Estates (UK) Limited [2014] 2 BCLC 49 at 92.
(1)	Firstly, the cash-flow test ‘looks to the future as well as to the present… The future in question is the reasonably near future; and what is the reasonably near future will depend on all the circumstances, especially the nature of the company’s business… The test is flexible and fact sensitive..’
(2)	Secondly, cash-flow solvency or insolvency is ‘not to be ascertained by a blinkered focus on debts due at the relevant date.  Such an approach will in some cases fail to see that a momentary inability to pay is only the result of temporary illiquidity.  In other cases it will fail to see that an endemic shortage of working capital means that a company is on any commercial view insolvent, even though it may continue to pay its debts for the next few days, weeks, or even months.’
152.	With this guidance in mind, I turn to consider the evidence of the Company’s financial position as at the time of Credit 1. 
153.	By August/September 2011, the government had announced that support for solar installations would be cut with effect from December 2011.  It is noted that each director withdrew a large lump sum from the liquid assets of the Company in December 2011.  The changes announced by the government were ultimately delayed until 3 March 2012.  Less than a week before that delayed implementation date, on 29 February 2012, the Respondents engaged OneE.
154.	The First Respondent maintained that the Company was in good financial health at the time of Credit 1.  At paragraph 19 of his statement, he put the matter thus:
‘The simple fact of the matter is that at 20 March 2012 the Company was balance sheet solvent and paying its debts as and when they were due and there were funds in account.  This excludes the fact that significant stock was held at that time together with an order book which enables the Company to generate further cash.  For example, at 31 March 2012, the company held stock of £442,547 at page [25].  As a guide, the cost of a container of panels of between £80,000 to £100,000 would produce retail sales of around £450,000 because of known and established profit margins.’

155.	The First Respondent relied upon draft management accounts for the period 1 July 2011 to 31 March 2012 drawn up by his in-house accounting team on 19 April 2012. These are however merely draft figures, drawn up part way through the Company’s accounting year, and it is not entirely clear how some of the figures were arrived at.  I was not taken to any breakdown calculations showing how the profit figure of £604,630 was arrived at, for example.   Mr Thomas and his accounting team were not called as witnesses to explain these draft management accounts. All such matters affect the weight that can be placed upon them.
156.	 Moreover, as Mr Ball noted in cross examination, even if taken at face value, whilst these draft figures might support the Respondents contention that the Company was  balance sheet solvent and profitable for the period ending 31 March 2012, they do not show whether the Company remained profitable (or, I would add, cash flow solvent) as at March 2012.  Given the halving of feed in tariffs as of March 2012,  no assumptions could be made in that regard.  
157.	I also note that the Company’s profit margins had been very slim in the previous accounting year; even on the more generous feed in tariffs then available, the Company had made a profit of just £27,730 on a turnover of approximately £2 million in the year ended 30 June 2011. A halving of feed in tariffs was therefore a highly significant event for this Company. 
158.	In oral evidence the First Respondent confirmed that the sale of solar panels enjoying the benefit of these feed in tariffs was a ‘big part’ of the Company’s business, but tried play down the impact of the drop in these tariffs in March 2012 by suggesting that suppliers were adjusting their prices to allow for it. This was not mentioned in his written evidence, however.  Moreover, I was taken to no documentary evidence suggesting that the Company’s suppliers materially dropped, or even discussed with the Company materially dropping, the prices at which they sold goods to the Company on or after 3 March 2012 when the reduction in feed in tariff came into effect.  I reject the First Respondent’s evidence on this issue. I further reject his claim (at paragraph 23 of his statement) that the market ‘peaked and dipped in 2012/13 but still continued in an upward trend.’ On the evidence before me it clearly did not, and such assertions were wholly at odds with the reasons given by the  First Respondent in his email to Risen in September 2012 seeking to excuse the Company’s non payment of its invoices.
159.	I accept Mr Reed’s evidence that he was shown some management accounts in February or March 2012 ‘to support the significant company profit at that time and to support the forecast profit to 30 June 2012.’  It was no part of his role, however, to vouch or verify these figures, which were prepared by the Company’s in house management team.  From the evidence which I have heard and read, I am satisfied that Mr Reed took the figures at face value.  I am further satisfied that he was not asked to and did not consider or advise on the solvency of the Company, whether in February/March 2012 or at any other material time.
160.	I would add that neither Respondent, nor Mr Reed, suggested in their written  evidence that Mr Reed was told in February or March 2012 of the halving of  feed in tariffs which came into effect on 3 March 2012. I consider it  legitimate to conclude from their collective silence on this issue that Mr Reed was not told of this at the time. 
161.	I was also taken to no profit forecasts in evidence, although Mr Reed mentioned such forecasts in his statement.  Mr Hughes found it possible to adduce a variety of Company documents  for the purpose of this trial (including some which Mr Ball complained had not been delivered up to him as part of the books and records of the Company).  Mr  Reed was also regularly cc’d into copy documents passing between the Company and One E and so would be another source of relevant documentation. If Mr Hughes had thought that such profit forecasts would assist his case, I am sure that they would have been located.  Their absence is telling. 
162.	 I turn to consider the issue of cashflow solvency at this time. 
Non Payment of One E’s fee
163.	One E’s fee for setting up the EFRBS and the initial tax planning was £44,000 plus VAT.  By email dated 29 February 2012 (at 14.44), Glyn Thomas wrote to Mr Matthews of One E stating the ‘profits to shelter’ were £440,000 and that OneE’s fee of £44,000 plus VAT was ‘50% payable 29/02/2012 and 50% payable after 30 days (As agreed with Dominic Slattery).’

