CPD NORTH:
COMPANY LAW UPDATE
7thOCTOBER 2014
DAVID CABRELLI
Solicitor and Senior Lecturer in Commercial Law
School of Law
University of Edinburgh
CPD NORTH: COMPANY LAW UPDATE
Introduction
In this presentation, I propose to analyse recent company law cases that are of a significant nature, and to ascertain how the judiciary have interpreted some of the headline provisions of the Companies Act 2006(“CA” or the “2006 Act”) since the summer of 2013. In particular, the principal focus will be on the following:
- The law of directors’ duties;
- Developments in the law relating to the statutory derivative action (sections 261 to 269 of the 2006 Act) and the unfair prejudice remedy (section 994 of the 2006 Act); and
- Recent developments in the case law.
Directors’ Duties
General
“170 Scope and nature of general duties
(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company…
(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
(5) The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply.”
- Relationship between the statutory duties and the common law:
Coppage v Safety Net Security Ltd. [2013] EWCA Civ 1176 at para. [28] per Sir Bernard Rix, who expressed an equivocal view on the relationship between the statutory code and the underlying common law:
“These new provisions both replace and build on common law rules and equitable principles. What is not clear, however, is how the new statutory provisions and the existing common law principles are intended to bed down together.”
- Who owes the duties? The status of de facto and shadow directorships:
Vivendi SA Centenary Holdings v Richards [2013] EWHC 3006 (Ch) at paras. [142]-[143] per Newey J
Elsworth Ethanol Company Ltd. v Hartley [2014] EWHC 99 (IPEC) – who are de facto directors?
Smithton Ltd. v Naggar [2014] EWCA Civ 939; [2014] BCC 482 – who are de facto directors and shadow directors?
- Parties connected to directors – connected persons and whether transactions between a director and his ‘mistress’ may be set aside:
Sargespace Ltd. v Eustace [2013] EWHC 2944 (QB)
Proper Purposes and Compliance with the Constitution
“171 Duty to act within powers
A director of a company must–
(a) act in accordance with the company's constitution, and
(b) only exercise powers for the purposes for which they are conferred.”
- Exercise of power in the articles to restrict the voting rights of certain shareholders in advance of company’s AGM:
JKX Oil & Gas Plc v Eclairs Group Ltd. [2014] EWCA 640; [2014] 2 BCLC 164
- Liability for the misapplication of a company’s property by exercising a power otherwise than that for which it was conferred cannot arise unless the director knows that it is an improper purpose or of the fact which make the purpose improper:
Madoff Securities International v Raven [2013] EWHC 3147 (Comm)
Duty to Promote Success
“172 Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”
- Does section 172 of the CA impose a duty on a director to take decisions which minimise the company’s tax liability? No – see opinion for the firm of Farrer & Co. sent to the CEO of every FTSE100 company:
- Does section 172 of the CA translate into a duty on the directors to ensure that the company has in place insurance against liability to its employees for personal injury sustained by them in the course of their employment? No:
Campbell v Peter Gordon Joiners Ltd. [2013] CSOH 181; [2014] SLT 178, 183 per Lord Glennie
- Nature of the test in section 172:
Madoff Securities International v Raven [2013] EWHC 3147 (Comm)
- Where a director has caused the company to make certain payments, despite knowing that it was cash flow and balance sheet insolvent under section 123(1)(e) and (2) of the Insolvency Act 1986, he was in breach of section 172. It was recognised that the subjective duty is subject to qualification in three circumstances:
Hellard v Carvalho [2013] EWHC 2876 (Ch)
Duty to Exercise Independent Judgment
“173 Duty to exercise independent judgment
(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting–
(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
(b)in a way authorised by the company's constitution.”
The purpose of this provision is to compel directors to reach decisions with an open mind, free from bias and without having had fettered their discretion in the past. To date, there have been no cases which have considered this particular provision.
Duty to Exercise Reasonable Care, Skill and Diligence
“174Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with–
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.”
- If the director does not believe in the merits of the decision of the board, must he/she resign? If he/she goes along with the view of the majority of the board, is he/she in breach of section 174? If he/she fails to supervise his/her fellow directors, is this a breach of duty?
