EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lady Paton Lord Bonomy Lord Brodie	[2011] CSIH 8 CA2/08 OPINION OF THE COURT delivered by LORD BRODIE in Reclaiming Motion by TAYPLAN LIMITED (IN ADMINISTRATION) Pursuers and Respondents; against ALAN SMITH AND LEE SMITH (also known as LEE STOW SMITH) Defenders and Reclaimers: _______

Pursuers and Respondents: Lake Q.C.; Shepherd & Wedderburn LLP

Defenders and Reclaimers: Parties

4 February 2011

Introduction

[1] The pursuer company, Tayplan Limited ("Tayplan"), was incorporated on 29 February 2000. Its principal business was property development. It was described during submissions before us as a "family business". 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. The original directors were Mr Lee Smith, the second defender, and his wife, Mrs Catherine Smith. The first and second defenders are father and son. The second defender was the company secretary. He became a director on 8 March 2000 and, initially at least, was principally responsible for the management of the company. The first defender became a director of Tayplan on 2 December 2002. On the same date Mrs Catherine Smith resigned.

[2] Tayplan encountered financial difficulties, exacerbated by a failure on the part of the defenders as directors of Tayplan to keep proper books and records of the company's business affairs and its financial position. It became substantially indebted to its bankers, latterly The Royal Bank of Scotland plc. On 31 July 2006, on the application of the Royal Bank, David Hill and James Stephen were appointed joint administrators of the company. As at that date Tayplan owed the bank approximately £540,000. There were unsecured creditors with claims of about £150,000. The monies owed to HM Revenue and Customs were not readily quantifiable because of the poor quality of Tayplan's records. Each of the defenders had a director's loan account.

[3] On investigating Tayplan's affairs the administrators formed the view that the defenders had misappropriated and misapplied funds belonging to the company. They accordingly brought an action against the defenders alleging breach of fiduciary duty in their capacity as directors. The administrators concluded for damages et separatim repetition of the benefit of the unlawful payments received by the defenders. The action went to proof. The Lord Ordinary was critical of the defenders. Some of their evidence, in the opinion of the Lord Ordinary, was, in part at least, significantly unsatisfactory and in relation to a particular transaction (the purchase from the company of property at 164 Woodhall Road, Edinburgh, by the first defender) neither credible nor reliable. As directors they had failed to complete and lodge company accounts for the financial years ending 28 February 2004 and 28 February 2005 within ten months of the relevant accounting reference periods, contrary to sections 222 and 224 of the Companies Act 1985, with the result that the last audited accounts prior to the appointment of the administrators on 31 July 2006 were those for the year to 28 February 2003. The defenders' accounting in respect of the subsequent period was disorganised and informal, in consequence of which the administrators required to expend large sums in attempting to recreate a reasonably accurate financial picture of the company's business. The company had largely ignored the requirements of the PAYE legislation. The Lord Ordinary found the allegation of breach of fiduciary duty to have been established.

[4] The administrators' accounting, having made allowance for sums to which they accepted the defenders were entitled, brought out the misappropriations of Tayplan's funds as totalling £343,855.48 paid to the first defender; £179,500 paid to the second defender; and £46,500 paid to third parties for purposes unconnected with the company. These were the sums sued for. Notwithstanding the view that he had taken of some of the evidence given by the defenders and the lack of documentation of their positions, the Lord Ordinary accepted that a number of payments that the administrators had impugned had in fact been made on behalf of Tayplan and therefore were to be regarded as lawful with allowance being made for them. However, on the Lord Ordinary's assessment of the evidence, the balance of the company's funds received by the first defender over what he was entitled to set off against them amounted to £175,305, and the balance of the company's funds received by the second defender over what he was entitled to set off against them amounted to £124,931. On the basis that these sums had been misappropriated by reason of breach of fiduciary duty for which both defenders, as directors of Tayplan, were responsible, in terms of his interlocutor of 30 June 2009 the Lord Ordinary granted decree against the defenders jointly and severally for payment of: (i)  £175,305; (ii)  £124,931 with interest thereon at the judicial rate of 8 per cent from 5 April 2007 being the date of citation, until payment.

[5] The defenders have reclaimed.