164.	By email of the same date, at 15.18, Mr Matthews of OneE responded:

‘Our fee for the planning will be £44,000 (plus VAT).  This fee relates to the Planning as detailed within the Letter of Engagement.  This fee … will be payable in two stages.  Fees of £22,000 (plus VAT) will be payable on commencement of our work.  The remaining £22,000 (plus VAT) will become due on completion of the planning.  Completion takes place when the company makes the payments to the participating employees.’

165.	On the evidence as a whole, it is clear that the Company and One E agreed the payment terms set out in Mr Matthews’ email.  I so find.  It is also clear that, in context, ‘completion of the planning’ took place on 20 March 2012, on execution of the tripartite deeds.  I so find. 
166.	The Company paid the first tranche of £26,400 by transfer on 29 February 2012.  The balancing payment, of £26,400, due on 20 March 2012, however, was not paid, and remained unpaid when the Company entered administration over a year later, in May 2013.  
167.	In his statement, Mr Hughes sought to explain this away, stating that ‘it was agreed that the remaining £22,000 would be paid at a later date’.  No documentary evidence was adduced in support of this contention however and I reject Mr Hughes’ evidence on this issue.   In cross examination, Mr Hughes volunteered another excuse for non payment, saying that the Company had been waiting for One E to supply a VAT invoice before paying and that a VAT invoice had not been supplied until July or August 2012.  The difficulty with this explanation was that the Company did not then pay the invoice in July/August 2012 when it arrived.  Mr Hughes had no real answer to this point in oral evidence.  Again, I reject his explanation. 
Late/Non payment of Crown debts
168.	By 2 March 2012, it appears that the Company had incurred a penalty for late payment of Crown debts.  By an email dated 2 March 2012 from Julie Llewellyn (a trainee accountant employed by the Company) to the Respondents and Glyn Thomas,  Ms Llewellyn wrote: 
‘Paul, Martin, Glyn,
Just to inform you that the CIS (Construction Industry Tax) return has been balanced for the period end 5/3/12.
The payment of £6590.68 is due 17/3/2012 but because this is a Saturday and the bank will not process HMRC payments on a weekend I have lined up payment for Thursday 15th March.  This is so it will not coincide with Friday payments that week for suppliers, installers, sales reps and payroll.
I have also balanced the period end PAYE return and have lined up payment for the same day.  This payment is Tax £3572 and Nat Ins £4177.86 total £7749.86 going out 15th March.
No penalties this month.
Julie Llewellyn.’
[emphasis added]
169.	By email of the same date (2 March 2012) Glyn Thomas responded to Julie
‘Well done Julie.
You are well ahead of the game by 17 days which is far better than starting things at 6.0pm on the day that the HMRC return is due.
I can sleep at night now.
Glyn’

170.	The Applicants maintain that this exchange indicates a past failure to pay Crown debts on time and seek to rely on this as an indicator of cash flow insolvency.  
171.	Taken alone, I do not consider the reference in this email exchange to earlier penalties to be an indicator of cash flow insolvency.  In context, looking at Mr Thomas’ response, it appears more likely that a penalty had been triggered in the past as a result of administrative inefficiency in getting the return in on time.
172.	The Applicants further rely, however, upon the Company’s failure to pay on time PAYE due in respect of March 2012.  This was due on or by 15 April 2012.  Initially Mr Hughes sought to dispute that there was any PAYE outstanding in respect of the year ended 6 April 2012, relying on a PAYE payment of £7,749.86 made on 15 March 2012.  That payment, however, related to sums due in respect of February 2012.  
173.	By letter dated 26 April 2012 from HMRC to the Company, it was provided: 
‘Dear Sir/madam,
PAYE payment overdue for 2011-2012
Our records show that your PAYE payment is overdue.  Please pay now’

Endorsed on the letter in manuscript is written ‘JULIE=£23,895 PAYABLE’
174.	Mr Hughes accepted in cross examination that the sum of £23,895 referred to related to PAYE. 
175.	On the evidence before me, I am satisfied that the PAYE payable in respect of March 2012 was not paid on time.  I am further satisfied that this payment was due on or about 15 April 2012 and remained outstanding as at 26 April 2012 (the date of HMRC’s letter).   Whilst it was paid some time later, this late payment, considered in the context of the evidence overall, does in my judgment evidence cashflow difficulties encountered by the Company by April 2012.

