December 10th 2020

Manolete Bulletin, December 2020

Manolete Partners Plc v Dr Amir Shafik Matta and Others [2020] EWHC 2965 (Ch)

The recent decision of Deputy Judge Pat Treacy in the case of Manolete Partners PLC v Dr Amir Shafik Matta and Others [2020] EWHC 2965 (Ch) handed down on 5 November 2020 considers a director’s statutory duties and obligations as set out in the Companies Act 2006 (“CA 2006”) in respect of a Director’s Loan Account (“DLA”) which had become overdrawn over a period of time and in causing or permitting unjustified and unexplained payments made to third parties. 
Dr Amir Matta is the former sole director of Saint George Investments Holdings Ltd (“the Company”) the holding company for seven other companies each of which operated a care home in the North West of England as well as a further dormant company (“the Group”).  
Dr Matta owned 81% of the shares in the Company. His daughter owned 11% and his son owned the remaining 8%. The Company went into administration and the joint administrators were appointed on 4 October 2016. On 8 February 2019, the Company and office holder claims were assigned to Manolete. 
At the date of administration, the DLA was overdrawn by £1,365,422.64. Manolete’s case was that this sum was therefore a debt owed by Dr Matta to the Company which fell to be repaid. Following the assignment of the Company’s claims, Dr Matta was liable to pay Manolete.
The Second Respondent, Mrs Raghida Matta, is the ex-wife of Dr Matta who, between July 2015 and September 2016, received payments amounting to £17,287.68 from the Company’s payroll.  The claim against her had been comprised at the time of the hearing.
The Third Respondent, Ms Sara Matta, is the daughter of Dr Matta and also received payments from the Company’s payroll in the sum of £54,368.85 paid between March 2015 and September 2016 which Manolete claimed that she was not entitled to. The claim against her has been stood over for trial. 
The Fourth Respondent, MMJ Global Limited is a limited company with a registered address in Blackpool. Between 20 July 2015 and 28 January 2016 the Company paid the total sum of £70,000 to the Fourth Respondent. It was Manolete’s case that the Company received no consideration for those payments. 
The Claims against Dr Matta 
Manolete sought various declarations and orders that Dr Matta acted in breach of the duties he owed to the Company as a director under sections 171 to 176 of CA 2006 as a result of:  
  1. causing or permitting payments to be made to himself from the DLA, which at the time of the Company entering administration (and for a considerable time before that), had become overdrawn; and 
  2. causing or permitting unjustified and unexplained payments to be made to the Second to Fourth Respondents. In addition, such payments were claimed to have been made without a proper basis, being either transfers at an undervalue contrary to section 238 of Insolvency Act 1968 (“IA 1986”) and preferences contrary to section 239 of IA 1986.  
Turning to breaches of duty under CA 2006, it was submitted that Dr Matta acted in breach of: 
  1. His duty to act, in good faith, in a way most likely to promote the success of the Company (pursuant to s.172 CA 2006); 
  2. His duty to exercise independent judgment (pursuant to s.173 CA 2006); and
  3. His duty to exercise reasonable skill, care and diligence (pursuant to s.174 CA 2006).
Manolete argued the payments made from the DLA were quite clearly related to Dr Matta’s personal expenditure and were in no way associated with the Company’s business or for its benefit. Payments included:  
  1. The costs associated with buying a Lagoon 450 yacht where payments were made in June 2014;
  2. Payments associated with a divorce settlement also made in June 2014; 
  3. Numerous payments bearing the personal reference of “Dr Matta”, “Dr Matta Flowers” and “Matta Preston City” which is a Council Tax payment.  
As a result of Dr Matta having not repaid the DLA, HMRC imposed a section 455 tax charge of approximately £39,000.  
In a witness statement in opposition to the application in relation to the DLA, Dr Matta said the loan was taken over a period of years and was intended to be declared as a dividend. He accepted the DLA was overdrawn in the sum claimed, that he had not repaid it and the amount owed to the Company had been accumulated over a number of years. 
The Decision
Deputy Judge Treacy held that the Company directors owe clear and important duties to the companies of which they are directors, as set out in sections 171 to 176 Companies Act 2006 and that the duties are owed to the company in question, not to the shareholders. She states at [Para 31] of the judgment: - 
