Chapter 3 - Case

Question 1

Re Kaytech International plc, Secretary of State for Trade and Industry v Kaczer

Answer 1

The Court of Appeal concluded that a person who was DEEPLY AND OPENLY concerned in the company’s affairs, who devoted himself to the company’s financial and property interests and who dealt with creditors, suppliers and the company’s professional advisers was not merely a consultant or company secretary but a de facto director.

Question 2

Secretary of State for Trade and Industry v Deverell

Answer 2

The court of appeal gave a ruling that appears to extend the definition. The court said that the concepts of “directions” and “instruction” in the definition did not exclude the concept of the giving of advice.

Question 3

Secretary of State for Trade and Industry v Becker

Answer 3

There was no evidence suggesting that the defendant (not a director but shareholder and father to sole director) carried out any function with regards to the management of the company that only a director could discharge. So he could not be disqualified to be a director.

Question 4

Holland v Revenue & Customs Commissioners

Answer 4

Holland was the director of a company that was itself the director of a group of companies. The companies became insolvent (but not the company Holland was a director of) and the Revenue applied to have Holland disqualified as a director. The action failed as Holland and the parent company are considered separate legal entities.

Simply acting as the director of a corporate director is not enough to make him a de facto director. If he was the ‘guiding mind’ then that would be true for all cases of corporate directors.

Question 5

Automatic Self Cleansing Filter Co v Cuninghame

Answer 5

Directors can only be given instructions by a three quarter majority. The directors are not the agent of the shareholders. They will have to dismiss the directors or change the constitutions.

Question 6

John Shaw & Sons v Shaw

Answer 6

There were 3 directors who owned the company. 2 of them loaned from it and refused to pay. A resignation of the 2 directors followed and an independent director was brought in. The 3rd director and the independent director brought an action against the debtors but the debtors called an extraordinary meeting to discontinue the litigation (by way of a resolution).

The court ruled that the resolution is invalid. The company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. Powers vested in the directors can only be exercised by them and only them. For a shareholder to control the exercise of powers, they can only alter the articles or if the opportunity arises, refuse to re-elect the directors of whose actions they disapprove.

Question 7

Smith v Henniker - Major

Answer 7

“Meaning of a ‘person dealing with a company’ of s 40

Mr Smith, a director, was in dispute with the other directors of the company and wished to bring a claim by the company against the defendant solicitors. The company was not pursuing the claim but the director believing that he had the power, acted alone and made an agreement as agent of the company under which the company’s claim against the solicitors was assigned to him personally.(He did call for a meeting but nobody except for him turned up) The assignment was later ratified by himself by way of a deed.

Mr Smith claimed that s 40 binds him to the agreement as it was made under his capacity as a director. The court however, ruled that the words were wide enough to cover a director but not in this case. Mr Smith was the chairman and it was his duty to see that the constitutions were adhered to. The court decision does not rule out that if a director who is more junior had made that agreement, it could be binding.”

Question 8

EIC Services Ltd v Phipps

Answer 8

A shareholder challenged the bonus issue of shares which was made with the inclusion of its share premium account and was only approved at the Boards level. The company’s Articles provided that bonus issues should be in proportion to paid up capital and had to be approved by an ordinary resolution. The High Court ruled that the bonus issue was enforceable. The shareholders were entitled to rely on s 40 of the Companies Act 2006.

Question 9

Hely-Hutchinson v Brayhead

Answer 9

“The CEO, Chairman and de facto managing director of Brayhead, Mr Richards, guaranteed repayment of money and indemnified losses of Lord Suirdale (Hely-Hutchinson) in return for injection of money for Lord Suirdale’s company. Perdio was then taken over by Brayheads. Perdio later went into liquidation and Lord Suirdale demanded for repayment. Brayhead refuses and claimed that Mr Richards had no authority to enter into the contract.