Non-Payment of Risen 1: £94,080
176.	On 13 April 2012 (6 days before Credit 1 was applied and backdated), one of the Company’s largest suppliers, Risen, raised an invoice numbered RSPN12029-2 in the sum of £94,080 (‘Risen 1’).
177.	On 13 April 2012, when Risen 1 was raised, the Company’s bank account with HSBC (‘HSBC account’) (from which such payments as were made to Risen appear to have been made) stood at £72,491.70.  The First Respondent accepted that at the date that this invoice was raised, the Company had insufficient liquidity to discharge it. 
178.	In oral evidence the First Respondent sought to shrug that off.    The invoice was not due for payment immediately, he argued.  He also stressed that, from a consignment such as that represented by Risen 1, he could generate a retail price of over £400,000.  He went on to give evidence that the Company would only place orders ‘when we needed more stock. That’s when we placed orders.’   The clear implication from his evidence was that the Company had buyers lined up for the consignment forming the subject matter of Risen 1 at the time of placing the order which gave rise to it.
179.	The bulk of Risen 1 remained unpaid over a year later however.  This is particularly troubling given Mr Hughes’ evidence that consignments were only ordered when more stock was ‘needed’.  The Company had received the goods, sold them on, but had not paid Risen for them. The First Respondent had no satisfactory explanation for this.
180.	By April 2012, the Company was clearly experiencing cashflow difficulties. It had not paid the balance of OneE’s bill.  It had failed to pay PAYE for March 2012 on time.  By 13 April 2012 it had received Risen 1 and did not have sufficient funds with which to pay it. It still did not have sufficient funds with which to pay Risen 1 in May 2012, when the invoice fell due for payment.  Instead, on 29 May 2012,  the Company negotiated 15 days extra credit for Risen 1, pushing back the payment date to 8 or 11 June 2012. Risen 1 still was not paid by the extended deadline of 8 or 11 June 2012.  The bulk of Risen 1 remained unpaid over a year later, when the Company entered into administration in May 2013. 
181.	I also note the movements on the First Respondent’s director’s loan account over this period. From the nominal ledgers relating to the Respondents’ directors loan accounts, it is clear that in April 2012, the First Respondent, who had hitherto shown little restraint in making regular cash withdrawals from the Company, first ceased his weekly withdrawals of £6,000 - and then started paying money back. The weekly withdrawals of £6,000 ceased for over two weeks between 7 April 2012 and 25 April 2012.  The First Respondent then made two payments back into the Company, of £10,000 and £4000, on 25 April and 27 April.  This pattern is in my judgment a further indicator of cashflow difficulties by April 2012.
182.	 On behalf of the First Respondent, Mr Brockman urged me simply to focus on 20 March 2012, and to consider, on a snapshot basis, what debts had fallen due and remained unpaid as at that date.  Having considered the guidance of Briggs J (as he then was) and Lewison LJ, however, I consider this to be too blinkered an approach. As confirmed by Lewison LJ in Casa Estates, cash-flow solvency or insolvency is ‘not to be ascertained by a blinkered focus on debts due at the relevant date’.  The cash flow test looks to the ‘reasonably near future’ as well as to the present.  In the context of this Company, I am satisfied that the ‘reasonably near future’ should be taken to embrace April 2012.  By April 2012, the Company clearly had cashflow difficulties and was robbing Peter to pay Paul. Trusting suppliers such as Risen were delivering goods which were then being sold on by the Company but were not being paid for. Mr Hughes was actually having to pay money back into the Company to keep this dubious trading model going.  
183.	For all of these reasons, I am satisfied that the Company was cashflow insolvent as at the time of Credit 1. For the purposes of the Duomatic test, however, it suffices for me to confirm that the Respondents have failed to satisfy me on a balance of probabilities that the Company was cashflow solvent as at 20 March 2012.
184.	I would add that even if I am wrong in those conclusions, on the evidence which I have heard and read, as at 20 March 2012, the Company was at the very least of sufficiently dubious solvency for the interests of creditors to intrude.  Applying the underlying principle set out in HLC, on the evidence before me, I am satisfied that, as at 20 March 2012, there was a real risk of the Company’s creditors being left unpaid. 
185.	It follows from this conclusion that at or by 20 March 2012, in order to discharge their duties to the Company, the Respondents were required to have regard to the interests of its creditors as a whole.  There is no evidence that they did so and I conclude that they did not.  Mr Hughes’ evidence was that he had not heard of cash flow insolvency until the commencement of these proceedings.  The fact that he and the Second Respondent applied Credit 1 (which was entirely for their own benefit) shows that they preferred their own interests to those of the Company and its creditors.
186.	As the Respondents subjectively failed to have regard to the interest of the creditors as a whole, in accordance with the guidance given in HLC, it falls upon me to apply the objective test.  On the evidence which I have heard and read, I am satisfied that an intelligent and honest man in the position of a director of the company could not reasonably have believed that Credit 1 was for the benefit of the creditors as a whole. I so find. 
 
The Company’s solvency position at the time of Credit 2: 30 June 2012
187.	On behalf of the Applicants, Mr Curl submitted that the Company was on the brink of insolvency if not insolvent as at 30 June 2012.  
188.	Email correspondence in evidence suggests that at the end of May 2012, the Company remained under significant creditor pressure.  
189.	By email dated 28 May 2012 from Neil Tritschler to the Respondents and Glyn Thomas, headed ‘bank update’, for example, Mr Tritschler set out current bank balances (which totalled approximately £66,000 odd), sums clearing (roughly £20,000 odd), an update on 14 surveys in the pipeline (these being required prior to installation of solar panels), and a list of installations scheduled for May. There were only 9 such installations listed, with a total value of £50,623.  Interestingly, in relation to each of the 9, the anticipated mode of payment was set out in some detail in the summary led (eg ‘Expected to pay by Cheque’, or ‘Confirmed paying by Bank Transfer’).  This level of attention to the precise mode of payment for fairly modest sums due for each installation is a clear indication of cashflow problems. 
190.	Further evidence of cashflow pressure is contained in an email written by Glyn Thomas dated 29 May 2012.   This confirms that two significant invoices from Risen, each dating from April and each in a sum in excess of available cash funds, had fallen due for payment in May but had not been paid.  Instead, Glyn Thomas had negotiated an extension for payment of each of the two invoices.  The email of 29 May 2012 provided as follows:
‘Risen reminder
Extra 15 days credit given by Risen.  Due dates now..
Friday 08/06/2012= £94,080 (Was 25/05/2012 -250w container one)
Monday 11/06/2012 = £94,080 due (was 28/05/2012- 250w container two)….’

