Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 93
CA2/08	OPINION OF LORD HODGE in the cause TAYPLAN LIMITED (IN ADMINISTRATION) Pursuers; against ALAN SMITH AND LEE SMITH (also known as LEE STOW SMITH) Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: O'Brien; Shepherd & Wedderburn LLP

Defenders: Parties

30 June 2009

[1] This is an action by Tayplan Limited ("Tayplan"), a company which is in administration, against its directors, Mr Alan Smith and Mr Lee Smith, to recover funds which it alleges they misappropriated. The defenders had legal representation until shortly before the proof but, after their solicitors withdrew from acting, they conducted the proof themselves. Mr O'Brien very properly assisted them and the court, not least by providing them with a helpful note of the matters which they required to address in their evidence in relation to the principal matters in dispute. I am very grateful to him for his assistance in this regard which enabled the defenders to focus on the main issues and allowed parties to complete their proof within a reasonable time.

[2] By interlocutor dated 15 January 2009 Lord Glennie ordained the defenders to lead at the proof. Lord Glennie also ordered parties to produce affidavits and to lodge expert reports and appointed the affidavits and reports to stand as evidence in chief, subject to any necessary supplemental questioning. The evidence at the proof therefore included affidavits of certain witnesses, whom the parties did not call to give oral evidence.

Background

[3] Tayplan was incorporated on 29 February 2000. The shareholders were the first defender, Mr Alan Smith, who was an experienced property developer, and his wife, Mrs Helen Smith, who each held fifty per cent of the shares, namely one £1 share each. The original directors were Mr Lee Smith, the second defender, and his wife, Mrs Catherine Smith. Mr Lee Smith was the company secretary. The background to the incorporation of Tayplan was as follows. Mr Alan Smith wished to retire in about 2000; he and his wife purchased a house in Beauzeville, France. But as his son, Mr Lee Smith, wished to continue in property development, Mr Alan Smith funded Tayplan as a vehicle for such development. Mr Lee Smith has been a director of Tayplan since 8 March 2000 and initially was principally responsible for the management of the company. Mr Alan Smith came out of retirement and became a director of Tayplan on 2 December 2002 after the company encountered financial problems. At the same time Mrs Catherine Smith resigned as a director of the company.

[4] Tayplan faced two principal problems; one was commercial and the other was administrative. The commercial problem comprised difficulties which the company encountered in relation to a site for the development of fifty nine houses at West Kilbride. Those difficulties included disagreements with the local planning authority over the height of buildings on phase 2 of the site, disputes with and between the local authority and Scottish Water concerning the drainage of the site, and problems with the building contractors and persons employed to market the site. The difficulties delayed the development of the site and caused Tayplan serious financial problems. As a result Mr Alan Smith made substantial loans to the company and also involved himself in the business of the company as a director from December 2002 onwards.

[5] The principal administrative problem was the failure of the defenders as directors of Tayplan to keep proper books and records of the company's business affairs and its financial position. This was principally the de facto responsibility of Mr Lee Smith but, as a director, Mr Alan Smith was also legally responsible for the preparation and preservation of such records. See section 221(5) of the Companies Act 1985.

[6] The directors of Tayplan failed to complete and lodge company accounts for the financial years ending 28 February 2004 and 2005 within ten months of the end of the relevant accounting reference periods, contrary to sections 242 and 244 of the Companies Act 1985. Accordingly, the last audited accounts for Tayplan, which were prepared by Gilmour Hamilton & Co, CA, comprised the accounts to 28 February 2003. Those accounts showed a deficit of £643,779 on the company's balance sheet. They also recorded a director's loan of £219,779 by Mr Alan Smith. That loan was stated to be unsecured, interest free and repayable on demand. Although at the start of the proof Mr Alan Smith contended that that figure understated the extent of his advances to the company, he conceded during the course of the hearing that that sum at that date should be treated as the starting point of any calculation of whether the company owed him money or, as the administrators contended, he owed money to the company. As the board of Tayplan had approved those accounts and arranged for their registration, I consider that concession to be appropriate.

[7] As a result of the inadequacy of Tayplan's financial records the company's auditors wrote a disclaimer in the 2003 accounts in the following terms:

"Because of the possible effect of the limitation in evidence available to us, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of the company's affairs as at 28 February 2003 or of its profit/(loss) for the year then ended. In all other respects, in our opinion the financial statements have been properly prepared in accordance with the Companies Act 1985. In respect alone of the limitation on our work relating to stock: we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and we were unable to determine whether proper accounting records had been maintained".

Gilmour Hamilton & Co also wrote to Tayplan's directors on 24 September 2004 to warn them of the serious inadequacy of the company's accounting records and that the company had largely ignored the requirements of PAYE legislation. They advised the directors that, to meet the requirements of the Companies Act 1985 and to avoid errors and fines, they needed to improve significantly the standard of the company's record keeping.

[8] In about May 2005 Tayplan's directors engaged PKF UK LLP ("PKF") as the company's auditors. PKF produced detailed draft accounts for the year ended 28 February 2004. Tayplan's directors never approved those accounts and it appears from their evidence that they never met with their accountants to discuss the draft accounts, notwithstanding the pressure from the company's bankers to have the accounts finalised. Those draft accounts showed a profit of £2,766 and a deficit on the balance sheet of £613,013. The loan by Mr Alan Smith was recorded as £208,194 and again was stated to be unsecured, interest free and repayable on demand. The accounts did not show any remuneration of the directors. While I accept that the directors did not approve the draft 2004 accounts, it is nonetheless significant that Tayplan's accountants had no knowledge of any service agreements between the company and its directors nor of any agreement by which the directors' loan accounts would bear interest. In the context in which the defenders averred and gave evidence that they were pressing PKF to finalise the company's 2004 accounts, their failure to disclose those documents to their accountants is striking.

[9] Tayplan eventually completed almost all of the residential development at the West Kilbride site. It also successfully developed a smaller site at Kilbarchan and invested in development sites at Johnstone and St Margaret's Road, Edinburgh, which it sold at a profit. Tayplan sold fifty eight of the fifty nine houses at West Kilbride but was not able to complete the roads within the site to the satisfaction of the local authority or to obtain from Scottish Water the financial contribution which it was seeking for the drainage which it had installed. On 31 July 2006 by interlocutor of this court, David Hill and James Stephen were appointed joint administrators of the company on the application of their bankers, The Royal Bank of Scotland plc. Mr James Stephen, one of the administrators, estimated that Tayplan owed the bank approximately £540,000 when the administrators were appointed. That sum included costs of between £150,000 and £180,000 in relation to a road bond. In addition Tayplan had unsecured creditors who had claims of about £150,000. Because of the poor quality of Tayplan's records, it was difficult for HM Revenue and Customs to submit an accurate claim.