The Court ruled that Mr Richards did have the authority. The fact that the board allowed Mr Richards to continue to act had in fact created an actual authority”

Question 10

Freeman & Lockyer b Buckhurst Park Properties (Mangal) Ltd

Answer 10

“Mr Freeman & Mr Lockyer sued Burckhurst Park Properties for unpaid fees due for their architecture work. The company Articles requires that all four directors were needed to constitute a quoram. The director who contracted them acted alone without proper authority and the company argued that it should not be binding.

The Court held that the company was bound. He noted that if a director has no actual authority, the contract can still be enforceable if the director had the authority to enter contracts of a different but similar kind and the persons contracting was induced by these representations to contract.

1) Knowledge - the board knew of the general activities and permitted his acts. Such conduct represented his conduct to contract fot these kind of thngs
2) The Articles conferred fulled power to the board
3) Freeman and Lockyer were induced to contract by the representations
4) The company had the capacity”

Question 11

Hopkins v TL Dallas Group Ltd

Answer 11

“The ex-director of the defendant company entered into a contract (letter) of undertaking and agreed to return £994,000 to a company. That second company subsequently went into liquidation and the liquidators assigned all rights to Mr Hopkins. Mr Hopkins demanded the payment. The defendant company claimed that the contract was made without proper authority.

The Court held that the contract was not binding. The giving of undertaking did not fall under the usual scope of his office and he never had the authority to raise money as he thought fit. The company who accepted the undertakings should have obtained proper confirmation of the proprietary from his fellow directors. The company did not act in good faith and thus reliance on the letter was not possible.”

Question 12

Percival v Wright

Answer 12

“Mr Percival owned shares of £10 each that has never been on the stock exchange. He inquired if anyone was willing to purchase his shares at price (£12.55) based on independent valuation. The defendant agreed to buy them at £12.10 each. Percival later found that the defendants are buying from other shareholders at a much higher price. Percival claimed a breach of fiduciary duty.

The Court held that the directors owed duties to the company and not the shareholders individually.”

Question 13

Peskin v Anderson

Answer 13

“Former members of Royal Automobile club sued the director for failing to disclose plans to demutualise. They could have gotten £35,000 but had given up their membership. They claimed that the directors breached a duty owed to them as shareholders to inform them of the plans.

The Court held that there was no breach of duty. General duties are owed to the company and specific futies owed to shareholders can only be generated through voluntary assumption of responsibilities.”

Question 14

Multinational Gas v Multinational Gas Services Ltd

Answer 14

Directors owe fiduciary duties to company but not creditors nor individual shareholders.

Question 15

Coleman v Myers

Answer 15

“Fiduciary relationship may arise between shareholders and directors in special circumstances.

R1(Son) and R2(Father) were managing director and chairman of an old established family company. R1 held a small amount of the shareholding and planned to acquire all the remaining shares (at US$4.80 each) using the company’s assets, making him the sole owner. R2 held a sizeable portion of the shareholders and is in support of R1. The minority shareholders reluctantly accepted and subsequently brought an action against R1 for breach of fiduciary duty.

The Court held that R1 and R2 owed fiduciary duties to the shareholders, arising from the family character of the company, the position of R1 and R2 in both the family and the company, their high degree of inside knowledge, the way in which they went about the takeover and the persuasion of shareholders.

The were under the duty of care in recommending shareholders to accept the take-over offer which they breached because the recommendation to sell with their knowledge as to asset-back, was not made with reasonable care for the interests of the shareholders.”

Question 16

Platt v Platt

Answer 16

“Fiduciary relationship may arise between shareholders and directors in special circumstances.

3 brothers were shareholders of an Essex company holding a BMW dealership. Keith ran the business and held ordinary shares. Colin and Denis did not take part in the business operations and held preference shares. Keith misled his brothers by telling them BMW was about to withdraw and urged him to sell the business. The 2 brothers transferred their shares to Keith for £1 to enable the sales. The business was not sold and made profits which Colin and Denis could not participate in.

The Court held that Colin and Denis could claim damages for misrepresentation and breach of fiduciary duties by Keith.”