Submissions

Defenders and Reclaimers

[6] The defenders appeared on their own behalf, submissions being made by the second defender which were then adopted by the first defender. Before going further, we would wish to record that we found the second defender's submissions to be both clear and succinct and, for all the obvious difficulties facing party litigants in the position of the defenders, that these submissions were advanced with commendable courtesy, both towards the court and towards Mr Lake Q.C., who appeared for the pursuers and respondents.

[7] The reclaimers' attack focussed on three of the Lord Ordinary's findings, each of which had a significant impact on the amounts which the defenders were entitled to set off against their respective drawings and other appropriations from the company. The first finding (the finding on salary) was that neither the first defender nor the second defender was entitled to salary or alternative reimbursement or remuneration in respect of the work done by them on behalf of the company from 1 March 2003 onwards (Lord Ordinary's opinion paragraph 32). The second finding (the finding on loan interest) was that the first defender was not entitled to payment of interest on the amount as stated in his director's loan account (Lord Ordinary's opinion paragraphs 33 to 37). The third finding (the finding on the price of 164 Woodhall Road) was that the first defender's purchase from Tayplan of a property at 164 Woodhall Road, Edinburgh comprising a house, stables and about 7 acres of ground in 2004 was at a price of £1.1 million rather than at a price of £825,000 as had been contended for by the defenders, with the result that the outstanding balance of £275,000 due by him required to be applied to the reduction of the first defender's loan thereby reducing the sum that the first defender was entitled to set off against what he otherwise owed to the company (Lord Ordinary's opinion paragraphs 38 and 44 to 48).

[8] The reclaimers advanced five grounds of appeal. There was a certain overlap as among the grounds, as the second defender acknowledged. Nevertheless, the argument was presented in five chapters under reference to these grounds and it is accordingly convenient to deal with them each separately.

[9] Ground 1 related to the finding on salary. It was submitted that the Lord Ordinary had made no allowance for director's remuneration. This was despite the work that the defenders had carried out for the company between 1 March 2003 and 31 July 2006 and the fact that each of the defenders had entered into a Director's Service Agreement with Tayplan for employment as a development manager, the first defender at a salary of £68,000 per annum (payable monthly), the second defender at a salary of £60,000 per annum (also payable monthly). Written resolutions purporting to be of the whole members of the company had been produced resolving to employ the defenders in accordance with the Directors' Service Agreement. The Lord Ordinary had held the resolutions to be of no effect in that they went no further than recording an arrangement as between the first and second defenders, the second defender not being a member of the company. The requirement of regulation 82 of Table A, which applied to Tayplan, was therefore not met. However, submitted the reclaimers, not only was this to enrich the company at the defenders' expense, but it was to ignore the principle to be derived from In re. Duomatic Ltd [1969] 2 Ch 365. This was a family business in which the other shareholder, Mrs Helen Smith, was involved. She had been called as a witness at the proof. She had not said that she did not know about the director's salaries. She could be taken to have assented to the payment of salaries in terms of the Directors' Service Agreements and, notwithstanding any informality in expressing it, her assent, together with that of the first defender should be regarded as being as binding on the company as a resolution in general meeting. That was the effect of the Duomatic principle.

[10] Ground 2 related to the finding on salary, the finding on loan interest and the finding on the price of 164 Woodhall Road. The reclaimers did not argue that the Lord Ordinary had misrepresented the evidence which had been led at proof but, they submitted, he had erred in not giving effect to the documentation supporting the impugned transactions (which the Lord Ordinary had accepted had not simply been created long after the relevant events in anticipation of litigation) by reason of his failure to have regard to the terms of Tayplan's Articles of Association and, in particular, article 17 and 19a of the articles specific to Tayplan and regulations 85, 86 and 92 of Table A which, with specified exceptions, applied to the company. The effect of these articles was to allow the directors to contract with the company, provided that they disclosed their interest. No act of the directors was to be invalidated by any defect in their appointment.