191.	Only one of these two outstanding Risen invoices (both of which dated from April) was ever paid in full.  Even then, it was paid late (on 18 June 2012).  The timing of its payment (which went hand in hand with the Company placing two further orders with Risen) suggests that the payment was a quid pro quo of Risen accepting any further orders from the Company. 
192.	An email sent by Glyn Thomas to Risen on 18 June 2012 opened ‘Please find attached HSBC confirmation of GBP 94,080 payment to Risen Energy Co Ltd made today. This is payment of invoice RSPN12029-1’.  Attaching proof of payment in this way is a clear indication that by then, payment had become an issue.  
193.	By this email of 18 June 2012, Mr Thomas went on to place further orders with Risen for two more consignments, adding that the Company ‘would like to receive delivery of these two containers as quickly as possible.’  The reference to the Company requiring the containers ‘as quickly as possible’, coupled with Mr Hughes’ evidence that the Company only ordered stock when it needed it, again suggests that the Company had forward sales lined up for these two consignments. 
194.	On 20 June 2012, Risen presented two invoices in respect of the consignments ordered by the Company on 18 June 2012.  These were invoice number RSPN12159-1 in the sum of £83,311.20 (‘Risen 2’) and invoice number RSPN12088-8 in the sum of £89,040 (‘Risen 3’).  
195.	Risen 2 and Risen 3 were never paid. They remained unpaid at the date of administration in May 2013. Whilst not due as at 30 June 2012, these were two substantial invoices in the pipeline on that date.
196.	Moreover as at 30 June 2012, Risen 1 (invoice number RSPN12029-2, in the sum of £94,080) was outstanding in full.  This had originally fallen due for payment in May 2012.  The negotiated extension of credit referred to in Glyn Thomas’s email of 29 May 2012 (to 8 or 11 June) had also come and gone.  It remained unpaid as at 30 June 2012 – notwithstanding the fact that, for the whole of May and June 2012, Mr Hughes and Mr Ware extracted £6,000 a week each from the Company’s cash funds for themselves, logging such withdrawals to their directors’ loan accounts.
197.	On 20 June 2012, the HSBC bank account had a balance of £64,927.53.  This was an insufficient cash balance from which to pay Risen 1 (which by then was due), let alone Risen 2 and Risen 3 which, whilst not yet due, would need to be accounted for in the near future.
198.	On behalf of the First Respondent, Mr Brockman argued that the Company enjoyed a healthy financial position as at 30 June 2012.  He relied upon the draft accounts for the Company for the year ending 30 June 2012.  According to these draft accounts
(a)	Sales were £6.9 million (£1.9m in 2011);
(b)	Profit before tax stood at £95,793 (£27,730 in 2011);
 c)	The Company had £24,551 in its bank account (£93,851 in 2011);
 (d)	The Company was balance sheet solvent with net assets of approximately £98,000 (£27,837 in 2011).
199.	These draft accounts, however, were simply work in progress. It is clear from the evidence given by Mr Reed that work on these accounts was never finalised.  They also raise a number of questions; such as how stock values stood at £380,128 (2012) compared to £10,113 (2011) (a multiple of over 30) against the backdrop of a lift in turnover from £1.9m to £6.9m (a multiple of less than 6).  It was largely this stock value that kept the balance sheet solvent as far as the draft figures were concerned.  
200.	There are also some marked disparities between the print outs from the company’s books and records as at 29 June 2012 in evidence and the figures set out in the draft accounts (printed out on 29 August 2012) for the year ending 30 June 2012.  Inevitably there will always be some year end and policy adjustments in any set of accounts and there may well be sensible explanations for all such matters. Regrettably, however, Glyn Thomas was not called as a witness, notwithstanding the fact that it was said that he and his accounting team at the Company dealt with day to day accounting at the Company.  None of the audit team from Broomfield and Alexander with day to day involvement in the unfinished audit of the Company’s books and records for the accounting year ending 30 June 2012 was called either.  Mr Reed was called, but it was clear from both his written and oral evidence that he did not play a day to day part in the unfinished audit process and was not told of the Company’s cashflow and trading difficulties until March 2013.  
201.	I also remind myself that neither Respondent completed a statement of affairs in this case.  Neither had a reasonable excuse for this failure.
202.	Against that backdrop, I have come to the conclusion that I should view the draft accounts for the year ended 30 June 2012 with some caution.  This affects the weight that I can place upon them.
203.	Moreover, regardless of the true balance sheet position of this company as at 30 June 2012, on the evidence which I have heard and read, I am satisfied that the Company was at the very least cashflow insolvent as at 30 June 2012.
204.	The emails of late May referred to in Paragraph 189 and 190 demonstrate cashflow difficulties.  In addition, by 30 June 2012, Risen 1 remained outstanding; the extended deadline for payment of Risen 1 (of 8 or 11 June 2012) had not been met and as at 30 June 2012 there was clearly insufficient money in the Company’s bank account to pay Risen 1.  Indeed, instead of paying Risen 1 as agreed,  the Company had incurred further debt to Risen, in the form of Risen 2 and Risen 3, each dated 20 June 2012.  The bulk of Risen 1, together with the entirety of Risen 2 and 3, remained unpaid as at the date of the Company’s later entry into administration in May 2013, almost a year later.  The Company had the stock and did not pay for it.  
205.	Other debts also went unpaid.  The balance of One E’s fee, which fell due on 20 March 2012, for example, remained unpaid as at 30 June 2012. 
206.	There was disputed evidence as to whether CIS payments were also overdue as at 30 June 2012.  Even proceeding on the basis that some or all of the CIS payments were made on their due dates over this period, however, the failure to pay a key supplier (Risen), whilst enjoying the benefit of its stock, speaks for itself. 
207.	 Overall, on the evidence before me, applying the approach adopted by Lewison LJ in Re Casa Estates, I am satisfied that the Company was cash flow insolvent as at 30 June 2012. For the purposes of the Duomatic test, however, it suffices for me to confirm that the Respondents have failed to satisfy me on a balance of probabilities that the Company was cashflow solvent as at 30 June 2012.
208.	Even if I am wrong in those conclusions, on the evidence which I have heard and read, as at 30 June 2012, the Company was, at the very least, of sufficiently dubious solvency for the interests of creditors to intrude.  Applying the underlying principle set out in HLC, on the evidence before me, I am satisfied that as at 30 June 2012, there was a real risk of the Company’s creditors being left unpaid. 
209.	It follows from this conclusion that as at 30 June 2012, in order to discharge their duties to the Company, the Respondents were required to have regard to the interests of its creditors as a whole.  There is no evidence that they did so and I conclude that they did not.  The fact that the Respondents applied Credit 2 (which was entirely for their own benefit) shows that they preferred their own interests to those of the Company and its creditors.
210.	As the Respondents subjectively failed to have regard to the interest of the creditors as a whole, in accordance with the guidance given in HLC, it falls upon me to apply the objective test.  I would add that, even if I am wrong in concluding that the Respondents subjectively failed to have regard to the interests of the creditors as a whole at this stage, it is clear that they unreasonably (without objective justification) failed to take proper account of the very material interests of a large creditor, Risen, thereby triggering the third exception in Re HLC at para 92(c).  Either way, therefore, the objective test applies.  
211.	On the evidence which I have heard and read, I am satisfied that an intelligent and honest man in the position of a director of the company could not reasonably have believed that Credit 2 was for the benefit of the creditors as a whole. I so find. 