Madoff Securities International v Raven [2013] EWHC 3147 (Comm)
- If the director has a limited role in the company and genuinely believes that what he is being told by the other directors in the board is legitimate/true, will he/she be in breach of duty where it transpires that the other directors were involved in a fraudulent transaction and misrepresentations to investors and he/she did not probe further into matters or the information he/she was given by the board?
Weavering Capital (UK) Ltd. (In liquidation) v Peterson [2013] EWCA Civ 71
- If the director has sufficient experience to do his job as a managing director and has sufficient knowledge and understanding of the company’s business, is he/she in breach of duty if he/she is not fully cognisant of all matters relating to the industry in which the company is involved, e.g. insurance and reinsurance?
ARB International Ltd. v Baillie [2013] EWHC 2060 (Comm)
Duty to Avoid Conflicts of Interest
“175Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
(4) This duty is not infringed–
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) if the matter has been authorised by the directors.
(5) Authorisation may be given by the directors–
(a) where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
(b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
(6) The authorisation is effective only if–
(a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
(7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”
- Is section 175 proscriptive or prescriptive?
ODL Securities Ltd. v McGrath [2013] EWHC 1865 (Comm)
- Duties are stringent, but there is scope for informed consent:
Re Annacott Holdings Ltd. [2012] EWCA Civ 998; [2013] BCC 98
Section 175(4)(b), Queensland Mines Ltd. v Hudson (1978) ALR 1 and Sharma v Sharma [2013] EWCA Civ 1287
- Was a director in breach of the duty to avoid a conflict of interest and duty where he acted as an agent for the sale of the shares of the company on behalf of the parent company shareholder, instructed solicitors to act on both their behalf, and made a personal profit on the sale of the shares ostensibly in respect of post-sale consultancy obligations owed to the company pursuant to a consultancy agreement (which was untrue)? Could the shareholders who received fewer pounds sterling per share than the director be imputed to have given informed consent to the director’s breach of fiduciary duty on the ground that the firm of solicitors acting for the director and the selling parent company shareholder had knowledge of the terms of the consultancy agreement?
Park’s of Hamilton (Holdings) Ltd. v Campbell [2014] CSIH 34; 2014 GWD 18-338, Lord Drummond Young at paras [38]-[42]:
“the rule that a fiduciary may not make a profit out of a fiduciary relationship is enforced strictly, and the exception for informed consent is interpreted restrictively. The reasons for this are straightforward. Any fiduciary relationship is based on considerations of trust, confidence and the utmost good faith. Furthermore, it is normal to accord a very high level of discretion to a fiduciary, and the supervision of the fiduciary's activities is generally minimal or non-existent, at least at a day-to-day level. This is merely an aspect of the trust that is reposed in a fiduciary. All of these considerations justify strict enforcement of the rules. At a more practical level, in view of the lack of everyday supervision, in particular, a small number of fiduciaries may be tempted to exploit their positions for profit. The relative lack of supervision means that the information that is required to bring such cases to account may be harder to discover than in other legal relationships. At the same time, the high level of discretion typically accorded to fiduciaries means that their activities are less amenable to control by their principals. For all these reasons I consider that the strictness of the rules governing fiduciary relationships is fully justified, and should not be relaxed… Informed consent requires that the principal should be in full possession of all material facts. For this purpose it is not enough that those facts may have been communicated to an agent, such as a solicitor, acting for the principal; the principal himself must be aware of the facts. Furthermore, the principal must understand fully what the proposals are; in particular, he must understand his legal rights under the fiduciary relationship and in what way those rights are to be given up. Once again, it is essential that the principal himself should be aware of all of these factors and apply his mind to them. The knowledge and understanding of an agent for the principal are not sufficient. The only exception to this would arise in a case where such an agent was empowered by the principal to undertake dealings with the fiduciary on the principal's behalf, as where a solicitor was specifically empowered to authorize the fiduciary to take remuneration. It is difficult to imagine that such a case could arise otherwise than by clear instructions to the solicitor, however, as the application of fiduciary duties is an important matter and the principal must understand that he is authorizing the abrogation of such duties. At any rate this is nowhere near such a case. There was no suggestion that [Holmes McKillop the solicitors acting for the director and selling shareholders] were authorized by the shareholders to sanction payments to the [director]. Instead, the matter was considered by the board at the meeting on 5 July 2007 and by shareholders following the circular letter of 16 August. The disclosure made at that meeting and in the circular was manifestly incorrect, in suggesting that the share premium was remuneration for consultancy services, and inadequate, in failing to say anything about remuneration under the consultancy agreement. In these circumstances it is abundantly clear that there was no informed consent.”