[11] Ground 3 related to the finding on salary. The directors were empowered to contract with the company. The Directors' Service Agreements provided written evidence that the defenders did contract with the company for a payment of salary. In previous years the second defender's drawings had been ratified on approval of the accounts. The drawings that the second defender had made subsequent to 1 March 2003 were broadly equivalent to his contractual salary, less deductions in respect of national insurance and income tax. Had accounts been drawn up for the period subsequent to March 2003 his drawings would have been ratified by the company in general meeting, as had happened previously. The Lord Ordinary was accordingly not entitled to find that the agreements to pay salary had no legal effect. Moreover, it had been inconsistent of the Lord Ordinary on the one hand to disregard the reclaimers' entitlement to salary under the Directors' Service Agreements and yet, on the other, to allow the first defender reimbursement of the expenses that the Lord Ordinary accepted had been incurred on behalf of the company, as was provided for by his Director's Service Agreement.

[12] Ground 4 related to the finding on salary, the finding on loan interest and the finding on the price of 164 Woodhall Road. With regard to the Duomatic principle, just as it should have persuaded the Lord Ordinary of the defenders' entitlement to salary, so it should have persuaded him of their entitlement to interest on their respective loan accounts, as evidenced by the receipts, personal bonds and written resolutions which had been produced. Section 320 of the 1985 Act authorised arrangements whereby a director acquired a non-cash asset provided this was approved by resolution of the company in general meeting: Re. Duckwari plc (Number 2) [1999] Ch 268 and Micro Leisure Ltd v County Properties and Developments Ltd 1999 SC 501. The Lord Ordinary should have held that the first defender had contracted with the company for purchase of the property 164 Woodhall Road and that at a price of £825,000. Moreover section 727(1) of the 1985 Act provided that an officer of a company may be relieved of liability for inter alia breach of duty or breach of trust where he has acted honestly and reasonably: Guinness plc v Saunders [1990] 2 AC 663 at 695. Alternatively, although admittedly this point had not been argued before the Lord Ordinary, if the claim for salary as provided by the Directors' Service Agreements was rejected then the Lord Ordinary should have made allowance for the defenders' work on a quantum meruit basis. As the Lord Ordinary had appreciated, to allow the defenders no reimbursement for their extensive work on behalf of the company was a harsh judgment.

[13] Ground 5 related to the purchase of the property at 164 Woodhall Road. The second defender had taken no benefit from this transaction and yet he had been found jointly and severally liable in respect of what was said to be the shortfall in payment of the price. As far as the first defender was concerned he had provided the company with a substantial sum of cash which was a fair price for the property at the relevant time. The defenders had felt that with the reduction in bank borrowing consequential on this injection of cash they had succeeded in steering the company ship past troubled waters when, like a bolt from the blue, administrators were appointed by the bank.

Petitioners and Respondents

[14] Mr Lake for the respondents began by reminding the court that, for the reasons he gave, the Lord Ordinary had found the defenders' evidence to be unsatisfactory. The Lord Ordinary had not been prepared to find that the documents founded on in support of the defenders' claims for salary and interest were in fact contemporaneous with the dates they bore. Moreover, he found that they had not been given contemporaneous legal effect. They were defensive in nature in the sense of having been created to protect the defenders in the context of insolvency proceedings being brought against Tayplan. Mr Lake referred in particular to paragraphs 20 to 23, 30 and 34 to 36 of the Lord Ordinary's opinion. The defenders faced two obstacles to the purported transactions with Tayplan in relation to salary and loan interest being given effect: first they were not intended as real agreements; second, as fiduciaries the defenders required to obtain the approval of the company in general meeting before it could be bound to pay either salary or interest. The Duomatic principle was capable of surmounting the problem of lack of formal approval but its application was not made out on the facts of the present case. As far as the purchase of 164 Woodhall Road was concerned the only issue was what was the contract price: the £825,000 which had been handed over by the first defender or the higher sum of £1.1 million. If the latter was, on the facts, what had been contracted for then a corresponding deduction had to be made from the first defender's director's loan account. There had been two bodies of competing evidence which had been considered by the Lord Ordinary before concluding that the price had been £1.1 million. He had preferred one over the other. The matter was as short as that. No question of indemnity such as referred to in article 19(a) of the Articles of Association arose. The respondents presented no challenge to the findings by the Lord Ordinary which were favourable to the defenders. The Lord Ordinary had explained at paragraphs 52 and 53 of his opinion why he distinguished the circumstances relating to the purchase of Plot 45 at West Kilbride, from those relating to 164 Woodhall Road. No argument had been made to the Lord Ordinary linking the position on miscellaneous expenditure and that on 164 Woodhall Road.