Credit 3: December 2012
212.	On day two of the trial, during the course of his cross examination, the First Respondent conceded that Credit 3 could not be justified.  He was right to concede this.  
213.	The TasBooks management accounts in respect of the Company record that in July and August 2012, the Company suffered losses of £46,698 and £104,998 respectively and that by 31 August 2012 the Company had net current liabilities of £69,694.  These figures were set out in Mr Ball’s written evidence and were not challenged, save that the First Respondent claimed that the Company was balance sheet insolvent ‘by September’ rather than by the end of August.  Little turns on that.
214.	The First Respondent stopped withdrawing £6,000 per week and logging it to his director’s loan account from August 2012 to December 2012. At the end of August 2012 Mr Ware, too, stopped withdrawing £6,000 a week and in fact paid £6,000 back in September 2012.  This was unprecedented on his part. From October 2012 until the beginning of December 2012 his withdrawals were reduced to £1,000 per week for the most part. This was a significant change in the pattern of withdrawals by both Respondents and started in each case in August.
215.	On 26 September 2012, Mr Hughes wrote personally to Daniel Zou of Risen, apologising for the Company’s failure to pay Risen’s outstanding invoices, which by then included the lion’s share of Risen 1, Risen 2 in full and Risen 3 in full.  His email read as follows:
‘Hi Daniel
Please can you accept my sincere apologies for the situation that has been created by us
Many PV companies in the UK are going out of business at present because of the lack of clarity on the new Greendeal initiative.
As I have explained we want to stay in business and trade our way out of this.
[he then put forward a payment plan for outstanding invoices spanning into the future as far as July 2013]
His email concludes ‘Please can you also let me know if we require more panels what price it will be and how we can trade’

216.	By this time, the Company owed Risen over £266,431 for goods supplied and yet the First Respondent was still seeking to persuade Risen to part with more stock.  
217.	According to the TasBooks management accounting records for the Company, between 1 September 2012 and 28 February 2013, the Company made further losses in the sum of £682,144.  These figures were set out in Mr Ball’s written evidence and were not challenged.
218.	As at 4 December 2012, the First Respondent’s director’s loan account was overdrawn in the sum of £39,217.76 and the Second Respondent’s director’s loan account was overdrawn in the sum of £98,120.20.  The TasBook management accounts record that by 30 November 2012, the Company had net liabilities of approximately £370,003 and net liabilities of approximately £351,121.  Again, these figures were set out in Mr Ball’s written evidence and were not challenged.
219.	Against that backdrop, the Respondents effected Credit 3.  On 4 December 2012, the sums of £62,400 and £98,400 were credited to the Respondents’ respective loan accounts with the reference ‘EFRBS(3)’.  This was recorded in the profit and loss account for December 2012 as ‘pension contributions’, with the result that the Company suffered a monthly loss of £232,208. 
220.	 I have summarised earlier in this judgment the Lazarus mechanics carried out in the lead up to Credit 3.  Viewed against the backdrop of the Company’s financial state at the time, it will be seen that Credit 3, and the transactional mechanics which preceded it, were wholly indefensible. 
221.	From the board minutes of the meetings held on 26 and 29 November 2012 in the lead up to Credit 3, it is troubling to note that not only the Respondents, but also Mr Glyn Thomas, a chartered accountant, attended each one. 
222.	On the evidence which I have heard and read, I am satisfied that the Company was both cashflow and balance sheet insolvent as at the time of Credit 3. 
223.	It follows from this conclusion that at or by 4 December 2012, the Respondents were required to have regard to the interests of its creditors as a whole.  There is no evidence that they did so and I conclude that they did not.  The fact that the Respondents applied Credit 3 (which was entirely for their own benefit) shows that they preferred their own interests to those of the Company and its creditors.
224.	As the Respondents subjectively failed to have regard to the interest of the creditors as a whole, in accordance with the guidance given in HLC, it falls upon me to apply the objective test.    I do so notwithstanding Mr Hughes’ late concession regarding Credit 3 to prevent any scope for uncertainty as to the position of Mr Ware on this issue.
225.	On the evidence which I have heard and read, I am satisfied that an intelligent and honest man in the position of a director of the company could not reasonably have believed that Credit 3 was for the benefit of the creditors as a whole. I so find.