Question 17

Briess v Woolley

Answer 17

The HL held that where shareholders employ the directors to negotiate a sale of their shares, the shareholders will be vicariously liable for damages to the purchaser if the directors fraudulently misrepresent the state of the company’s affairs to the purchaser.

Question 18

Gething v Kilner

Answer 18

The Court held that in a takeover, the directors of the ‘victim’ company owe a duty to the shareholders to be honest and not mislead as by suppressing, for instance, a professional advice recommending rejection, and that the court might grant an injunction where this had happened. to prevent the bid going ahead. Where there are competing offers then the directors are not under a positive duty to recommend and facilitate the acceptance of the highest offer.

Question 19

Punt v Symons

Answer 19

“GG Symons was given the power under the company’s articles, to appoint and remove directors which would continue to exist after his death for exercise by his executors. A separate agreement stated that the company would refrain from amending these articles. A proposal to amend the articles by special resolution was subsequently brought in and the executors sought an injunction.

The Court held that a company cannot contract itself out of the rights to alter its articles.”

Question 20

Hogg v Cramphorn

Answer 20

“A takeover offer was brought up to the company. The directors believing that it would have a negative impact on the organisation, issued additional shares to outvote the offeror. A shareholder sued that the issuance was ultra vires.

The Court held that the issuance was invalid. The power to issue shares creates a fiduciary duty and it must only be exercised in order to raise capital. It could only be made valid if the decision is ratified by the shareholders at a general meeting with no votes allowed for the new shares.”

Question 21

Bamford v Bamford

Answer 21

“If directors are unable to exercise their powers in a lawful manner as it would breach their duty to exercise those powers for the purpose it was give, the members may by ordinary resolution ratify the act. Members could also authorise directors in advance to do act in question.

The directors allotted shares to a company whcih distributed their products to fight off a takeover bid. This was an improper exercise but members later ratified that act.”

Question 22

Howard Smith v Ampol

Answer 22

“A company was embroiled in a hostile takeover bid by Ampol. The directors did not want them to succeed as Howard Smith offered better terms for the take over and also offered employment to the directors even in the future. The directors then issued shares to Howard claiming that it was to fund two tankers. Without the issue, Howard had no hope in taking over the company but with the issue, Ampol could not complete its acquisition.

The Court held that the issuance was invalid and that the purpose being to fund the tankers were ‘unreal and unconvincing’. It was held that the issue was intra vires but exercised for an improper purpose.”

Question 23

Extrasure Travel Insurance v Scattergood

Answer 23

“Scattergood was the director of E and I. E and C were both subsidiaries of I. A creditor pressured C for the return of a debt and Scattergood transferred cash from E to I and then I to C in order to repay the debt. Extrasure brought an action against Scattergood claiming that the transfer was not in its best interest and was made for an improper purpose. E contended that the director breached his fiduciary duties even if he honestly, but unreasonably and mistakenly, believed that he was pursuing a company’s best interest.

The Court held that Scattergood was in breach of his duties. He did not gave any actual consideration as to whether the transfer was in E’s interest. The transfer was made to assist C and not to preserve the survival of E. It was made for an improper purpose and no ratification was given.

1) Identify Power in question
2) Identify Purpose
3) Identify Purpose Exercised
4) Assess if it was proper

Question 24

Criterion Properties Plc v Stratford UK Properties LLC

Answer 24

“The managing director of the claimant company made an agreement with a substantial shareholder that required the company to buy out the shareholder at a high price should there be a change in control or composition of board of directors. He was later removed and the company asked the Court to set the agreement aside as it was entered for an improper purpose.

The Court ruled that the agreement was intended to put off unwelcomed bidder in a predatory takeover and had been made for an improper purpose. The impact caused by the buy-out would inflict greater harm than an acquisition. The agreement could not be enforced against the company.”

Question 25

CAS (Nominees) Ltd v Nottingham Forest FC plc

Answer 25

“A shareholder brought a petition alleging improper purpose in D’s acquisition, with the board’s approval, of control of Nottingham Forest’s assets in a manner that avoided the need for a special resolution. Consequently, the value of the shares reduced and if D exercised an option, NF would lose control of the Football Club, an outcome not in the best interest of NF but the Club.