[15] Mr Lake then turned to the grounds of appeal which he addressed in turn.

[16] As to Ground 1 and the defenders' claim for salary or other remuneration, there were the two obstacles to which Mr Lake had previously referred: absence of genuine agreement and absence of valid resolutions of the company approving the purported agreements. On the evidence the Duomatic principle had no application. It appeared from the evidence of Mrs Smith that she had not consented to the entering into of Directors' Service Contracts. As appeared from the judgment of Buckley J in In re. Duomatic Ltd supra at 372 to 373, the principle that actual consent of all members of the company to a given proposal is tantamount to their formal assent by vote in a general meeting, depends on those entitled to vote having applied their minds to the matter in question at the relevant time. What is required is consent to a proposal not simply the absence of dissent. As is demonstrated in Guinness plc v Saunders supra at 684 to 690, directors have no automatic claim for remuneration for their services, only what is provided for in the articles of the company and that depends on such approval as the articles require. Not only was no claim quantum meruit advanced before the Lord Ordinary, it could not have been advanced. Nor was there any scope, given the underlying equitable principle that forbids someone in a fiduciary position making a profit from that position, for affording relief in terms of Section 727 of the 1985 Act on the basis that the defenders acted honestly and reasonably: Guinness plc v Saunders supra at 695E to 696A, 701E and 702C.

[17] As to Ground 2 and the argument that the Lord Ordinary had failed to have regard to the Duomatic principle and the Articles of Association in holding the purported resolutions to be invalid because they had been signed by the directors rather than by the members, Duomatic did not apply on the facts. There had never been an objection based on the articles. The articles did not enable the directors to substitute their decision for that of the members. There was nothing in the articles of Tayplan which modified regulation 82 of Table A (directors shall be entitled to such remuneration as the company may by ordinary resolution determine). Nothing in article 19(a) relieved the first defender of the obligation to pay the contract price for the property at 164 Woodhall Road. Regulation 92 of Table A had no application. There was no issue over the validity of the defenders' appointment as directors. The acquisition of 164 Woodhall Road could be contrasted with the purchase of Plot 45 at the West Kilbride site discussed at paragraphs 51 and 52 of the Lord Ordinary's opinion and in respect of which the Lord Ordinary had been prepared to allow the first defender's claim for reimbursement of his costs. The West Kilbride transaction was of the nature of purchasing an item of "retail stock" in order to provide cash in the short term as opposed to the acquisition of a long term development asset which was the position in relation to 164 Woodhall Road. The Lord Ordinary's decision in relation to Plot 45 may have been unduly favourable to the first defender but it was open to the Lord Ordinary on the facts and it was not subject to a cross reclaiming motion.

[18] Ground 3 was similar to Ground 2. It concentrated on the validity of the documents which purported to be Directors' Service Agreements. The Lord Ordinary had found that they were not intended to have effect. The evidence upon which he based that conclusion was summarised in paragraph 28 of the Lord Ordinary's opinion. The first defender had drawn no salary and no salary had been credited to his loan account. There had in fact been no retrospective approval of drawings, albeit that had there been thought to have been a need for retrospective approval that would have been inconsistent with there being a binding Director's Service Agreement. The second defender submitted tax returns on the basis of not having received salary. The company had not made PAYE contributions commensurate with the salary said to be payable to the second defender.

[19] On Ground 4, Mr Lake reminded the Court of the Lord Ordinary's findings. The Duomatic principle had no application to the claim for loan interest or the finding on the price of 164 Woodhall Road. As far as loan interest was concerned, for reasons that he had set out at paragraphs 33 to 37 of his opinion, the Lord Ordinary found the documents which purported to constitute the claim to be merely latent and defensive. They had and have no legal effect. As far as the finding on the price of 164 Woodhall Road was concerned, as appeared from paragraphs 38 to 48 of his opinion, the Lord Ordinary considered two competing versions of events and preferred that of the respondents. There was ample to justify rejection of the defenders' version. While, as a matter of generality, one could have a quantum meruit claim where for some reason a contract failed, a claim for the equivalent of salary was not available to the director of a company for the reasons explained by Lord Templeman in Guinness plc v Saunders supra at 692C to G.