Reliance upon professional advice
226.	By his witness statement, Mr Hughes claimed that the Lazarus scheme was entered into on the advice of One E.   This does not assist him. One E made very clear, in their letter of engagement dated 27 February 2012, that (1) it was not a firm of solicitors (2) that it was not providing company or insolvency advice and (3) that such advice ought to be taken.  Indeed, the letter of engagement contained the following express warning:
‘Solvency – The Director will need to contemplate what effect the EFRBS Arrangements will have on the Company’s working capital position.
If there is or may be any question as to the Company’s solvency and/or its ability to pay its debts (within the meaning of section 123 Insolvency Act 1986) either at the time that the EFRBS Arrangements are approved or as a result of implementing the EFRBS Arrangements, then the Directors’ duty to act in the interests of the Company’s creditors may override their other duties.  Directors should seek specific advice on what actions they should take at that time’

The letter continued:
‘As mentioned earlier the Firm [One E] would be happy to recommend specialist solicitors at the Directors’ request to advise on any of the above company law considerations’.

227.	Accordingly, the Respondents were well aware that One E was not providing company or insolvency advice and that such advice ought to be taken.
228.	The First Respondent also made reference to the involvement of Mr Glyn Thomas.  Mr Glyn Thomas is notable by his absence from this trial, however.  Moreover, neither Respondent gave any persuasive evidence, written or oral, of any advice given by Mr Thomas on the issue of the cash flow of the Company, whether at the time of each of the Credits or at any other time.  If the Respondents wish to persuade the court that they reasonably relied upon the advice of their in house accountant (or any other accountant or professional adviser for that matter), it is for them to adduce clear evidence of what advice they were given and when.  
229.	The Respondents also sought to rely upon discussions with Mr Leighton Reed.  As I have previously found, however, Mr Reed was not asked to and did not advise upon the solvency of the Company at any material time; and he was kept in the dark about the Company’s trading and cashflow difficulties until March 2013.
230.	Overall, on the evidence before me I am not persuaded that the Respondents took any advice on the company or insolvency law implications of causing the Company to engage in Lazarus or to apply the Credits at any material time. As rightly noted by Mr Curl in his skeleton argument: ‘The contrast with the way the directors behaved in Re Continental (No 4) could hardly be starker.’

Quantum Meruit
231.	Mr Brockman also sought to raise a quantum meruit argument.  He submitted  that on any footing, the Respondents could not be expected to work for nothing and so would be entitled to the sums forming the subject of Credits 1 and 2 (defence of Credit 3 was abandoned) on a quantum meruit basis if nothing else.  
232.	Mr Curl submitted that the Respondents could hardly be said to have worked ‘for nothing’ given the significant sums which they each withdrew from the Company by way of ‘management fees’  in the accounting years ending 30 June 2011 and 30 June 2012 respectively.  In this regard it will be recalled that in the year ended 30 June 2011, Mr Hughes’ service company (which was wholly owned by him) had been paid management fees of £126,569 and Mr Ware was paid management fees of £132,549. In the year ended 30 June 2012, they had each received further ‘management fees’ in the sum of £161,500 respectively. 
233.	Mr Curl further submitted that in the light of Guinness Plc v Saunders [1990] 2 AC 663, it was not open to the Respondents to claim entitlement to the monies forming the subject matter of Credits 1, 2 and 3 by way of quantum meruit. 
234.	Mr Brockman relied upon a recent decision of HHJ Paul Matthews in the case of Global v Hale [2017] EWHC 2277.  There are a number of marked distinctions, however, which ultimately render Global v Hale of little assistance to Mr Brockman.
235.	The first key distinction is that, in Global v Hale, the respondent was a full time PAYE employee (paragraphs 13 and 14).  On the advice of the company accountants, Mr Hale was paid only £456 per month as an employee.  In addition, he received payments from the company intended to represent dividends on his shareholding equal to £1383 per month, giving him an annual income before tax of approximately £25,000.  It will be noted that this was a fairly modest sum overall. At the end of each financial year, the company books would be forwarded to the accountant, who would check to see if there were sufficient distributable reserves out of which to declare the dividends.  In two earlier years (2011/12 and 2012/13), the accountant had told Mr Hale that there were insufficient reserves, and the payments had been re-characterised for accounting purposes, resulting in increased payments under PAYE to Mr Hale as an employee.  The accountant had not done this in relation to the accounting year 2013/14, however, the focal point of the application.  It was in this context that the applicant (who had taken an assignment from the liquidator of the company) brought an application against Mr Hale to recover the sum of £23,511.  The application was put in three ways (para 23).  The first was a claim against Mr Hale as a member of the company because there were not sufficient distributable reserves during the year in question.  The second was a claim against Mr Hale in misfeasance for paying an unlawful dividend.  And the third was a claim against Mr Hale as a party to a transaction at an undervalue/preference.
236.	Having heard the evidence, the judge found that, at the time of signing off dividend tax vouchers asserting that each payment was an interim dividend, Mr Hale did not think he was making definitive decisions about declaring dividends.  Instead he thought that he was not making any decision at all at that stage, because it would all depend on whether there were distributable reserves at accounting year end (para 38).
237.	The judge then proceeded to consider the position on the footing that no dividend had been declared (para 44).  The judge was referred to the decision of the Court of Appeal in Craven-Ellis v Cannons Limited [1936] 2 KB 403. In Craven Ellis, the purported directors of a company (whose appointments were void for technical reasons) had, purportedly on behalf of the company, agreed, by way of an agreement under seal, a remuneration package for the plaintiff on appointing him managing director of the company.  The ‘managing director’ did the work asked of him but, as the purported directors had no authority to bind the company, the contract appointing him was void.  In allowing a claim in quantum meruit, the Court of Appeal stressed that the claim did not arise by way of inference of fact, but by way of rule of law, essentially to avoid unjust enrichment of the company, which had enjoyed the benefit of the plaintiff’s services at the expense of the plaintiff.
238.	Having considered Craven Ellis and certain other authorities, HHJ Paul Matthews concluded that a claim in quantum meruit should be allowed.  At paragraph 55 of his judgment, he put the matter as follows:
’55.	The fact that the dividend cannot be paid lawfully as a dividend is the very reason why the quantum meruit rule is needed, to prevent the unjust enrichment of the company, and in this cases its assignee, who bought the claim to recover £23,511 for £950, at the expense of the respondent, who provided the services in question.  The relevant rule of law is that, where services necessarily required are supplied on the basis that they would be paid for, and there is no other claim, the law imposes an obligation to pay a reasonable sum for them.’