[10] Mr Lee Smith did not co-operate with the administrators' staff, in breach of his duty under 235(2) of the Insolvency Act 1986. He delayed in providing the administrators with the company's books and papers. He informed the administrators that his father lived in France and had not been involved in the day to day affairs of the company. The latter assertion was true only in the sense that the first defender left it to the second defender to maintain the financial records of the company. Mr Lee Smith asked that all questions relating to the company be directed to him, rather than to his father. While the administrators' staff were able to contact Mr Lee Smith on his mobile phone and by email, he did not disclose his home address to them. As a result the administrators wrote to him at various addresses, including his home address, but mail addressed to him at what turned out to be his home address was returned with the assertion that the addressee was unknown. Eventually the administrators employed tracing agents to establish Mr Lee Smith's home address.

[11] Both of the defenders in their evidence were critical of the administrators and their staff; Mr Lee Smith asserted that he had co-operated with the administrators and that he had revealed his home address. I am satisfied that he did not co-operate with the administrators to the extent which he claimed. In this regard I accept the evidence of Mr James Stephen, one of the administrators, Mr Nicholas Clinton, assistant manager in BDO Stoy Hayward, and Alastair Frood, a solicitor in Shepherd & Wedderburn LLP whom the administrators instructed in this case, which was supported by contemporary documentation. I am also satisfied that the defenders did not produce a statement of affairs to the administrators, contrary to their obligation under paragraph 47 of Schedule B1 to the Insolvency Act 1986. The defenders asserted that that statement had been produced but both they and their advisers were given access to all of the company's papers in the administrators' office and did not lodge in court such a statement. I do not accept the defenders' evidence on these matters.

The administrators' claims

[12] In the summons the pursuers aver that the defenders were in breach of their fiduciary duties and seek payment of sums either as loss and damage arising from that breach or under an accounting for the benefit of unlawful payments. They have three joint and several conclusions, namely (i) for £343,855.48 with interest from 9 September 2005, (ii) for £179,500 with interest from 24 May 2006 and (iii) for £46,500 with interest from 9 May 2005. They seek payment jointly and severally on the basis that the defenders both withdrew substantial sums from Tayplan and were both responsible for the failure to keep proper accounting records and systems to protect the company's assets.

[13] The first sum mentioned above is, the pursuers aver, the balance due by Mr Alan Smith to Tayplan after allowing for the loans which he made to the company both before and after 28 February 2003. The second sum is the sum which the pursuers aver that the second defender has misappropriated from Tayplan and is net of a loan of £40,000 which he made to the company. The third sum relates to payments made to Helen Smith, to Colinton Country Cattery and to Goldacre Racing which the pursuers assert were misapplications of Tayplan's funds.

[14] In the course of preparation for proof, the defenders were able to vouch by contemporaneous documentation that they had used certain of the sums which they had withdrawn from the company's bank accounts to pay expenses incurred on behalf of Tayplan and that they had met obligations of Tayplan out of their personal funds. Counsel for the administrators conceded such items. After proof, because he was not satisfied that the defenders' evidence was credible and reliable, counsel intimated that the administrators were unable to accept their evidence of expenditure on behalf of Tayplan unless it was independently vouched.

Tayplan's financial difficulties and the making of cash payments

[15] Both Mr Alan Smith and Mr Lee Smith in their evidence explained the informal way in which they carried on Tayplan's business and the financial difficulties which the company encountered as a result of the delays in the completion of the West Kilbride development. Mr Alan Smith in particular, who returned from France almost weekly to manage the site, spoke their practice of drawing cash from the company's bank account to pay tradesmen and miscellaneous expenses associated with the development, such as funding site expenses, snagging works and kitting out show houses. When the company's bank started to dishonour its cheques, Tayplan's directors had to use personal funds to meet its liabilities.

[16] One of the problems for the defenders is that they failed to keep any cash books, ledgers or management accounts of the company to vouch Tayplan's business expenditure. Although the company had four bank accounts, there was no bank reconciliation. There were no wage records other than incomplete weekly wage sheets. It appeared that there were only very limited PAYE documents and no VAT records. The company's record keeping was so poor that its accountants had to compose its accounts by relying on Mr Lee Smith's manuscript annotations of Tayplan's bank statements. As a result the defenders were not able to vouch by management accounts and other financial records that expenditure was incurred and money withdrawn from Tayplan was used on behalf of the company.

[17] Mr Alan Smith explained in his evidence that he came out of retirement to assist his son in managing Tayplan's business in order to save his and his wife's investment in the company. He used personal funds to meet company expenditure. Tayplan purchased 164 Woodhall Road, Edinburgh, as a development prospect in February 2004 with finance from the Bank of Scotland. Unfortunately, contrary to the wishes of Tayplan's directors, the bank manager, who was responsible for Tayplan's accounts, did not create a separate facility for the Woodhall Road development but included the sums borrowed within the company's facility for the West Kilbride development. This caused Tayplan to break the terms of that facility letter, which required a prompt reduction of indebtedness, and gave rise to a crisis in the autumn of 2004 when the bank demanded an immediate and very significant reduction of the company's indebtedness. To achieve that reduction Mr Alan Smith purchased 164 Woodhall Road and also one of the houses at West Kilbride (plot 45) from Tayplan and the directors invested further sums in the company. I discuss those transactions in paragraphs [38] to [48] and [51] to [54] below. Tayplan's directors were very unhappy about the attitude which the bank manager had taken and negotiated to transfer the financing of the company to The Royal Bank of Scotland plc in November 2004. The manager in the Bank of Scotland then made some concessions and they chose to stay with that bank; but in January 2005, when they considered that the concessions had not been honoured, they moved the company's borrowings to The Royal Bank of Scotland plc.

[18] Mr Alan Smith explained that he and his son had invested significant sums in Tayplan and had reduced the company's indebtedness significantly between 2004 and the appointment of the administrators. He was aggrieved that the bank had chosen to appoint administrators when the company could have traded out of its indebtedness if the bank had supported further development proposals which Tayplan had put forward.

[19] Mr Lee Smith confirmed his father's account of the history of Tayplan. He explained the company's system of paying sub-contractors and labourers on a weekly basis and the use of cash payments after the bank stopped some of the company's cheques. He explained that he drew on the company's bank accounts to obtain cash to pay the wages and also to provide the site agent with a float for miscellaneous expenses. He described the transactions which he funded with his own money. I discuss these in more detail below. He also explained how his mother worked on sales and marketing and was reimbursed for her purchases on behalf of Tayplan.

[20] I found some of the defenders' evidence to be significantly unsatisfactory. I discuss those matters below. I am concerned by Mr Lee Smith's apparent belief of the extent to which the company's financial records could be manipulated after the event to suit the defenders' commercial interests. I am particularly disssatisfied with the defenders' evidence about the terms of Tayplan's sale of 164 Woodhall Road and also the provenance of the formal company documents on which they found certain of their claims. There was also evidence of the defenders' taking contradictory positions in English proceedings and in these proceedings on the question whether equestrian expenses were incurred on behalf of Tayplan. Mr Alastair Frood in his affidavit explained that in proceedings in England in relation to veterinary bills, the defenders had asserted that they were not personally liable as they had contracted on behalf of Tayplan. But in these proceedings Mr Alan Smith accepted that the equestrian expenditure was his personal expenditure. This behaviour is not acceptable. Nonetheless, I am prepared to accept their evidence of a course of conduct in which they both made many cash payments on behalf of the company with money which they had withdrawn in round sums from the company's bank accounts without keeping adequate records of the expenditure. I also accept that they used personal funds to pay the company's subcontractors and suppliers, particularly in 2004 when the bank stopped some of Tayplan's cheques, and that Mrs Helen Smith also used her own money to purchase furnishings and other goods for Tayplan. Their accounts of this course of conduct are consistent with each other and fit in with the context in which the defenders were seeking to restore the company's financial fortunes and to save the investment which Mr Alan Smith and his wife had made in its business.