The Court dismissed the petition that since the aim of the transaction had been legitimate and the Act did not prohibit the exercise of board’s power in such a way. There had been genuine desire to raise capital for the Club. Thus it could not be said that the board used their powers for an improper purpose.”

Question 26

Dalby v Bodilly

Answer 26

“An applicant shareholder sought an order that the respondent and/or the company buy out his shares at a price determined by an independent chartered accountant approved by the court. Both the first respondent and the applicant had 50% shareholdings each. The first respondent then secretly allot additional shares to himself until he had 95% shareholdings and set up a company to divert business away from the firm.

The court ruled that the allotment of remaining shares to himself was a blatant breach of fiduciary duties in that he placed his own interest before fellow shareholder and that also amounted to unfairly prejudicial conduct. The Court ruled that a buy out order was an appropriate remedy.”

Question 27

Regentcrest plc v Cohen

Answer 27

The question is not whether, viewed objectively by the court, the act or omission was in the best interest of the company; still less is the question whether the court, had it been in the position of the director might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the best interest of the company.

Question 28

West Mercia Safetywear Ltd v Dodd

Duty to promote success of company - Creditors’ interests

Answer 28

The director of two companies that went insolvent was found to commit fraudulent preference and misfeasance. Company A had a credit bank balance while Company B had a huge overdraft which he was the guarantor. When the two companies were insolvent, to reduce his personal liabilities, he transferred part of Company A’s funds to Company B to reduce his liabilities. At the same time, Company A was also found to owe Company B £30,000.

The Court held that by doing so, he committed fraudulent preference (paying company B ahead of other creditors and to reduce his own liabilities). In effecting the preference, he breached his fiduciary duties to A and thus guilty of misfeasance.

Question 29

Kinsela v Russell Kinsela

Duty to promote success of company - Creditors’ interests

Answer 29

When a company is solvent, the proprietary interests of shareholders entitle them as a general body to be regarded as the company when question of the duty of directors arise. But where a company is insolvent the interests of the creditors prevails. They become prospectively entitled, through the mechanism of liquidation to displace powers of shareholders and directors to deal with the company’s assets

Question 30

Re MDA Investment Management Ltd, Whalley v Doney

Answer 30

Duty to promote success of company - Creditors’ interests and ““nature and manner of disclosure”” huh?

Doney had been the principal shareholder and director of MDA Investment Management Ltd. He entered into an agreement where its business was sold to a third party. The consideration was split between MDA IM and MDA Partnership. Whalley claimed that the transaction was made at an undervalue. Certain payments was also made by Doney after the sale of its business before its liquidation. The liquidator of MDA Investment claimed that all proceeds from the sales should go to MDA Investment alone and he sought the repayment of the payments made by Doney.

The Court held that there MDA Partnership was entitled to part of the consideration, however as it has received more than it should, it should repay the amount to MDA Investment. The transaction was indeed at an undervalue, but a restoration of the company to the position prior to the transaction, in this case, would have done more harm than good. Doney was also required to repay the sum authorised by him after the sales of the business.

Question 31

Fulham Football Club Ltd v Cabra Estates

Answer 31

Duty to exercise independent judgment - Directors must not fetter their discretion.

A director must ensure that they do not put the interest of anyone above that of the company. It does not, however, preclude a director entering into a contract authorised by the company’s constitution. A director can enter into an agreement that restricts the future exercise of discretion by the directors. In Fulham Football Club Ltd v Cabra Estates plc [1992] B.C.C. 863 the directors signed an agreement to develop the football ground and gave an undertaking that Fulham Football Club Ltd would not oppose the development at a later date or support a compulsory purchase order. It was held that the directors had not improperly restricted the future exercise of their discretion.

Question 32

Thorby v Goldberg

Answer 32

Duty to exercise independent judgment - Directors must not fetter their discretion.

