Directors Duties Update

Senior Associate Solicitor Lauren Hartigan-Pritchard

In the recent decision of Dickinson v NAL Realisations (Staffordshire) Ltd, the High Court had to determine whether certain transactions entered into by a company with one of its directors had been adequately authorised, whether they contravened the Companies Act 2006, whether they entailed breaches of duty on his and his co-directors’ parts, and whether they were transactions defrauding creditors under section 423 of the Insolvency Act 1986.

The transactions included a sale of freehold property, a purchase of own shares and the sale of a subsidiary. The court held, among other things, that:

  • The property sale, to the managing director and controlling shareholder, was unauthorised and had not been subsequently ratified. Consequently the director held the property on trust for the company and was liable to restore it and to pay compensation;
  • The purchase of own shares, from the managing director and connected shareholders, contravened the Companies Act 2006. Specifically, the purchase price had been left outstanding on loan account, which did not satisfy the requirement for payment on purchase under section 691(2) of that Act. A share buyback was capable of constituting a transaction at an undervalue for the purpose of section 423 of the Insolvency Act 1986, and it was appropriate to make a section 423 order in this case. An additional allegation, that the directors causing the company to enter into the buyback had breached their common law duty to consider or act in the interests of the creditors of the company, was not upheld. Among other things, the judge held that the duty had not arisen at the relevant time. Specifically, he rejected a submission to the effect that directors were required to give priority to the interests of creditors in the event of a recognised risk of adverse events that could or even would lead to insolvency;
  • The sale of the subsidiary, also to the managing director and controlling shareholder, was voidable, first, for want of authority on his part and, secondly, because it contravened section 190 of the Companies Act 2006 (substantial property transactions). It was also a transaction at an undervalue, justifying a section 423 order and a finding of breach of fiduciary duty on the managing director’s part;
  • Either the court’s jurisdiction to relieve D from liability pursuant to section 1157 of the Companies Act 2006, alternatively section 61 of the Trustee Act 1925, did not apply or the court was not minded to exercise it.

Two co-directors were found to be in breach of duty on the basis that they had abrogated their responsibilities to the managing director. However, these breaches of duty were found not to be causative of any loss suffered by the company, and the claims against these two directors were accordingly dismissed.

This case is yet another reminder that company directors, even – and perhaps especially – dominant ones, must not be too quick to assume that they have authority to bind the company. The steps required to secure authority (or ratification) are often not onerous but failure to take them can prove costly.

For further information about directors duties or for any other insolvency queries please do not hesitate to contact Lauren Hartigan-Pritchard on 01905 677051 or lhartiganpritchard@thursfields.co.uk

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