Discussion of the disputed claims

[21] The starting point of any consideration of the administrators' claims must be the failure of Tayplan's directors to perform their statutory duty to maintain proper financial records. As a result the administrators have had to spend large sums in attempting to recreate a reasonably accurate financial picture of the company's business from the many boxes of invoices, bank statements, cheque stubs, contracts, conveyances and other documents which Mr Lee Smith produced to them. The disorganisation and informality in the company's accounting, while unlawful, might not have caused harm if Tayplan had remained solvent and its creditors had been paid. But, when insolvency occurs, the court will take a strict view of the rights of people who have sought to benefit from trading through a vehicle with limited liability while failing to perform the legal duties imposed on them in that context. They cannot be heard to complain if, through their own failures, they are not able to vouch the entitlements which they claim.

[22] In support of various claims which the defenders asserted against Tayplan the defenders founded on copy company documents which they produced to their solicitors in about April or May 2007. Mr Robert More, a solicitor who at the time worked for Drummond Miller, supported the defenders' evidence on when Mr Lee Smith gave the copies to that firm. He explained in his affidavit that someone had mislaid the copy documents in Drummond Miller's office and that he had found them in a large brown envelope in a filing cabinet in July 2007. The defenders did not have the principal documents but suggested that they would have been with Tayplan's company file, which Mr Lee Smith asserted that he had handed over to the administrators' staff in August or September 2006. Counsel for the administrators robustly challenged the authenticity of those documents. The administrators' evidence was that they had neither the principals nor copies of such documents other than the copies which the defenders had first intimated and delivered in the course of these proceedings.

[23] After the parties had completed their evidence, the defenders produced with their submission a copy of an inventory of documents which the administrators' staff had prepared of the documents contained in the boxes which Mr Lee Smith had handed over. The inventory listed in box 9 "Memorandum and Articles (provided by Miller & Bryce)". Mr Lee Smith in his submission suggested that the administrators had lied when they said that they did not have the company's file. I do not accept that assertion. First, as I explained at the time, documents produced with a written submission after the parties had completed their evidence are not admissible as evidence. Secondly, the inventory referred only to the presence of the company's Memorandum and Articles of Association and did not vouch the presence of the company's file or the disputed documents. Thirdly, the defenders have long been aware that the administrators challenged the authenticity of the copy documents and their legal and accountancy advisers, their expert witness or a representative from his office, as well as Mr Lee Smith have had access to the documents in the administrators' office; but the principals or other copies of the documents on which the defenders found have not been produced. Fourthly, the defenders in their evidence did not claim that they or their advisers had seen the principals among the administrators' papers but asserted only that the inventories recorded the existence of certain bank statements which appeared to have been mislaid. Fifthly, there was no evidence that the Tayplan directors had produced any other board minutes or written resolutions during the company's period in business. I therefore accept the evidence of the administrators that Mr Lee Smith did not give them the disputed documents with the company's papers. The only other suggestion which the defenders made was that the company's accountants, PKF, would have had the documents. But Mr Frank Paterson, the partner in PKF who provided services to Tayplan, gave evidence in which he stated that he had never seen the disputed documents.

[24] Mr Alan Smith gave evidence that, shortly after he became a director of Tayplan, he pressed his son to keep better records of the directors' and investors' entitlements in order to protect their financial interests. He said that initially thereafter Mr Lee Smith did keep better records but that he swiftly reverted to his previous informal approach to the administration of the company. Mr Lee Smith asserted that the copy documents were copies of documents which had been executed on the dates which they bore. The defenders also called as a witness Mr Warren Deighan who confirmed that Mr Lee Smith had asked him on several occasions to witness the signature of documents and that the copies of the directors' service agreements appeared to bear his signature as a witness. He was not clear precisely when he had signed the documents. He could not say with confidence that it was in 2003 but suggested that it had been several years ago, and certainly some time before the administrators commenced this action in April 2007.

[25] In the circumstances, I am satisfied on the balance of probabilities that the defenders did not create the disputed documents after the litigation was underway. But, while I do not go so far as to make any finding that the documents were produced long after the alleged events in anticipation of the litigation, I am not satisfied that the defenders have proved that the documents were executed on the dates which they bear. As I discuss in more detail below, it appears that the documents were produced at some stage in order to provide documentary vouching for claims by the directors against the company. I turn then to consider the individual documents and whether the documents have any legal effect.

(i) The directors' service agreements

[26] The defenders seek to set off claims for remuneration which they assert was due to them under written service agreements against Tayplan's demand that they repay money which they have obtained from the company. Mr Lee Smith also asserts that some of the money which he withdrew from the company were payments of his salary as a director. Those agreements, and purported written resolutions by the shareholders in which the defenders were erroneously designed as the members, bear to be dated 1 March 2003. They were among the copy documents which the defenders' solicitors lodged in process in this action but of which the principals and other copies have not been discovered.

[27] In Mr Alan Smith's service agreement, Tayplan was to pay him a salary of £68,000 which was to be payable on a monthly basis. The agreement provided that the salary was to be reviewed annually on 31 March. Any part of the salary which was not drawn was to be credited to his director's loan account which would bear interest at three per cent above the base lending rate of The Royal Bank of Scotland plc. In Mr Lee Smith's agreement, which was otherwise in the same terms, Tayplan was to pay him a salary of £60,000 per year which was to be payable on a monthly basis. The defenders claimed that Tayplan was due to pay them their entitlements under these agreements.

[28] Unfortunately for the defenders, it was clear that the agreements had never been implemented. Mr Alan Smith drew no salary from the company. In the years preceding 28 February 2003 Mr Lee Smith drew funds from Tayplan and after the end of a financial year the company, when approving its accounts, retrospectively authorised his drawings as director's remuneration. There was no evidence of such authorisation for the years which followed 1 March 2003. But Mr Lee Smith, on the advice of his accountant, Mr William Watson, completed his tax returns for the years ended 5 April 2005 and 2006 on the basis that he had received director's remuneration of only £4,700 and £4,800 respectively. This was consistent with an understanding that the system of retrospective approval of drawings, which had operated in relation to the years to 28 February 2003, was continued thereafter; because the company had not authorised Mr Lee Smith's drawings in the years after 1 March 2003, he did not declare them as his income. No account was taken of any entitlement under the alleged director's service agreement. The tax returns are not consistent with Mr Lee Smith having received remuneration of £60,000 of which the undrawn proportion was credited to his loan account. There was also no evidence that the defenders paid tax on Mr Lee Smith's drawings, on sums credited to their loan accounts for undrawn salary, or on any interest earned on their directors' loan accounts. In a letter dated 9 March 2009 to Shepherd & Wedderburn LLP, Mr Lee Smith stated that he had not paid income tax on his drawings as they had not been ratified by the company. On cross-examination he stated that after 1 March 2003 he had continued his earlier practice of drawing money from the company which he expected Tayplan to ratify retrospectively at a general meeting. It was clear that Tayplan never operated his service agreement. Mr Alan Smith said that the documents, including the service agreements, had been created to protect himself and his wife so that they would not be attacked in the event of an insolvency. He had recognised at the time that Tayplan could not afford to pay him a salary but he had wanted a record of what was due to him. He and his wife said that they would get their reward if the company succeeded.