Shareholders in a company agreed with a group of prospective shareholders terms on which the latters’ capital was to be brought into the company. The documents provided that the articles be amended so that the directors bound themselves to allot shares in a certain way and to resign and to accept certain resignation. The directors later contended such amendments.

The Court held that the agreement was not void for illegality on the ground that the directors were fettering their fiduciary powers in advance, since they did so bona fide for the benefit of the company.

Question 33

Aberdeen Railway Co v Blaikie Bros

Answer 33

Avoiding Conflict of Interests - Declaring interests in transactions

Blaikie Bros entered a contract with Aberdeen Railways to make iron chairs at a fixed price. Blaikie sued to enforce the agreement. Aberdeen argued that they should not be bound as at that time, the Chairman of Aberdeen is a managing director of Blaikie Bros and there was a conflict of interest.

The Court held that Aberdeen was not bound by the contract. The Chairman’s personal interest would lead him to fix a high price.

Question 34

Bhullar v Bhullar

Answer 34

Avoid Conflict of Interests - Should not make secret profits

Bhullar Bros was owned by two families with 50% shareholdings each. They later fell out and decide to split but were unsuccessful. One family found a carpark near one of their leashed property and set a company to buy it over. This transaction was not disclosed nor approved by the Board. The other family brought a claim saying that they breached their fiduciary duty of loyalty to the company.

The Court ruled that there was a breach of the rule.

Question 35

Cook v Deeks

Answer 35

Avoid Conflict of Interests - Should not make secret profits

Toronto Construction has 4 directors who held 25% shares each. 3 directors wanted to exclude Mr Cook from the business. The 3 directors took on a business contract in their own name and passed a shareholder’s resolution declaring that the company had no interest in the contract. Mr Cook claimed that the contract did belong to Toronto and the ratification should not be valid.

The Privy Council advised that the 3 directors breached thei duty of loyalty and that the ratification was a fraud on Mr Cook as a minority.

Question 36

IDC v Cooley

Answer 36

Avoid Conflict of Interests - Should not make secret profits

Mr Cooley was an architect employed as a managing director of IDC. A firm came to him with a lucrative project but they did not wish to contract with IDC. He resigned from IDC using health reasons. He took on the project and IDC later sued him.

The Court held that he had breached his duty of loyalty. The fact that the firm will not receive the contract regardless of his actions does not affect the case.

Question 37

Item Software v Fassihi

Answer 37

Avoid Conflict of Interests - Should not make secret profits

Fassihi was a director of a software company. The only other director is D. The company mainly distributes software from company A. The software company decide to renegotiate terms with A, but at the same time Fassihi entered private talks with A with a view of setting up his own company. Fassihi encouraged D to improve their position in the negotiation which ultimately led to A terminating the contract. When Fassihi’s sneaky business were found out, he was dismissed and sued.

The Court held that he was under a fiduciary duty to disclose his own wrongdoings and interest in the contract. Fassihi could not possibly have believed that it was in the company’s interest for him to withold information of his talk with A.

Question 38

Regal (Hastings) Ltd v Gulliver

Answer 38

Duty to not make secret profits still applies regardless of company’s position

A company owned a cinema and wished to buy two others with the objective of selling all 3 together. It formed a subsidiary to purchase the 2 cinemas, however as it does not have sufficient funds, it needed to raise capital. The directors of the parent company bought shares in the subsidiary to provide the capital and subsequently sold it at a profit. The new controllers of the parent company cause an action to recover the profits made on the sale of shares.

The Court held that as this profit was obtained only through their knowledge and opportunity gained as directors, they were liable to account to the company once it was established that:

1) What the directors did was so related tot he affairs of the compay that it could properly be said to have been done in the course of their management and in utilization of their opportunities and special knowledge as directors; and
2) what they did resulted in a profit to themselves.

Question 39

Crown Dilmun v Sutton

Answer 39

Duty to not make secret profits still applies regardless of company’s position

Crown Dilmun brought an action against its former managing director, Sutton, for breach of fiduciary duties after he failed to disclose to the organisation an opportunity to buy a football ground. The ground was later purchased by another company which Sutton was involved in.