239.	At paragraph 56 of his judgment the learned judge continued:
‘56.	In my judgment, that is also the present case.  In particular, the respondent’s evidence (which I accept) made clear that the idea of paying himself in dividends was a scheme advised by the accountant as a way of saving tax on salary for the work that he did.  If there had been no tax advantage there would have been no need to sign the dividend tax forms and the payments (of salary) would have been made in the usual way.  Accordingly, in causing the company to make the payments, the respondent was causing the company to satisfy its liability to pay for the services which he had provided.  In my judgment, whatever else it may be, this is not misfeasance justifying a claim under section 212’.

240.	The claim based on transaction at an undervalue was rejected as well.  The learned judge confirmed (at para 57) : ‘These were payments that were made in respect of the services provided by the respondent to the company.  I have already accepted the evidence of the respondent as to the significant work which he did for the company during the period in question, and pointed out that this scheme was entered into only because it was thought to confer tax advantages over paying salary in the normal way.  On the material I have seen, there is no question of regarding the value of the payments made as in any way overvaluing the services provided.  The value of those payments is too modest for that’.
241.	Dealing with the alternative case of preference put, the learned judge ruled that the applicant did not have title to a claim in preference, as this had not been assigned to him by the liquidator.  Accordingly that claim was dismissed as well.
242.	On behalf of the Applicant, Mr Curl argued that Global was of no assistance at all to the Respondents. The case concerned a PAYE employee and was only effectively argued one side (para 6).  Moreover, of critical importance, he argued, was that a key House of Lords authority, Guinness Plc v Saunders, had not been cited.  
243.	In the case of Guinness, the two defendants and another director of the plaintiff company, as a committee of the board of directors, agreed to pay the second defendant £5.2 million for his services in connection with a take over bid being made by the plaintiffs.  Following the successful completion of the bid, the plaintiffs paid the money.  They then claimed recovery of the money on the ground that the second defendant had received the payment in breach of his fiduciary duty as a director, having failed to disclose his interest in the agreement to the plaintiffs’ directors as required by section 317(1) of the Companies Act 1985. The plaintiffs succeeded at first instance and the second defendant lost on appeal to the Court of Appeal.  The second defendant’s further appeal to the House of Lords was dismissed.
244.	The House of Lords held that by article 91 of the plaintiffs’ articles of association, special remuneration could only be awarded to a director serving on a committee by the board of directors.  The articles did not enable the board to delegate its powers.  The power of deciding directors’ remuneration being vested in the board alone.
245.	The House of Lords further held that the second defendant was not entitled to recover any part of the sum by way of quantum meruit based on an implied contract by the plaintiffs to pay reasonable remuneration for his services, since no contract could have been entered into on behalf of the plaintiffs save by the board pursuant to article 91.  The second defendant was not entitled to recover by way of equitable allowance, since in equity, as a trustee, he had not been entitled to profit from his trust save in so far as the plaintiffs’ articles provided, and the court would not usurp the functions of the board in that regard.  Their Lordships also held that any application of section 727 CA 1985 to remunerate him without the authority of the board would  be contrary to the plaintiffs’ articles and a breach of the principles of equity; and that accordingly, the second defendant had no answer to the claim for recovery of the £5.2 million and should repay it.
246.	At page 689 of his judgment (with which Lords Keith and Brandon unqualifiedly concurred), Lord Templeman confirmed:
‘My Lords, the short answer to the quantum meruit claim based on an implied contract by Guinness to pay reasonable remuneration for services rendered is that there can be no contract by Guiness to pay special remuneration for the services of a director unless that contract is entered into by the board pursuant to article 91.  The short answer to the claim for an equitable allowance is the equitable principle which forbids a trustee to make a profit out of his trust unless the trust instrument, in this case the articles of association of Guinness, so provides.  The law cannot and equity will not amend the articles of Guinness.  The court is not entitled to usurp the functions conferred on the board by the articles.’
247.	At p.692 Lord Templeman continued:
‘Equity forbids a trustee to make a profit out of his trust.  The articles of association of Guinness relax the strict rule of equity to the extent of enabling a director to make a profit provided that the board of directors contracts on behalf of Guinness for the payment of special remuneration or decides to award special remuneration. Mr Ward did not obtain a contract or a grant from the board of directors. Equity has no power to relax its own strict rule further than and inconsistently with the express relaxation contained in the articles of association….
… Similarly, the law will not imply a contract between Guinness and Mr Ward for remuneration on a quantum meruit basis awarded by the court when the articles of association of Guinness stipulate that special remuneration for a director can only be awarded by the board.’