“Dr Matta did not dispute that the payments were made in respect of personal expenditure, nor did he submit that they were in the best interests of the Company. Dr Matta explained that he had intended to convert the DLA into dividends, but that this intention had been thwarted by the Company’s eventual administration. Dr Matta did not explain why he took no steps to deal with the longstanding indebtedness under the DLA during the period leading up to formal insolvency, but stated that he had never been advised to regularise the position with the DLA.”
She states at paragraph 34 of the judgment: - 
“I accept the submissions of Mr Channer that a director’s powers to authorise payments from a company’s funds are not granted to enable directors to pay for or fund very significant personal items of expenditure on a long term basis. I also accept that authorising such payment on a continuing basis, and taking no steps to regularise the position is a breach of duty to act in a way most likely to promote the success of the Company.”
In addressing Dr Matta’s arguments that the payments were made when the Company was in a position to afford them, Deputy Judge Treacy’s finding was that it was “not an answer” to the issue that arises under CA 2006. She accepted Manolete’s submission that by failing to regularise the situation over a period of many years (including once a tax charge had been levied on the Company as a result of the position) and as the Company’s financial position became less favourable, Dr Matta was in breach of his obligation to exercise reasonable skill, care and diligence in carrying out his duties. In addition, as at the date of the Company’s entering into administration, the loan from the Company was still outstanding. The Court held that “there is no basis not to require Dr Matta to repay it.” 
Payments to Second and Third Respondents
In relation to the claims against the Second and Third Respondents, the Court concluded that key elements of the Applicant’s case were not sufficiently established to reach a conclusion on whether the payments were TUVs of preferences within the meaning of sections 238 and 239 IA 1986 and in the context of a two hour hearing there was no ability to probe the evidence in depth. As such the court refused the applications in relation to those payments. Payments against the Second and Third Respondents to be determined at a later date by trial. 
Payments to the Fourth Respondent
As referenced above, the Company paid the Fourth Respondent in payments amounting to £70,000 between 20 July 2015 and 28 January 2016. Manolete’s claim was that those payments were a TUV and repayable to the Company by the Fourth Respondent. 
The director of the Fourth Respondent, Ayman Khalil, asserted that the payments were the refund of a “charitable donation made in a purely personal capacity on behalf of Dr Matta for the benefit of the Coptic Church in Egypt and in particular to help poor families in Egypt”. His evidence supported the position that despite the payments having been made from one company to another, they had related to a matter completely personal to Dr Matta and had nothing to do with the Company. Dr Matta said that the dealings were between him and Ayman Khalil were dealt with through his DLA.
The Court found that it was impossible to conclude that those payments were made at a time when the Company was not in a position to pay its debts and as such declined to make orders against the Fourth Respondent. The claim against the Fourth Respondent was therefore dismissed. 
However, given the time at which the payments were paid, the Court concluded that the payments were authorised by Dr Matta in breach of his duties under CA 2006 and that he is liable in respect of them under CA 2006 and thus liable to pay the unjustified and unexplained payments totalling £70,000. 
This case provides a further caution to company directors that they simply cannot use the company bank accounts to help themselves to company cash to fund their lifestyles over long periods of time, regardless of how cash rich the company is and even when the director is a major shareholder. Asserting that a company can afford to make such payments is “not an answer” and in considering whether a director has breached his statutory duties and obligations, the court will also consider the steps that have been taken to make repayments to the company to regularise the position and breach of duty by acting in a way most likely to promote the success of the company. 
If, however, the DLA remains overdrawn at the point of formal insolvency, it remains a debt due to the company and the court has made it clear that in such circumstances there is no basis not to require a director to repay it.
Tanya Barrett