The Court held that Sutton had the duty to exploit every opportunity that he became aware for Crown’s benefit. Sutton had acted deceitfully and dishonestly in seeking to conceal the opportunity in order to reserve it for himself. Sutton breached his fiduciary duties

Question 40

Quarter Master UK Ltd v Pyke

Answer 40

Duty to not make secret profits still applies regardless of company’s position

Quarter Master and AL were companies set up by P and N who were their sole directors. They later accepted an offer to sell Quarter Master to a third company and became part of the Board in the group. AL was not acquired but they agreed to transfer the goodwill to Quarter Master (Commission from main client ““C”” goes to Q). The new group ran into financial difficulties and became insolvent. P and N resigned stating that they were terminating their directorships ““of your company””. While the group was placed into liquidation, P and N had negotiated a continuance of AL’s Business with its main client for its own benefit. Q argued that P and N breached their fiduciary duties by carrying on the same business that it had.

The Court Held that they were liable to account for the profits made to Quarter Master because they were still directors of Q and breached their fiduciary duties. Their resignation specifically resigns them from being directors of the purchasing company but not Q.

Question 41

Gencor ACP Ltd v Dalby

Answer 41

Mr Dalby, a director of ACP group, dishonestly diverted assets and opportunities to his company. Gencor ACP sued for him and the company to account for the profits. His son was paid £24,000 a year for work even though he was schooling.

The Court held that they were liable for the profits. He could have escaped liability if consent of ACP’s shareholders were obtained. Payment to his son was invalid and had to be returned.

Question 42

CMS Dolphin Ltd v Simonet

Answer 42

Resignation and exploitation of a conflict - No Profit

Mr Simonet resigned from his position as MD of CMS and set up his own company. CMS’s staff followed and so did major clients. CMS sued Simonet for the profits, alleging that he breached his duty of loyalty. He contended that there was no duty as he had already left the company.

The Court held that as Simonet resigned without given proper notice, he was in breach of the contract. He made no proper disclosure and misused confidential information. The maturing business opportunities were CMS’s property, ‘where he knowingly had a conflict of interest, and exploited it by resigning from the company’.

Question 43

Simtel Communications Ltd v Rebak

Answer 43

Exploitation of a conflict - No Profit Principle

Simtel Communications and its financial backer D brought claims against 3 defendants, Rebak and two others (T and C. T being a company set up by R and C). D and Rebak were the directors of Simtel. When D experienced problems with Rebak’s management, he decided to recall his secured debts from Simtel. Rebak and the defendants carried on S’s business where it left off under T’s name. D brought an action in Simtel’s name stating that Rebak had financially mismanged Simtel, committing it to high value order without securing sales and misled D to get authorisation to pay deposit. R had also removed cash without proper authorisation for personal purposes.

The Court held that in entering a deal where there is a high degree of risk and misrepresenting the position to D, Rebak breached his fiduciary duties. In using unauthorised finances for personal means, Rebak had misappropriated S’s properties and breached his fiduciary duties. Rebak and C who was a former trader with Simtel both acted in breach of their duties by setting up a company that would directly compete with Simtel.

Question 44

Shepherd Investments v Walters

Answer 44

Resignation - no profit principle

The directors of Shepherd Investments made active promotion of another planned business and exploited a business opportunity while still in office. Shepherd Investments sued for a breach of fiduciary duties.

The Court stated that the precise point at which the preparations for the establishment of a competing business becomes unlawful depends if it is permissible or if it is impermissible, has consent been obtained from the company or employer after full disclosure. Soliciting customers of the company is an obvious breach of fiduciary duty.