[29] In short, there is no evidence to suggest that the company or the defenders ever implemented the directors' service agreements. Had they done so and had they credited the defenders' undrawn entitlements to the directors' loan accounts, that would have significantly exacerbated the company's insolvency. Mr Lee Smith explained in his evidence that he had obtained a style service agreement from another company with which the defenders had been involved and style company documents from the internet. He had not sought legal advice. Significantly, the defenders did not disclose the documents to the company's legal advisers or accountants who produced detailed draft accounts for Tayplan.

[30] Therefore, because the defenders have not established when the service agreements were executed and in any event because the terms of those agreements were never implemented, I am satisfied that, at best for the defenders, they did not intend that the documents should have contemporaneous legal effect. The documents were defensive documents which the defenders created to protect themselves in the context of insolvency procedures against Tayplan. Accordingly the documents do not vouch valid legal claims; they have no legal effect.

[31] The defenders advanced no other legal basis for Mr Lee Smith's drawings of £141,500. As a result, I reject Mr Lee Smith's claim for drawings of salary and his alternative claim for undrawn salary, which the defenders' independent accountant, Mr Greg W Rowand, set out in his report dated 11 February 2009. I also reject Mr Alan Smith's claim for £154,792 in respect of undrawn salary.

[32] I recognise that this has the effect that the defenders do not have a claim for reimbursement for the work they carried out on behalf of the company from 1 March 2003 onwards. On one view that is a harsh judgment and the company and its creditors are enriched to some extent by not having to give credit for their services. But as fiduciaries the defenders were under a duty to have any remuneration approved by the company and they did not do so. By their failure to keep proper financial records they have caused the administrators to incur significant costs, thereby reducing the funds available to Tayplan's creditors. Further, the latency of the documents on which they now found, and in particular the defenders' failure to disclose them to the company's accountants, is a material consideration in persuading me that I ought not to make any allowance, to the detriment of the company's creditors, for the work which they carried out in attempting to rescue Tayplan from insolvency.

(ii) The documents in relation to the directors' loan accounts

[33] The defenders also seek to argue that from 1 March 2003 they were entitled to interest on the balances in their directors' loan accounts. In his report at paragraph 4.4.9 Mr Rowand calculated that Mr Alan Smith's entitlement to interest would be in the order of £93,000 in the period between 2001 and 2006. Mr Rowand suggested that Mr Lee Smith had a small deficit on his loan account and so the issue of interest does not arise in his case.

[34] In support of an entitlement to interest on the loan accounts, the defenders found on an alleged minute of a meeting of the directors of Tayplan dated 1 March 2003 in which it is recorded that Mr Alan Smith had requested the repayment of his loan which then amounted to £219,779 and that the company was not in a financial position to do so. It recorded a resolution that the loan would remain but would bear interest, backdated to the date of the initial loan, at three per cent above the base lending rate of The Royal Bank of Scotland plc. The defenders also produced an alleged written resolution of the members of Tayplan for the purposes of section 320 of the Companies Act 1985. The resolution was ineffective as it was drafted on the basis that the defenders were the members of the company.

[35] As the defenders have failed to prove when the relevant documents were executed and as they never disclosed them to the company's lawyers or accountants, notwithstanding their potential to have a significant effect on Tayplan's financial position, I am satisfied that these documents again were latent defensive documents which had and have no legal effect.

[36] The defenders also found on a personal bond dated 24 February 2004 in which Tayplan acknowledged receipt of a loan of £50,000 from Mr Alan Smith and bound itself to pay interest on the loan at three per cent above the base lending rate of The Royal Bank of Scotland plc. It was supported by a purported written resolution also dated 24 February 2004 for the purposes of section 320 of the Companies Act 1985 which again was prepared and signed in the erroneous belief that the defenders were the members of Tayplan. While there is no dispute about the loan itself, I am again not satisfied for the same reasons as I have set out in relation to the other documents that the personal bond has any legal effect.

[37] Accordingly, I conclude that the defenders are not entitled to claim interest from Tayplan on any credit balances on their directors' loan accounts.

(iii) The purchase of 164 Woodhall Road, Edinburgh

[38] Tayplan faced a financial crisis in second half of 2004 when the Bank of Scotland sought a reduction in the company's indebtedness under its West Kilbride facility. By this time Tayplan had sold all but six of the houses at the West Kilbride site. Mr Alan Smith purchased from Tayplan the property at 164 Woodhall Road, Edinburgh, which comprised a house, stables and about seven acres of ground, in order to reduce the company's indebtedness to the bank. The company had purchased the property as a potential development site on 25 February 2004 for £1,000,000. In the missives of sale to Mr Alan Smith, in the disposition by Tayplan and in the entry in the Land Register the consideration for his purchase was stated as £1,100,000. In February 2007 the solicitors for the pursuers wrote to Messrs Holmes McKillop, the solicitors who acted for Tayplan in relation to this transaction. In a letter dated 23 February 2007 Holmes McKillop replied. In that letter they stated that they had recovered their file for the Woodhall Road transaction and confirmed that Mr Alan Smith had bought the property from the company for £1,100,000, which represented its open market value in December 2004. They explained that the purchase had been funded in part by a loan of £825,000 to Mr Alan Smith from The Mortgage Business, which was a division of the Bank of Scotland, and in part by reducing Mr Alan Smith's director's loan account by the balance of £275,000. The letter also confirmed that Mr Alan Smith paid, among other expenses, the Stamp Duty in respect of the transaction.

[39] Holmes McKillop also produced a letter from the Bank of Scotland dated 29 December 2004 which had accompanied a release of the property from their bond and floating charge. In that letter the bank described the transaction as involving the crediting of "Full proceeds of £825,000" to a specified Tayplan account. The defenders founded on the use of the words "full proceeds" as indicating that £825,000 was the true value of the transaction which the parties had agreed. But in a facsimile to the bank dated 23 December 2004, in which Holmes McKillop requested the bank to issue the letter of non-crystallisation, Mr Ian Robertson, the solicitor in charge of the transaction, confirmed that he had received written instructions from the directors to send the bank "the full proceeds of the mortgage being raised by Alan Smith over the above property". I consider that the bank's use of the expression "full proceeds" in their response to that facsimile needs to be seen in that context.