248.	In re Duomatic was distinguished on the grounds that there had been no sanction or ratification either by the board of directors or by the shareholders. As I have already indicated, there is no room for the rule in re Duomatic to operate on present facts either.
249.	The case of Craven-Eliis v Canons Limited [1936] 2 KB 403 was also distinguished (at page 693), on the grounds inter alia that in Craven Ellis, the plaintiff was not a director (his appointment having been void).  There was therefore
‘no conflict between his claim to remuneration and the equitable doctrine which debars a director from profiting from his fiduciary duty, and there was no obstacle to the implication of a contract between the company and the plaintiff entitling the plaintiff to claim reasonable remuneration as of right by an action in law…. In the present case Mr Ward was a director, there was a conflict between his interest and his duties, there could be no contract by Guinness for the payment of remuneration pursuant to article 91 unless the board made the contract on behalf of Guinness and there was no question of approval by directors or shareholders.’
250.	It should be noted that the decision in Guinness was reached even though their Lordships proceeded on an assumption that Mr Ward acted in good faith, believing that his services were rendered under a contract binding on the company, and that in that mistaken belief Mr Ward may have rendered services to Guinness of great value and contributed substantially to the enrichment of the shareholders of Guinness (p695 and p696). 
251.	In the courts below, the fact that the appellant had failed to disclose his interests as required by s317 CA 1985 was considered highly significant.  This was not, however, the basis of the decision in the House of Lords. 
252.	Referring to the authorities addressed in the judgment of Lord Templeman, Lord Goff continued: 
‘These indeed demonstrate that the directors of a company, like other fiduciaries, must not put themselves in a position where there is a conflict between their personal interests and their duties as fiduciaries, and are for that reason precluded from contracting with the company for their services except in circumstances authorised by the articles of association.  Similarly, just as trustees are not entitled, in the absence of an appropriate provision in the trust deed, to remuneration for their services as trustees, so directors are not entitled to remuneration for their services as directors except as provided by the articles of association.
Plainly, it would be inconsistent with this long–established principle to award remuneration in such circumstances on the basis of a quantum meruit claim.  But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered.’ 

253.	In this regard Lord Goff made reference to Phipps v Boardman [1964] 1 WLR 993, where in holding a solicitor to a trust accountable for a proportion of profits, Wilberforce J directed that a liberal allowance should be made for his work and skill.  This decision was later affirmed by the House of Lords sub nom Boardman v Phipps [1967] 2 AC 46.  
254.	At page 701 in Guinness, Lord Goff continued: 
‘Whether any such an allowance might ever be granted by a court of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exercised in such a case, which may be said to involve interference by the court in the administration of a company’s affairs when the company is not being wound up.’

255.	Viewed against the backdrop of Guinness, HHJ Paul Matthews’ decision in Global to allow a director a sum by way of quantum meruit on unjust enrichment grounds (para 55) is open to question. Even Lord Goff considered it to be inconsistent with long-established principle to allow a quantum meruit claim on such grounds in the case of a de jure director.  The only possibility that Lord Goff was prepared to countenance was an ‘equitable allowance’ in an appropriate case. Even then, he expressly reserved his position on this issue. 
256.	Craven Ellis was hardly a firm foundation for the decision in Re Global either.  In Craven Ellis, the individual benefiting from a quantum meruit award was not a de jure director.  His appointment was void. 
257.	Ultimately, however, it will be for other courts to determine the fate of Re Global.  For present purposes it suffices to state that the decision is distinguishable from present facts. In Global, the director was already a PAYE  employee who had been in receipt of a salary for a number of years prior to the events in question (paras 13 and 14).  In the present case, the Respondents did not have employment contracts and had consciously decided against the same.  
258.	Mr Brockman also sought to rely upon the case of Currencies Direct Limited v Ellis [2001] 2 BCLC 482.  This case again, however, is readily distinguishable. In Currencies Direct, no case was advanced at trial or on appeal that there was a breach of duty by Mr Ellis as a director of the company.  No reliance was placed by the company on its articles of association either (para 10).  It was also clear in the case that the directors had been paid salaries (para 11), that the judge at first instance had found that the sums in dispute (save for one small exception) had been received as remuneration, not as loans on account of salaries subsequently to be determined (paras 15 and 16) and that the board had resolved that they should be paid remuneration (para 12); that is to say, remuneration had been authorised.  This is quite distinct from the facts of the present case where, as I have found, remuneration had not been authorised as required by the Company’s articles of association and reliance on Re Duomatic is not open to the Respondents. The case ultimately rested in findings of primary fact (para 19).
259.	Having considered the reasoning of their Lordships in the case of Guinness Plc v Saunders, I am satisfied that it is not open to the Respondents to claim entitlement to the monies forming the subject matter of Credits 1, 2 and 3, or any part thereof,  by way of quantum meruit.

Conclusion
260.	On the evidence which I have heard and read, I am satisfied that in effecting Credits 1, 2 and 3, 
(1)	the Respondents acted in breach of their fiduciary duty to act in the best interests of the creditors of the Company, contrary to Section 172 of the Companies Act 2006;
(2)	the Respondents misapplied the Company’s assets for their own benefit; and
(3)	the Respondents failed to exercise  their powers for proper purposes, contrary to Section 171 of the Companies Act 2006.  
They were accordingly misfeasant for the purposes of Section 212 of the Insolvency Act 1986.
261.	In the light of my conclusions on the Applicants’ primary case, it is not necessary for me to address the secondary arguments raised.
262.	For the reasons given, I propose to make an order pursuant to Section 212 of the Insolvency Act 1986 that the Respondents do jointly and severally repay the sum of £758,020 to the Company together with interest.
263.	I shall hear submissions on interest and on any other relief sought at the handing down of this judgment.

Registrar Barber
13 December 2017