[20] Turning to Ground 5, Mr Lake reminded the Court that the action was one for damages as reparation where the conclusions, as supported by the first plea-in-law, were directed against the defenders jointly and severally. There was an alternative case for repetition or restitution, supported by the third plea-in-law, but the claim for damages had been made out against both defenders. Both had been involved in the administration of the company. Both were responsible for the failure to keep proper records. The various purported resolutions of the company, although ineffective, indicated that both defenders joined in the disputed transactions. It was therefore open to the Lord Ordinary to conclude that the harm suffered by Tayplan was something to which each defender had made a material contribution. A joint and several decree was accordingly entirely appropriate.

Discussion
The issues and their context

[21] The starting point to a consideration of this reclaiming motion against the interlocutor of the Lord Ordinary dated 30 June 2009 and pronounced after proof is that no challenge has been made to the Lord Ordinary's findings as to primary facts. If such a challenge had been made it would have been necessary for this court to look at all or at least a substantial part of the evidence led at the proof. That was not done because that was not the focus of the Grounds of Appeal. It is true that some very limited reference was made, in particular, to the evidence of Mrs Helen Smith for the purpose of illustrating that she had never been asked whether she knew and had agreed to the purported arrangements as to salary and loan interest, but the only criticism levelled at the Lord Ordinary in the Grounds of Appeal was that he erred in law in the ways summarised in previous paragraphs of this opinion. Accordingly, this court must proceed upon the basis of the primary facts as they were found to be by the Lord Ordinary.

[22] It was the task of the Lord Ordinary at proof to determine whether and, if so, to what extent, the defenders had a liability to make repayments to Tayplan, having regard to their appropriation of cash and other property prior to the appointment of the administrators. In carrying out that task, in order to strike such figure as might be due, it was necessary that he determine what rights the defenders had against Tayplan and, conversely, what obligations Tayplan had towards them. Some matters were conceded at the outset. For example, it was accepted by the administrators that the defenders had made loans to Tayplan which had not been repaid. The amounts owed to the defenders in respect of their loans therefore fell to be set against such claims as Tayplan had against the defenders. Other matters, although not conceded, were determined by the Lord Ordinary in the defenders' favour thereby reducing the sums which the administrators had claimed against them. However, in respect of three disputed transactions, the first in relation to salary, the second in relation to loan interest and the third in relation to the purchase of the property at 164 Woodhall Road, the Lord Ordinary found against the defenders' contentions as to the rights the transactions conferred on them and the correlative obligations that they imposed on Tayplan. For the reasons that he gave in his opinion, the Lord Ordinary found that the first transaction gave rise to no entitlement to salary, that the second transaction gave rise to no entitlement to interest and that the third transaction, while effective as a purchase of the property from Tayplan by the first defender, provided for payment of a price of £1.1 million and not for the £825,000 contended for. It is the Lord Ordinary's findings in respect of these three transactions that are attacked in this reclaiming motion. In addition, the reclaimers attack the Lord Ordinary's joint and several finding against the second defender insofar as it relates to the unpaid balance of £275,000 in respect of the purchase of 164 Woodhall Road.