[40] Significantly, Holmes McKillop also provided what they described as "a copy of a letter signed by the two directors/shareholders resolving that this arrangement be put in place". That document, as the defenders emphasised in their evidence and submissions, was not dated and was not on headed notepaper. But it was signed and was in the following terms:

"We, Alan Smith and Lee Smith, Directors of Tayplan Limited, hereby authorise and instruct Holmes McKillop, Solicitors, Johnstone, to deliver by telegraphic transfer to the Bank of Scotland, East Kilbride, the proceeds of the sale of the property at One Hundred and Sixty Four Woodhall Road, Colinton, Edinburgh, as soon as they are received from the Mortgage Business.

We have sold the property for the price of £1,100,000 to Alan John Smith and this price will be paid as follows:

1.     The mortgage of £825,000 from the Mortgage Business

2.     The removal of a sum of £275,000 from the loan account of Alan John Smith with the Company."

This document appears to be the written instructions to which Mr Robertson referred in his facsimile to the bank of 23 December 2004.

[41] The defenders while they were legally represented had also lodged in process an affidavit by Mr Ian Robertson. At the proof the defenders sought to have this evidence excluded on the basis that he had acted for both parties in the transaction. I refused that motion. They also sought to argue that his affidavit was inadmissible as hearsay as neither party had cited him to give oral evidence and he was unable to come to court to give oral evidence at their request. Again I rejected this submission. In my opinion the affidavit is admissible evidence under section 2(1)(b) of the Civil Evidence (Scotland) Act 1988. In addition Lord Glennie's interlocutor of 15 January 2009, to which I referred in paragraph [2] above, provided that the affidavits which the parties lodged were to stand as evidence in chief.

[42] In the affidavit, Mr Robertson stated that his facsimile of 23 December 2004 had confirmed the instructions which he had received from Tayplan's directors. He described the transaction in the following terms:

"The price was to be £1.1 million. The Smiths agreed and instructed me that the difference of £275,000 would be paid to the company as a reduction in Alan's Director's loan. There is an undated mandate from Alan and Lee to this effect recording the sale of the property for the price of £1.1 million to Alan. This notes that the price was to be paid by a mortgage of £825,000 from The Mortgage Business and removal of £275,000 from the Director's Loan Account of Alan. Holmes McKillop would have prepared this mandate. Stamp duty was paid on £1.1 million."

[43] The defenders' position on the transaction was very different. Their evidence was that it had been a forced sale as the bank had required an immediate reduction in the company's indebtedness. Mr Alan Smith had been able to borrow only £825,000 on the property as, at the time, mortgage providers would not lend more than seventy five per cent of the value of such residential properties. There had been an agreement between the company, its directors and the bank that, in the context of a forced sale, the fair value of the property was £825,000. This agreement was vouched by the copy documents which they had produced (and to which I refer in the next paragraph). Mr Alan Smith explained that in the commercial world, valuation was a matter of professional opinion and a commercial man could instruct several valuers, informing them of the valuation which he sought, to see if one would provide a valuation which suited his purposes. The price stated in the Disposition was what had to be stated in order to obtain the loan of £825,000 and did not reflect the commercial reality. The documents were, he said, a means to an end to allow the agreement to be carried out. Mr Lee Smith similarly described the valuation at £1.1 million as a means to an end. In relation to the mandate or instructions, which I have quoted in paragraph [40] above, both Mr Alan Smith and Mr Lee Smith used the same formulation in their evidence. Each stated that he did not recall signing the document but acknowledged that he appeared to have signed it. Each stated that he did not accept that the document was valid and genuine as it was not on the company's notepaper, was not dated and was not witnessed.

[44] The first of the copy documents to which the defenders referred in support of their evidence about the transaction was a purported written resolution of the shareholders of Tayplan dated 24 November 2004 approving the sale under section 320 of the Companies Act 2005. Again the document erroneously stated that the defenders were the shareholders. The document was thus ineffective. The other document purported to be a minute of a meeting of Tayplan's directors on the same date which stated that all parties had agreed that the purchase price was to be £825,000. The document recorded that the directors resolved that the company would reimburse Mr Alan Smith all costs which he incurred in relation to the purchase, that the costs would be added to his director's loan account and that the company would repay the loan on demand together with interest at three per cent over the base lending rate of The Royal Bank of Scotland plc or of such other bank as he might nominate from time to time.

[45] While I am prepared to accept that the sale of 164 Woodhall Road occurred in the context in which the bank had demanded a prompt reduction of Tayplan's indebtedness by about £1 million, I do not accept the defenders' evidence that the sale was at a price of £825,000. I accept that the bank were prepared to release the security over the property in return for a cash injection of £825,000 from the new borrowing by Mr Alan Smith, which was the maximum which he could raise on the security of the property. But I do not accept the defenders' assertion that the company's solicitor, Mr Robertson, knew that that was the actual purchase price, notwithstanding the price stated in the missives and the disposition. That assertion is contradicted by the evidence in his affidavit, which the defenders' solicitors lodged in process. In relation to this transaction I find that the evidence of both Mr Alan Smith and Mr Lee Smith to be neither credible nor reliable. In their evidence the truth has been annihilated by imagination and self interest.

[46] I accept the evidence of Mr Ian Robertson in his affidavit and find that the transaction was as the mandate or instructions which I quoted in paragraph [40] above stated. Were it otherwise, the sale would have been at a substantial undervalue as Mr Alan Smith could have marketed the property shortly after taking title and could have made a profit of about twenty five per cent. It would in any event have involved a breach of section 320 of the Companies Act 1985 and would have been voidable at the instance of the company.

[47] I am satisfied that the documents on which the defenders found have no legal effect. I have already stated that they have not established in evidence when the documents were prepared. If they were contemporaneous documents, they have no legal effect as I am satisfied that they were not disclosed to the company's advisers and accountants and they contradicted the instructions which the defenders gave to Mr Robertson. They were at best a latent defensive mechanism to cover the possible insolvency of the company.

[48] Accordingly the balance on Mr Alan Smith's loan account requires to be reduced by £275,000.

(iv) The sale proceeds of Laighcartside Street, Johnstone

[49] The pursuers assert that the defenders misappropriated the free proceeds of the sale of a property which Tayplan owned in Laighcartside Street, Johnstone. In September 2005 Tayplan sold the property for £610,000. The company repaid a loan secured over the property from the free proceeds of the sale and transferred £292,539.59 to a bank account of Mr Alan Smith in Jersey. The defenders' evidence was that the money was transferred to Mr Alan Smith to reduce the company's indebtedness to him. Both defenders also gave evidence that Mr Alan Smith had had to ask his son to lend £40,000 to the company during its financial crisis in November 2004 and that Mr Lee Smith had raised the money against the security of his family home. Contemporaneous documents vouch the secured loan of £50,000 which Mr Lee Smith and his wife took out in November 2004 and the transfer of £40,000 by Mr Lee Smith to Tayplan. Mr Alan Smith explained that he was ashamed at having to ask his son to risk his home and that he repaid him at the earliest opportunity. He therefore transferred £50,000 of the proceeds of sale of the Johnstone property to Mr Lee Smith. The company's debt to Mr Lee Smith was repaid by that sum. The administrators do not dispute Mr Alan Smith's transfer of £50,000 to Mr Lee Smith and I see no reason to doubt the accuracy of the defenders' evidence that he transferred that sum to his son for the reasons which he stated.

