Directors' duties and share purchase agreements

In First Subsea Ltd v Balltec Ltd and Others [2017] EWCA Civ 186, the Court of Appeal recently considered whether the terms of section 21 of the Limitation Act 1980 apply to claims involving a director’s breach of fiduciary duty involving fraud.

Section 21 provides that a claim for breach of trust must be issued within a six-year period following the breach, save for actions which involve fraud or embezzlement of company property.

In this case, a former director (D) of First Subsea Ltd (C) formed a rival company in order to compete with C’s business. C subsequently issued a successful claim against D for breach of fiduciary duty, fraud, and conspiracy to injure by unlawful means.

D appealed to the Court of Appeal on the grounds that the breaches took place in 2004 and the initial claim made by C was issued in 2010, after the limitation period had expired, and therefore the claim was statute barred.

Section 21(3) states that ‘an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued’.

Therefore the court had to consider whether there was a trust in order to establish whether the six-year limitation period would apply in this case.

Section 21(1) provides a defence to a limitation claim in connection with a breach of trust:

‘(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.’

If the court could establish that D was a trustee, consideration would need to be given as to whether the section 21(1) defence would be available to C due to the fact that D had acted fraudulently. The court considered the case of Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, among others, which established that a company director is a ‘trustee’ of a company’s assets. It therefore followed that D was a trustee and that section 21(1) of the 1980 Act was applicable to C’s claim.

D’s appeal was dismissed as it was unanimously agreed by the Court of Appeal that due to the fact he had ‘fraudulently’ breached his fiduciary duty as a director, the limitation period would be dis-applied under section 21(1)(a). It was not necessary for D to have also misappropriated company property under section 21(1)(b).

Authority to bind a company

In Dickinson v NAL Realisations (Staffordshire) Ltd [2017] EWHC 28, the High Court considered the extent of a director’s authority to bind a company. The case arose following a dispute as to whether a series of transactions entered into between NAL Realisations (Staffordshire) Ltd (NAL) and a director and shareholder of the company were correctly authorised.

In 2000, D, the managing director and a shareholder of NAL, acquired the entire issued share capital of the company. D subsequently transferred a proportion of the shares into various trusts and thereafter held 50.6 per cent of the issued share capital in his name. D and his wife then became the sole directors of NAL until 2008, when W was also appointed. Following D’s acquisition of NAL, the company entered into the following transactions (among others) with D personally:

• In 2005 D purchased NAL’s freehold property for a sum of £224,000;

• In 2010 NAL entered a share buy-back agreement with each of the shareholders, acquiring the majority of the issued share capital for an aggregate consideration of £2.5m, but the purchase price was not paid on purchase. Instead NAL debited the purchase price on loan account for the shareholders; and

• Also in 2010 D purchased NAL’s subsidiary company from NAL for the sum of £1 – representing an undervalue of that asset.

A nuisance trial commenced in 2012 against NAL, and the judge ultimately ordered that damages were payable by the company in the sum of £1.2m together with costs. NAL had been aware of this claim since 2007.

NAL then went into liquidation and D pursued a claim against the liquidators for various sums allegedly owed to him. The liquidators subsequently issued counterclaims against D, alleging that the transactions listed here had not received the requisite authority. Further to this, the liquidators also claimed that D’s wife had breached her director’s duties in relation to the share buy-back and the sale of the subsidiary company. In relation to the property transfer in 2005, the High Court upheld the liquidator’s counterclaim and therefore the transaction was void. D was not entitled to form part of the quorum in the relevant board meeting as he had a personal interest. Further to this, the quorum for a board meeting was two, therefore D’s wife could not have passed the resolution herself. It followed that the transaction could not have gained adequate authority. Therefore the property was actually held on trust for NAL and D was liable to pay compensation and restore the property to NAL.

In relation to the 2010 buy-back of shares, the judge held that the transaction was void as the purchase price was not paid on purchase, pursuant to section 691(2) of the Companies Act 2006. An order was also made under section 423 of the Insolvency Act 1986 as the share buy-back was deemed to be a ‘transaction entered into at an undervalue’.

In relation to the sale of NAL’s subsidiary company to D in 2010, the court held this transaction was also void as:

• It had been sold to D without adequate authority;

• As a result D had breached his fiduciary duties;

• The transaction was a ‘substantial property transaction’ and D had not complied with section 190 of the 2006 Act; and

• The transaction was entered into at an undervalue, contravening section 423 of the 1986 Act.

D’s wife and the third director, W, were found to have breached their director’s duties in delegating their responsibilities to D but they were not held liable for any resulting losses.

Share purchase agreement

In Wood v Capita Insurance Services Ltd [2017] UKSC 24, the Supreme Court considered the interpretation of a specific indemnity clause in a share purchase agreement (SPA).

The buyer entered into an SPA to acquire the entire issued share capital of Sureterm Direct Limited (SDL). The buyer subsequently claimed that SDL had mis-sold insurance products prior to its acquisition, causing the buyer to suffer a loss, and that this was covered by an indemnity given by the seller in the SPA.

The indemnity clause in question stated: ‘The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.’

The sellers argued that a customer would need to make a claim or complaint against SDL to the Financial Services Authority regarding the mis-selling of any insurance products for any resulting losses to be covered by the indemnity. They claimed that as SDL itself had reported the mis-selling to the FSA the indemnity was not triggered.

The buyer claimed that it was only ‘fines, compensation or remedial action or payments imposed on or required to be made by the Company’ which needed to ensue from a claim or complaint made to the FSA under the clause, and therefore the loss incurred by mis-sold insurance products was covered by the indemnity. The Supreme Court held that the seller’s interpretation was the correct one. Lord Hodge stated that ‘the circumstances which trigger that indemnity are to be found principally in a careful examination of the language which the parties have used’.

Debbie King is a partner at Farleys

@FarleysLaw

www.farleys.com