[23] We shall look at these three transactions in turn and the way that they were treated by the Lord Ordinary. We shall then consider the point on joint and several liability. However, it may be useful first to note the context of the issues that the Lord Ordinary required to determine at proof. Tayplan was a company registered under the Companies Acts. In argument before us the second defender described it as a "family business" and no doubt in certain senses that is true. The only shareholders were a husband (who was also a director) and wife. Their son was a director and the company secretary. This therefore was a family enterprise from which, had it remained solvent, the family, and only the family, would have been likely to benefit, the benefit being distributed in such way as the individual family members wished. However, the vehicle through which this family chose to conduct its business was a registered company. That brought with it certain advantages, most notably the incorporation of a company with a personality distinct from its members and consequently limited liability, but also the requirement to observe certain disciplines designed to protect not only the members but also those who dealt with the company. The Lord Ordinary found that the defenders, as directors and company secretary, and therefore the persons responsible, did not observe these disciplines. In contravention of section 221 of the Companies Act 1985, they failed to keep sufficient accounting records. In contravention of sections 242 and 244 of the Act they failed to lodge accounts and reports with the registrar. It was the view of the Lord Ordinary that there was no evidence that the defenders had produced any board minutes or written resolutions during the company's period in business. Now, at proof the defenders had produced what purported to be documents recording resolutions of the company, agreements and a bond which, on their face, related to the disputed transactions but, and it is this finding which presents the reclaimers with the major obstacle to the success of their arguments, the Lord Ordinary rejected both the authenticity of the documents and the claim made by the defenders that the documents either evidenced or constituted genuine transactions. What he found was that the supposed transactions relating to salary and loan interest were never intended to have contemporaneous legal effect. Rather, the defenders had created the documents with a view to protecting their own positions in the context of insolvency procedures against Tayplan. The Lord Ordinary described these documents as "latent and defensive". Similarly, the Lord Ordinary rejected the testimony of the defenders in relation to the price of 164 Woodhall Road together with the authenticityof the documents put forward to support that testimony. Thus, when considering the submissions of the defenders and reclaimers this court must have regard to the fact that their evidence about the disputed transactions was found to be incredible and the documents that they relied on were found not to be genuine.

[24] At risk of some repetition we now turn to look at the claims made by the defenders.

Salary

[25] The law has long regarded directors of a registered company as fiduciaries for that company. In other words the relationship as between a director on the one hand, and the company, its affairs and its assets on the other, is the equivalent of the relationship as between a trustee and a trust fund. As is explained by Lord Templeman in Guinness plc v Saunders supra at 689D to 690F a consequence of this is that, prima facie, a director cannot claim remuneration for his services to the company. Lord Templeman was setting out the law of England and he did so by reference to the then current editions of two English textbooks, Palmer's Company Law and Snell's Principles of Equity but in this, as in most aspects of company law, the law of England and that of Scotland are the same. Indeed Lord Templeman vouched the proposition that, as general rule, a director cannot contract with the company because that inevitably would involve conflict as between his personal interests and his fiduciary duties, by reference to what was said in a Scottish appeal, Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq HL 461. The general rule can however be relaxed and usually will be by a provision or provisions in a company's articles of association. Thus, in the present case article 17 of the Articles of Association of Tayplan provides that no director is disqualified by his office from contracting with the company. Article 1 applies the Regulations contained in Table A, save in so far as they are excluded and regulation 82 of Table A provides that the directors shall be entitled to such remuneration as the company may by ordinary resolution determine. Therefore, in the case of Tayplan, what would have been the result of the general rule flowing from the directors' position as fiduciaries, does not apply. A director of Tayplan might receive remuneration for his services and the Lord Ordinary did not suggest otherwise. However, if the defenders as directors of Tayplan are to be entitled to remuneration, it can only be as is provided by regulation 82: the company must by ordinary resolution so determine. The reason why the Lord Ordinary rejected the first defender's claim for undrawn salary and the second defender's claim that his drawings should be attributed to salary was that he found that the company never did make a determination on directors' remuneration. The relevant passages in the Lord Ordinary's opinion are found at paragraphs 26 to 32. The defenders had put forward certain documents or copy documents including what purported to be Directors' Service Agreements and resolutions of shareholders. The Lord Ordinary was unable to find when these documents were executed but for the reasons he sets out he found that they did not constitute or evidence agreements which were intended to have effect contemporaneous with their purported dates. As appears from paragraph 28, the first defender appears to have acknowledged as much in his evidence which was to the effect 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 insolvency. The agreements were never implemented. They were not reflected in the terms of the second defender's tax or the company's PAYE returns. Indeed Tayplan's accountants had no knowledge of any Service Agreements. That there was such an agreement was inconsistent with the second defender's expectation of a need for the company to ratify his drawings at the end of the relevant accounting period. As we have already observed, none of the Lord Ordinary's findings of primary fact has been attacked in this reclaiming motion. Accordingly, it appears to us that he was fully entitled to conclude that there never was any genuine agreement to pay salary to the defenders. While the defenders pointed to the documents as proving the contrary, the Lord Ordinary rejected them as latent and defensive. This was a finding that he was to repeat in respect of other documents relied on by the defenders. What he meant was that the relevant documents, whenever executed, were meant to be kept undisclosed and only produced and relied upon in the event of the company's insolvent administration or liquidation with the object of protecting the directors in competition with the company's creditors. Put shortly, the documents were not genuine. There was never any genuine agreement as to payment of directors' remuneration.