[50] As a result, in striking a balance of sums due to and from the directors, Mr Lee Smith falls to be treated as having received £50,000 of Tayplan's money and £242,539.59 should be debited against Mr Alan Smith's loan account.

(v) Reimbursement of costs in relation to purchases from Tayplan

[51] The defenders also claim that Mr Alan Smith is entitled to be indemnified by Tayplan for the costs which he incurred in purchasing properties from the company in the financial crisis in the autumn of 2004. Mr Alan Smith purchased not only 164 Woodhall Road, Edinburgh, which I have discussed above, but also plot 45 at the West Kilbride site, which was known as 15 Hauplands Way, for which he paid £220,000. He subsequently sold the West Kilbride property for £215,000 and so suffered a capital loss of £5,000. He also paid the expenses of the purchase.

[52] In relation to the purchase of the West Kilbride property the defenders found on an alleged minute of a meeting of the directors of Tayplan dated 1 November 2004 in which the directors resolved that the company should reimburse all costs which Mr Alan Smith incurred in that purchase. In relation to the purchase of 164 Woodhall Road, Edinburgh, the defenders found on a substantially identical minute of a directors' meeting resolving to reimburse Mr Alan Smith his costs incurred in the purchase. While it is not unreasonable in the circumstances which arose in late 2004 that the directors should seek to cover Mr Alan Smith's costs in acquiring plot 45 which was then to be sold on, I am not able to give effect to the written resolutions to reimburse costs for the same reasons as I have given in relation to the other latent documents. I am prepared nonetheless to recognise the agreement to reimburse the costs of acquiring plot 45 as I think it likely that the defenders agreed that the company would do so.

[53] I am not satisfied that the defenders have proved such an agreement in relation to 164 Woodhall Road, which Mr Alan Smith acquired and retained and which had development potential in the longer term. There was no question of an immediate sale of that property and it was not marketed thereafter. Mr Alan Smith acquired the possibility of profiting from the development of that property and I see no business reason why Tayplan should have agreed to cover his costs.

[54] Accordingly I recognise as a claim against Tayplan only the costs in relation to the purchase of plot 45. Those costs include the fees and outlays of Messrs Stirling & Mair in their fee note dated 10 November 2004, which I was informed related to plot 45 although it refers to another property. Those amount to £3,400.80. It was not explained in evidence how an outlay of £198 came to be paid to Messrs Holmes McKillop for the registration fee in relation to plot 45 as Messrs Stirling & Mair charged for that. Accordingly I do not allow the sum of £198 as an expense in this context. On the other hand I consider that the costs of the secured loan and insurance of the property during the period between November 2004 and June 2005 in which Mr Alan Smith owned the property which amount to £9,478 fall to be included within the costs of purchase. Together those sums come to £12,879. I consider also that the small capital loss on the sale of the plot (£5,000) falls within the agreed reimbursement of costs in relation to its purchase. £17,879 therefore is a claim against Tayplan which falls to be included in striking a balance.

(vi) Miscellaneous expenditure

[55] The administrators also challenge many cheques drawn on the company's bank accounts in favour of Mr Alan Smith or Mr Lee Smith. In their pleadings the administrators averred that Mr Alan Smith had misappropriated £89,000 in this way and that Mr Lee Smith had misappropriated £219,500. But of that latter sum, £141,500 falls to be attributed to Mr Lee Smith's claim that he was entitled to withdraw funds from the company towards his salary due under his service agreement. I have dealt with that claim in paragraph [31] above. Accordingly, the sum initially in issue in relation to Mr Lee Smith was £78,000. The parties also dispute whether sums which the defenders paid out of their own funds may properly be attributed to expenditure on behalf of Tayplan. I deal with each defender in turn.

(a)  Mr Alan Smith

[56] Mr Alan Smith explained that while Mr Lee Smith had primary responsibility for paying wages and expenses, he also had withdrawn sums from the company in cash to pay wages of labourers on site and other site expenses. Mr Frank Paterson was aware of this practice. There were various wage sheets which Mr Lee Smith had compiled contemporaneously but it was not possible precisely to match the cash withdrawals, which were round sums, with the wage sheets. In the event, out of four cheques for £1,000 each paid between November 2003 and September 2004, the administrators accepted that £2,346.55 had been adequately vouched as wages paid. I am however prepared to accept Mr Alan Smith's evidence that the full £4,000 was used to pay weekly wages and other company expenditure, notwithstanding the defenders' inability fully to vouch the precise use of the cash withdrawals.

[57] Mr Alan Smith also claimed £39,598 as payments which he made on behalf of the company. He initially claimed £58,723 under this head but conceded that a payment of £19,126 to Holmes McKillop, solicitors, was not company expenditure. The administrators conceded that one payment of £1,600 and two payments of £1,000 had been vouched as payments to painters on site but submitted that otherwise the claims had not been vouched. I am however prepared to accept Mr Alan Smith's evidence that he made numerous payments on behalf of the company and consider that his evidence and that of Mr Lee Smith support the view that he had adopted a course of conduct in bailing out the company with his own funds. I note that the disputed items under this heading include payments to R and E Boyd for the site manager (£2,421.79) and payment to Timber Technics (£7,389.84) which were made in November 2004 when Tayplan faced a financial crisis. There was also a further payment of £602 to Neil Finlayson for gardening services. I am not prepared to accept as company expenditure the amount paid to Stirling & Mair, solicitors (£25,386) in November 2004 for the purchase of Plot 45 of the West Kilbride site or the £198 which he paid to Holmes McKillop as I have dealt with his entitlement to reimbursement of the costs of purchase in paragraphs [51] to [54] above. His entitlement under this head falls to £14,014.

[58] Mr Alan Smith also claimed that he had paid suppliers of the company (Rob Roy Homes Ltd and Howdens Kitchens) in November 2003 and December 2004 sums which totalled £26,891.32. He was able to vouch those claims which the administrators conceded.

[59] I am also prepared to accept Mr Alan Smith's claim for expenditure which he incurred on materials from suppliers such as Wickes, B & Q, Homebase, N & P Flooring, R V Woodcraft and Screwfit Direct. He was able to vouch two substantial invoices (N & P Flooring: £5,186 and R V Woodcraft: £1,100) as being expenditure on behalf of the company and the administrators conceded those items. Having regard to the nature of the suppliers and the fact that Mr Alan Smith had his principal home in France at the material time, I am prepared to accept that all of the expenditure claimed under this head was incurred on behalf of Tayplan. It amounts in total to £14,584.32. As Mr Smith had regularly to fly from and to France and travel within Scotland in order to assist his son in managing the company, I also accept his evidence that the costs which he incurred on flying, parking his car at Prestwick Airport and purchasing fuel, which include certain instances of fuel purchased for use on site which the administrators conceded, are properly to be regarded as expenditure on behalf of the company. They amount to £7,112.15, £1,883.78 and £4,006.32 respectively.