- Was a director in breach of section 175 where he acted as a property agent for the company in respect of a sale of its property to a third party, in terms of which the director would be remunerated by the company and the purchaser for his services?
The Northampton Regional Livestock Centre Co. Ltd. v Cowling [2014] EWHC 30 (QB)
The answer was ‘No’ because the director had obtained the authorisation of the board of the company to the proposed sale and the board were fully informed and gave their consent – see section 175(4)(b). In addition, there was nothing irrational about the director’s behaviour in (a) failing to obtain advice in relation to the marketing of the property, (b) marketing the property on an unconditional basis only, (c) failing to resist Bank pressure or negotiate further concessions from the Bank and (d) selling the property to a purchaser for £2.25m who immediately re-sold it to a third party on the same day for £5m.
- Cana sole shareholder who is also the sole director of a company take advantage of section 175(4)(b) to authorise his own breaches of duty as director?
Goldtrail Travel Ltd. v Aydin [2014] EWHC1587 (Ch) - No
Duty not to Accept Benefits
“176 Duty not to accept benefits from third parties
(1) A director of a company must not accept a benefit from a third party conferred by reason of–
(a) his being a director, or
(b) his doing (or not doing) anything as a director.
(2) A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.
(3) Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.
(4) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
(5) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”
- Where a trustee was appointed as a non-executive director of a number of companies in which the trust had invested, does section 176 apply to proscribe remuneration to that trustee/non-executive director for services rendered as a professional trustee? No, since those benefits were received by the individual in his capacity as a trustee, notwithstanding that there was a blurring of his roles as a trustee and non-executive director. The remuneration was not received because the individual was a director or doing anything as a director.
Pullan v Wilson [2014] EWHC 126 (Ch); [2014] WTLR 669 at para. [74] per Judge Hodge QC
Substantial property transactions and section 190
“190 Substantial property transactions: requirement of members’ approval
(1) A company may not enter into an arrangement under which–
(a) a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset, or
(b) the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or a person so connected,
unless the arrangement has been approved by a resolution of the members of the company or is conditional on such approval being obtained.
For the meaning of ‘substantial non-cash asset’ see section 191…
191 Meaning of “substantial”
(1) This section explains what is meant in section 190 (requirement of approval for substantial property transactions) by a “substantial” non-cash asset.
(2)An asset is a substantial asset in relation to a company if its value–
(a) exceeds 10% of the company’s asset value and is more than £5,000, or
(b) exceeds £100,000.
(3)For this purpose a company’s “asset value” at any time is–
a) the value of the company’s net assets determined by reference to its most recent statutory accounts, or
(b) if no statutory accounts have been prepared, the amount of the company’s called-up share capital.”
- Does the above wording cover potential acquisitions of non-cash assets?
Smithton Ltd. v Naggar [2014] EWCA Civ 939; [2014] BCC 482 – The answer is ‘No’. See Arden LJ at para. [110]:
“Section 190 requires an arrangement (which can be a non-contractual arrangement) under which a director or connected person acquires “or is to acquire” [a substantial non-cash asset]. There is no basis for interpreting the words “is to acquire” as “may acquire”. The fact that conditional arrangements are permitted does not require this interpretation since even a conditional arrangement must still satisfy the words quoted even if it is conditional. Since, when the arrangement was made for the [contracts] to be written there was no certainty that on closing out the [contract] holder would opt to acquire the referenced shares, section 190 does not apply. The arrangement was not said to be made on closing out and election to take the referenced shares.”