[26] In the absence of genuine agreements with the company the defenders had no claim for contractual salary but even had the defenders entered into some sort of genuine arrangement they faced the additional difficulty that on no view did this include a determination on remuneration made by the company by way of ordinary resolution in general meeting. This was because the only documents purporting to be company resolutions on remuneration were, ex facie, no such thing, in that the second defender was designed as a member of the company when in fact he was not a shareholder.

[27] The reclaimers attempted to elide these difficulties by reference to the principle to be derived from the judgment of Buckley J in In re. Duomatic Ltd supra. That case was analogous to the present to the extent that a liquidator challenged payments to directors in name of salary in the absence of such sums ever having been voted in general meeting. Buckley J found against the liquidator on the basis that where it could be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. Mr Lake did not challenge the soundness of that proposition but submitted that it applied only where those entitled to vote had actually applied their minds to the matter in question: In re. Duomatic Ltd supra at 372G and 373B. Here, as was confirmed by consideration of the transcript of evidence, it was not and could not be said that Mrs Helen Smith (who had been a witness) had known about a proposal that the company pay salaries to the defenders and had agreed to it. At best the reclaimers' position was that there was no evidence that she had objected to such a proposal.

[28] We consider Mr Lake to be correct in his analysis of the Duomatic principle. It goes to the reality of the situation: if in fact all of the shareholders agree to a particular proposal which is honest and within the powers of the company it should be regarded as having been agreed to, even although assent is not signified by a formal vote in general meeting and even if assent is given by different parties at different times. But there must have been a proposal of which all parties were aware and it must have been agreed to. Here the Lord Ordinary found that there never was a genuine proposal that salaries should be paid to the defenders but even if there had been, in the absence of evidence that Mrs Helen Smith had agreed to it in addition to the first defender the Duomatic principle could have no application.

[29] A claim for remuneration on a quantum meruit basis was not advanced to the Lord Ordinary but, as was submitted by Mr Lake, for the reasons set out by Lord Templeman in Guinness plc v Saunders supra at 692C to H, such a claim is not available to directors in the position of the defenders. The relevant underlying principle is that a trustee or someone in an equivalent fiduciary position cannot make a profit, even to the extent of reasonable remuneration, from his trust position. The application of that principle may be relaxed to the extent permitted by the articles of association of the company but no further. To do otherwise, by for example implying a contract for reasonable remuneration, would be to subvert an important equitable principle.

[30] Accordingly, as far as salary was concerned, we consider that the Lord Ordinary came to the correct conclusion and, for all that he may not have had as full submissions on some points as we have been favoured with, for the right reasons.

Loan interest

[31] As we have already noted, the administrators accepted that both the first and the second defender had made loans to Tayplan. The loan made by the second defender was effectively repaid but loans made by the first defender were not. The company was thereby liable to the first defender in the outstanding balance of capital. The administrators accepted as much, but the first defender further contended that he was entitled to interest on the outstanding balance founding on the purported resolutions of the company dated, respectively 1 March 2003 (in relation to the then loan of £219,779) and 24 February 2004 (in relation to a further advance of £50,000), associated purported minutes of meetings of the directors and, in relation to the advance of £50,000, a bond dated 24 February 2004.