[60] I accept his evidence that he spent £9,867 on behalf of the company on the purchase of a site van and related costs. I am also prepared to accept as company expenditure the £4,700 which he paid to The Royal Bank of Scotland plc on 22 October 2004 for surveys of Tayplan's properties when he was negotiating the transfer of the company's indebtedness from the Bank of Scotland.

[61] Similarly, I accept Mr Alan Smith's evidence that £3,427.75 was incurred in purchasing materials to fit out show houses between 2003 and 2006. I accept his oral evidence in that regard which was supported by the identity of the recipients of the payments shown on his bank statements. I accept and the administrators also concede Mr Alan Smith's payment of £993.21 to Tayplan on 4 November 2004. I am also prepared to accept Mr Alan Smith's claim for £1,173.62 in relation to miscellaneous expenses such as the cutting of keys, Post Office expenses and a computer scanner, and also appliance repair expenses in the sum of £196.10. Similarly I accept his evidence that expenditure of £417.26 related to office expenditure on behalf of Tayplan.

[62] In short, I accept the general picture to which Mr Alan Smith spoke in his evidence of Tayplan encountering financial difficulties and his attempts to operate the company's business in the context of chaotic financial records and informal management practices. As the company appeared to be insolvent from at the latest March 2003 onwards, Mr Alan Smith made further advances to Tayplan and incurred expenditure on its behalf, especially in 2004 and 2005 after the financial crisis. Subject to the personal expenditure to which I refer in paragraph [76] below, there was no evidence that he used the company's resources to fund his personal expenditure on a regular basis. Having regard to the company's parlous financial state, that is not surprising when he was seeking to protect the value of his investment by attempting to allow the company to trade out of its financial difficulties. While he withdrew round sums of £5,000 or more at various times between 2003 and 2005 to reduce his loan account when he considered that Tayplan's finances were not in crisis, there was no evidence of his using the company to fund his own day to day expenditure. I observe also that the administrators conceded that he had used his own money on behalf of the company when it was vouched by documentary evidence.

[63] With some hesitation I am also prepared to accept as legitimate company expenditure the expenses of £20,030 in relation to 164 Woodhall Road incurred while Tayplan owned the property. Of that sum £10,000 was paid to the former owners of the property to purchase computer equipment which Mr Smith explained was used in Tayplan's business and £10,030 was used to fund the business of Colinton Country Cattery in order to maintain a presence on the property as an alternative to paying a security firm to guard it when people had vandalised properties nearby. I accept also that on 26 June 2006 Mr Alan Smith paid his son £4,030 towards his salary; but as Tayplan never authorised Mr Lee Smith's salary after 28 February 2003, I cannot allow that sum as a claim against the company.

(b) Mr Lee Smith

[64] I turn to Mr Lee Smith's expenditure. Between November 2003 and July 2005 he periodically withdrew sums ranging between £1,000 and £2,000 from the company's accounts in cash. There were seventeen such withdrawals, which totalled £26,000. Mr Lee Smith gave evidence that the sums were used to pay the wages of Tayplan's employees. The administrators have accepted that certain of those payments are to be attributed in whole or in part to the payment of wages as they have been able to reconcile sums withdrawn to payments due at the relevant time recorded in the company's wage sheets. Of the £26,000, the administrators calculated that the defenders had not accounted for £8,960. Mr Lee Smith however gave evidence that when he withdrew more than was immediately required for wages he left the balance of the withdrawal as a cash float for the site agent to meet miscellaneous expenses. I am prepared to accept his evidence in this regard, although there is no documentary vouching, and treat the £26,000 withdrawn as expenditure on behalf of Tayplan.

[65] Between 1 March 2003 and the administration of Tayplan, Mr Lee Smith withdrew £141,500 from the company in monthly payments of remuneration as director. I accept that during that period he worked for the company but, as I have stated in paragraph [28] above, he did not declare this income to the Inland Revenue, apparently on the basis that the company had not approved his remuneration. In view of the breaches of fiduciary duty on his part, I do not see a way of giving Mr Lee Smith any credit for his work as a director in the absence of approval of his remuneration by the company. I therefore have to treat the sum of £141,500 as misappropriated.

[66] Mr Lee Smith also claims for two payments of £6,000 each to Alexander Roofing and Roughcasting on 26 and 27 August 2004 respectively. The administrators challenged this claim and observed that the defenders had produced no documentary vouching of the recipient of the two cash withdrawals. There was documentary evidence that Alexander Roofing and Roughcasting carried out work for Tayplan and that they sought payment in cash after the bank had stopped one of Tayplan's cheques. While the documentary vouching is far from complete, I am prepared to accept the defenders' evidence on this matter and treat the £12,000 as a company expense.

[67] On 29 December 2004 Mr Lee Smith signed a company cheque for £30,000 which was payable to himself. Mr Rowand explained in his report that Mr Lee Smith accepted that the cheque should be treated as a repayment of his loan account. It therefore falls to be set against his loan account.

[68] Mr Lee Smith also claims that he paid various suppliers on behalf of Tayplan in December 2004 and January 2005 a total of £7,371.75. The alleged payees were D Flood, a painter, CCC Joiners, TLS Building Supplies and A Frew, a labourer. While there is evidence in bank statements of the payments, again there has not been documentary vouching of the payees. But, having regard to the timing of the payments, I am prepared to accept Mr Lee Smith's oral evidence that these were payments on behalf of Tayplan.

[69] Mr Lee Smith also claims £10,469.22 as expenditure which he incurred on Tayplan's behalf between July 2001 and July 2006. There was evidence that he had not claimed expenses in the years from 2001 to 2003 for which Gilmour Hamilton & Co completed company accounts. I am prepared to accept this claim as the amounts and the recipients are vouched by Mr Smith's bank statements. The identities of the recipients listed in schedule LS5 to Mr Rowand's report are consistent with the expenditure being company expenditure. While items such as petrol could equally be personal expenditure, I am prepared to accept that Mr Lee Smith regularly used his car on company business.

[70] With some hesitation I am also prepared to accept his claim for £10,728 in relation to eight payments from his bank account which he asserts were expenses on behalf of the company. Seven of the eight payments occurred in May and June 2004 and one in November 2005. In May and June 2004 three of the recipients were Makro, Homebase and B& Q and three were for unidentified subcontractors. While it is very unsatisfactory that the documentary vouching of this claim is absent, it is consistent with the course of conduct of both directors in this poorly managed company that such informality has occurred.

(c) Other payments

[71] The administrators also claim that three payments to Helen Smith, Mr Alan Smith's wife, amounting in total to £35,000 were misappropriations of Tayplan's funds. They also claim that the payment of £6,500 to Colinton Country Cattery was not a legitimate charge against the company. The third claim under this heading relates to the payment of £5,000 to Goldacre Racing and I deal with that claim in paragraph [76] below as personal expenditure by Mr Alan Smith in the calculation of sums due under the first conclusion.

