In Re Bronia, ICC Judge Burton had to consider whether a director could retrospectively reclassify a director’s loan as “drawings” in order to release the director from any liability to the company. ICC Judge Burton concluded that such an approach was unacceptable.
The co-liquidators of Bronia Buchanan Associates Limited (“the Company”) requested statements that the sole director, Ms. Bronia Buchanan (“the Director”), was a debtor of the Company in the amount of 286,421, 45 £ (or any other sum the Court deemed appropriate) and that the reclassification of the sums due on the current account of the administrator on September 10, 2014 in “drawings” had no effect to release the administrator from liability towards the society.
The company was incorporated in June 2003. The director hired an accountant in 2007. The director moved to a new accounting firm, Blinkhorns, on the recommendation of the accountant. The accountant reassured the director of 2007-2010 that “everything was going well financially”But at the end of 2012, the manager received requests for unpaid tax from HMRC and it became evident that there were problems with the bookkeeping performed by the accountant. The accountant was fired and a new accountant was hired. The former accountant refused to disclose the electronic files unless a substantial payment is made. This sum was not paid and the new accountant was therefore left with incomplete files.
Blinkhorns produced the accounts for the year ending June 2013. The principal stated that she was severely pregnant and suffered from pre-eclampsia when asked to sign the accounts in March 2014. The principal admitted that she was pregnant. ‘she was unable to devote the time to considering the accounts in detail and had signed the accounts without consideration.
On August 18, 2014, HMRC demanded that £ 127,541.04 be paid within 7 days. The company was unable to respond to this request within the prescribed timeframe and the director asked it to advise a lawyer, Mr. Drew. Mr. Drew was also the principal’s husband. The Company ceased its activities in September 2014 and went into liquidation.
Mr. Drew sought professional advice from Mr. Lewis. Mr. Lewis was appointed co-liquidator of the Company on December 2, 2014 and was previously the senior partner of the partner insolvency firm in which the other co-liquidator, Mr. Bass, was a partner.
Mr. Drew’s testimony was that Mr. Lewis had informed him that the manager’s loan should be identified as drawdowns rather than loans, as it appeared to be the minimum wage the company had paid the manager.
The Director and Mr. Bess argued that, in accordance with this notice, the appropriate entries have been made in the Company’s accounts to correct the unpaid “loans” as “drawdowns” (“the Reclassification”).
Following an interview at the office of the liquidators, Mr. Bass wrote to the director on July 24, 2015 explaining that he did not consider that the reclassification accurately recorded the true nature of the payments and that, in his opinion, the director remained indebted to the company for the reclassification amount.
The manager argued that the amounts received from the company should have been recorded as wages at all times. It was argued that the annual salary received by the manager of £ 6,000 was not commensurate with that of a manager who often worked 15 hours a day for a company with an approximate annual turnover of £ 500,000, eight employees and, at one time, more than 400 customers.
The manager admitted that she should have reported the payments to HMRC as income, but sought to excuse the failure by saying that at all relevant times she had relied on the advice of professional advisers.
It was also argued that, under section 5 of the Limitation Act 1980 (“LA 1980”), all amounts constituting the reclassification amount were amounts due under contract and because each amount became due in year-end accounts from 2010. -2013, the six-year limitation period had expired when the application was filed on November 30, 2020.
ICC Judge Burton referred to the principles summarized by District Judge Kelly in his ex tempore judgment approved in Henderson & Jones Limited v Garry Patrick Price  EWHC 3276 (chapter). This judgment refers inter alia to the following statements:
- “I am convinced that whether it is strictly a shift of the burden of proof or simply an exchange of the well-established principle that a trustee is accountable for his transactions with the estate in trust, that Mr. Aslett is correct that once the liquidator proves that the relevant payment has been made, the burden of proof rests on the respondents to explain the transactions in question“- Lesley Anderson QC in Re Idessa (UK) Limited  EWHC 804;
- “In addition, people who have run the affairs of public limited companies with a high degree of informality, as in the present case, cannot seek to shirk responsibility or be judged to a lower standard than that which applies. to other administrators simply because the necessary documentation is not available.. “- Arden LJ, as she was then, in Re Mumtaz Properties Limited  EWCA Civ 610;
- “I do not consider that such periodic drawings can simply be reclassified as remuneration as and when it is appropriate for one of the beneficiaries to claim so. Or at least that cannot be done without acknowledging that the manner in which it was previously disclosed to HMRC was incorrect, with all the consequences in terms of paying additional taxes, interest and penalties that might entail.”- Snowden J in Re The Skey Wheels Group of Companies Limited  EWHC 1112.
The judge accepted Mr. Lewis’ testimony that he did not advise reclassifying the principal’s loan as “drawings”.
The judge noted the following facts:
- A file note from Blinkhorns dated March 2, 2011 indicated that the Director had been informed that the reserves were insufficient to cover the amounts that the Director had withdrawn from the Company and that the amounts owed were to be reimbursed;
- The principal acknowledged in her letter of instruction to Blinkhorns dated 28 March 2012 that the balance in her principal’s loan account was £ 83,780.96;
- The accounts closed on June 30, 2011 made express reference to the Director who owed the company £ 83,781;
- Blinkhorns expressly stated in a letter to the Director of March 27, 2014 that the Director’s loan account consisted of “sums which you have withdrawn from Bronia Buchanan Ltd in the years which have not been compensated by salary or dividends and, therefore, must be repaid“;
- The annual accounts of the Company dealt separately with the salary and dividend payments made to the Director each year;
- Taking into account the monthly payments and the official salary of the Director of £ 6,000 per annum, the Director received payments at an annual rate of approximately £ 61,000 during the period preceding the liquidation of the Company.
ICC Judge Burton said in paragraph 86:
“In my opinion, it is simply not open to a director to recreate the history and the basis on which he has historically received money from a company. As a result of Re Idessa, having established by reference to the accounts of the company that much more was paid to Ms Buchanan than was expressly recorded as salary or dividend, the burden of proof falls on Ms Buchanan to show that she had the right to receive these sums. “
The judge held that, as evidenced by the failure to declare them as such, the payments from the company’s account were not and never were intended to be wages for which the director would be liable for tax on income and national insurance. The judge also noted that no evidence had been provided that a resolution had been passed under the company’s articles of association regarding the amounts claimed to be paid through ‘drawings‘.
The judge also dismissed the director’s defense of limitation. Counsel for the applicants argued that there was no contractual period during which the loan was to be repaid and that the relevant section of LA 1980 was therefore section 6.
ICC Judge Burton held that under section 6 (2) of LA 1980, the time limit for payment did not begin to run until a demand was made by the company for that the director repay the debt. The Director made no request and the first formal request was made on March 10, 2017. The proceedings were initiated within six years of that date and, therefore, the limitation period has not expired.
The director did not dispute the quantum. As a result, the judge concluded that £ 286,421.45 was to be paid plus interest. This amount consisted of the principal’s loan account balance in addition to the amount that appeared as an unpaid liability on the principal’s drawdown ledger.
The case should serve as a clear warning that directors cannot recreate the history and basis on which they have historically received money from a company.