[32] Much the same considerations applied in respect of the claim by the first defender for interest on his director's loan as applied to the claims for salary. The directors of Tayplan might have contracted with the company for payment of interest on their loans provided that the company agreed. The purported resolutions of the company supposedly expressing such agreement could be no such things because they proceeded upon the erroneous basis that the second defender was a member when he was not but in any event the Lord Ordinary did not accept any of the proffered documentation as relating to genuine transactions; it was, as with the documentation purporting to establish entitlement to salary, latent and defensive, in other words not genuine. Tayplan's accountants had no knowledge of any agreement whereby the directors' loan accounts would bear interest. In those circumstances (and, as we have indicated, the Lord Ordinary's primary findings are unchallenged), the Duomatic principle can have no application, even had it been established that Mrs Smith was aware of a proposal to make the second defender's loan interest-bearing, which it was not. As far as loan interest is concerned therefore, again in our opinion the Lord Ordinary came to the right conclusion for the right reasons.

The price of 164 Woodhall Road, Edinburgh

[33] The Lord Ordinary addresses this transaction at paragraphs 38 to 48 of his opinion. It was a sale of a substantial heritable property by Tayplan to the first defender with the immediate object of providing the company with cash in order to reduce its indebtedness to the Royal Bank. In implement of missives of sale the first defender had taken delivery of a disposition and recorded title in the Land Register. The sum of £825,000 had been paid to the company. As the Lord Ordinary observes, as a transaction whereby a director acquired a substantial non-cash asset of the company, the provisions of section 320 of the 1985 Act applied to the sale. It required the approval of the company by resolution in general meeting and otherwise was voidable at the instance of the company in terms of section 322 of the Act. The transaction was potentially open to challenge in terms of section 242 of the Insolvency Act 1986.

[34] The administrators did not seek to rescind the contract. Rather, the issue before the Lord Ordinary was simply as to what had been the contract price: £825,000, as the defenders maintained; or £1.1 million, as was stated in the missives, the disposition and the Land Register, to be paid by £825,000 borrowed by the first defender from a division of the Bank of Scotland and the removal of the sum of £275,000 from his loan account with Tayplan. The Lord Ordinary narrates the evidence that he heard on these competing contentions and what he made of that evidence. He prefers that which was relied on by the administrators. As for the evidence of the defenders, at paragraph 45 he concludes: "In relation to this transaction I find 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". As for the documents that the defenders relied on, at paragraph 47 the Lord Ordinary describes them as "at best a latent defensive mechanism to cover the possible insolvency of the company." Again the issue that the reclaimers seek to raise was one that was determined against them as a matter of fact. The Lord Ordinary was entitled to reach his conclusion. He made no error in law in doing so.

Joint and several liability

[35] The Lord Ordinary found the defenders jointly and severally liable in respect of all sums misappropriated or unpaid by one or the other of them, including the balance due on the price of 164 Woodhall Road. The reclaimers questioned why the second defender who was not due to make payment of the price of the Woodhall Road property and who did not acquire any interest in it, should share the first defender's liability in this way.

[36] The Lord Ordinary's interlocutor reflects the first alternative of the administrators' claim on behalf of Tayplan: for damages as reparation for breach of fiduciary duty, the measure of damages being the loss to the company, not the gain to the defenders. Both defenders were found to be guilty of breach of their fiduciary duties as directors. Each appropriated substantial sums from the company and colluded in his fellow director doing the same. Each was responsible for the failure to keep proper accounting records. Each therefore was a wrongdoer whose wrongs materially contributed to the company's loss. The consequence is joint and several liability in damages, irrespective of the precise contribution made by each wrongdoer.

[37] Agreeing with Mr Lake, we consider that no question of indemnity such as is referred to in article 19(a) of the Articles of Association arises. Neither does regulation 92 of Table A have any application.

[38] Reference was made in argument to section 727(1) of the 1985 Act. That provides that an officer of a company may be relieved of liability for, inter alia, breach of duty or breach of trust where he has acted honestly and reasonably. It has no application to the present case, given the Lord Ordinary's findings. The defenders' approach to the keeping of business records was simply not consistent with the honest and reasonable conduct of the business of a registered company. We would respectfully endorse the Lord Ordinary's disapproval of an approach which contemplates the manipulation of a company's financial records after the event in order to suit individual commercial interests and we would entirely agree with his statement that when insolvency occurs, with the consequent losses that ordinary creditors will incur, 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.

Conclusion

[39] The reclaiming motion is refused. All questions in relation to expenses are reserved.