[72] Both Mr Alan Smith and Mr Lee Smith gave evidence that Tayplan employed Helen Smith to market the company's properties and that she incurred expenses principally in fitting out show houses and in replacing items when purchasers wished to retain the furnishings of the houses which they acquired. I have also considered the affidavit and oral evidence of Helen Smith. She explained that she took on responsibility for organising the show houses on the West Kilbride site, arranging sales brochures and advertising the houses in the press. Mrs Smith also dealt with the snagging of a house on its completion. She worked full time for the company. She explained that there was an oral agreement that she would be paid a salary and commission on sales but that she had not received any income from Tayplan. When equipping or re-equipping a show house, Mrs Smith purchased the goods on her own account and presented the invoices to her son, Mr Lee Smith, for reimbursement. She was happy to wait until the company was able to pay her and, as a result, the receipts for outlays accumulated for a considerable time. In her affidavit she did not discuss the extent of her outgoings or the sums which she received in reimbursement from Tayplan.

[73] The company paid her £10,000 on 21 October 2003, £15,000 on 1 December 2003 and £10,000 on 19 July 2004. Documentary vouching of the expenditure said to be reimbursed was again in short supply. Mr Rowand submitted a list of payments derived from Helen Smith's American Express card between January 2003 and July 2005 amounting to £20,292 but did not identify the payees. Having regard to the oral evidence of the defenders and Mrs Smith, I am prepared to accept that the payments which she received were legitimate payments connected to Tayplan's business.

[74] Mrs Smith explained in her affidavit that she became involved in running Colinton Country Cattery in about June 2005 and that she and Mr Alan Smith continued to run the business. She was not able to identify the purpose of the payments of £6,000 and £500 by Tayplan to the cattery business in April and May 2005 respectively. Mr Alan Smith explained that the payments were for maintenance works on the property at 164 Woodhall Road while it was owned by Tayplan. He referred to an invoice for £7,000 dated 22 December 2004 from Arek Painting & Decorating which, he said, was for interior works carried out in November and December 2004 following a leak in the roof. The defenders produced a letter from Arek supporting this assertion together with the invoice. It is not clear why, if, as Mr Alan Smith asserted and Arek stated in their letter, the contractors were paid in cash while on site over six weeks, the invoice, which invited prompt payment, was presented at the end of that period. Nor is it clear why the cattery business, which Mrs Smith was not then operating, paid the cash sums rather than obtain the sums from Tayplan. While I am again concerned about the poor quality of the vouching, I am prepared to accept the defenders' oral testimony on this matter.

[75] As a result the defenders are not liable to repay any of the sums sought in the third conclusion of the summons.

Summary of financial balances

(a) Mr Alan Smith

[76] Parties agreed that the starting point for the calculation of the balances due to or by Tayplan was Mr Alan Smith's loan account at 28 February 2003. At that time the sum due by Tayplan on the loan account was £219,779. Parties agreed that since 1 March 2003 Mr Alan Smith had made three further advances to Tayplan during 2004 which amounted in aggregate to £108,523. They also agreed that between November 2003 and July 2005 the company repaid him £85,000 of his loans in tranches which were five figure sums except for one payment of £5,000. Parties also agreed that Tayplan had paid £15,618 in relation to personal expenditure on his racehorses and a further sum of £5,000 to Goldacre Racing which were not legitimate charges against the company. Mr Alan Smith has conceded further equestrian expenditure of £11,625 as personal expenditure. His personal expenditure therefore amounts to £32,243.

[77] As set out in paragraphs [26] to [32] above, I see no basis for giving Mr Alan Smith credit for a salary when Tayplan did not approve his remuneration and when the alleged service agreement had no legal effect. It is also necessary to reduce his loan account by the £275,000 contribution towards the price of 164 Woodhall Road and by the free proceeds of the sale of the Johnstone property. See paragraphs [38] to [48] above. Thereafter, I deduct from his liability the costs which he incurred in his temporary ownership of plot 45 (paragraph [54] above) and the items of miscellaneous expenditure to which I have referred (paragraphs [56] - [63] above).

[78] Tayplan's claim against Mr Alan Smith can be summarised as follows:

Opening balance on loan account (1.3.03) (£219,779) (para[76])

Further loans to Tayplan (£108,523) (para [76])

Repayments of loan £85,000 (para [76])

Personal expenditure £32,243 (para[76])

Part price of 164 Woodhall Rd set off £275,000 (para [48])

against loan account

Proceeds of Johnstone property £242,540 (para [50])

less £50,000 repayment of L Smith's loan

Reimbursement of costs on Plot 45 (£ 17,879) (para [54])

Miscellaneous expenditure on behalf of (paras [56]

Tayplan (£113,297) -[63])

Balance due by Mr Alan Smith to Tayplan £175,305

(b) Mr Lee Smith

[79] As at 1 March 2003 Mr Lee Smith did not have a director's loan account. But he appears to have thought that he did at that time and he recorded in his affidavit that in April 2004 Tayplan paid him £10,000 in partial repayment of his director's loan. As mentioned in paragraphs [49] and [50] above, on 29 November 2004 he lent £40,000 to Tayplan and Mr Alan Smith transferred £50,000 to him on 23 September 2005 from the proceeds of the Johnstone property with the intention of repaying that loan and other expenditure which Mr Lee Smith had incurred on Tayplan's behalf. I have disallowed the drawings of £141,500. See paragraphs [31] and [65] above.

[80] Tayplan's claim against Mr Lee Smith can be summarised as follows:

Opening balance on loan account at 1.3.03 Zero

"Partial repayment" of director's loan £10,000 (para [79])

Loan to Tayplan November 2004 (£40,000) (para [79])

Payment of company expenses in cash (£26,000) (para [64])

Unauthorised remuneration £141,500 (para [65])

Payment of Alexander Roughcasting (£12,000) (para [66])

Withdrawal £30,000 (para [67])

Repayment by Alan Smith with Tayplan £50,000 (para [50])

funds

Payment of suppliers (£7,372) (para [68])

Miscellaneous expenditure (£10,469) (para [69])

Further payments of suppliers (£10,728) (para [70])

Balance due by Lee Smith to Tayplan £124,931

Conclusion and postscript

[81] I therefore repel the pleas in law for the defenders and uphold the first and third pleas in law for the pursuers to the extent that I grant decree against the defenders jointly and severally for payment to the pursuers of (i) £175,305 in terms of the first conclusion and (ii) £124,931 in terms of the second conclusion of the summons. Interest is payable on those sums at the judicial rate from 5 April 2007, which was the date of citation.

[82] I found Mr Rowand's report to be very useful in giving shape to the evidence led in the proof. By contrast I have not relied on the evidence of Mr Jack Finlay, an accountant with William Watson & Co Accountants Ltd, as he did not provide independent evidence. He stated in his affidavit that he had been given the task of retrieving information which showed that Mr Alan Smith's loan account was in credit. He had concentrated on the credit items in the loan account and not the debits. As a result the exercise which he carried out was of no assistance to the court and I reject his conclusions. In fairness to him, I record that he provided advice to the defenders and had not expected to give oral evidence.