Question 45

Canadian AeroService Ltd v O’Malley

Answer 45

Resignation - Exploitation of conflict, No profit principle

O’Malley, Zarzycki and Wells were directors of Canadian AeroService Ltd (Canaero). Canaero was acquired by a company and Wells subsequently resigned from it. O’Malley and Zarzycki later also resigned from the company. Prior to the latter’s resignation, Wells, knowing that they were dissatisfied with restrictions imposed upon them by the new parent company, suggested that they form a business venture that is in the same field as Canaero. The company was then incorporated a month after O’Malley and Zarzycki’s resignation and received a business contract shortly after. Canaero filed a claim against the three for breach of fiduciary duties and improperly taking fruits of a mature corporation.

Question 46

Island Export Finance v Umunna

Answer 46

It was ruled in the case that a director may resign and he is not thereafter precluded from using his general fund of skill and knowledge, or his personal connections to compete. The resignation of the directors were unaccompanied by disloyalty and thus there was no liability.

Question 47

In Plus Group Ltd v Pyke

Answer 47

Partners of In Plus Group were dissatisfied with one of its partners, Mr Pyke. Mr Pyke refused to resign and the others tried to squeeze him out by excluding him from management and severing his salary. He set up his own company and got a lucrative contract with one of In Plus Group’s major customer. In Plus sued him for breach of fiduciary duties.

The Court held that Mr Pyke had effectively been expelled from the company some 6 months prior to any of the events in question. Also, he was not allowed to withdraw the money he invested and denied remuneration. Mr Pyke had not used any company property for the opportunity or any confidential information that came to him as director.

Question 48

Foster Bryant Surveying v Bryant

Answer 48

Bryant was one of the two directors at Foster Bryant Surveying. Due to internal issues, Bryant later tendered his resignation. Before his resignation took effect, Foster Bryant’s largest client approached him to request that he works for them when his employment ceases. The client offered to share the work between Bryant and Foster Bryant which Mr Foster, the other director, declined and subsequently brought an action against Bryant for breach of fiduciary duties.

The Court held that there was no breach of that duty. Bryant did not use corporate property; resigned in order to make use of the opportunity; solicited corporate business in competition or acted in bad faith, deceitfully or clandestinely. Bryant’s resignation had no ulterior purpose.

Question 49

Movitex Ltd v Bulfield

Answer 49

Disclosure of interest

The articles of association of Movitex Ltd provided that a director could be interested in a contract with the company provided he disclosed the interest. It also states that where the sole interest is that ““he is a director or other officers, member of creditors thereof””, his votes with regards to the transaction will be counted towards the quorum. The company sought to set aside transactions made with companies which had directors in common with it.

The Court held that the articles had covered the situation. As long as the directors had given full disclosure and the transaction was fair to the company, the directors will not be regarded to have breached his fiduciary duties.

Question 50

JJ Harrison (Properties) Ltd v Harrison

Answer 50

Duty to declare interest in proposed transaction, Resignation and making secret profits

Harrison was a director from JJ Harrison (Properties) and acquired plots of land from the company with the knowledge that he could profit from it by selling it to other parties. This knowledge was not disclosed to the Board and he later resigned as a director. The company sued. Harrison brought in evidence to show that the company had suspicion on his intentions at the time of his resignation.

The Court held that Mr Harrison breached his fiduciary duties. There was no real possibility that the evidence upon which Harrison sought to rely would have caused the trial judge to alter his conclusion.

Question 51

Gwembe Development v Koshy

Answer 51

Duty to declare interest in proposed transaction

Koshy was the managing director in Gwembe Development. He arranged a loan transaction with Gwembe which involved another company under the control of Koshy. Koshy and that company made huge profits from the transaction. His interest was not disclosed nor approved by the Board. Gwembe sued.

The Court held that evidence justified findings that Koshy had breached his fiduciary duties by deliberately and dishonestly concealing from the other directors and shareholders the size of the profits made by him from the transactions.

Question 52

Lee Panavision Ltd v Lee Lighting Ltd

Answer 52

Disclosure not required if other directors are already aware of it. (No idea how this relates)

Lee Panavision sought an injunction to restrain Lee Lighting from terminating a management agreement under which members of Panavision were appointed Lighting’s managers. The agreement was made by Panavision’s nominees who were directors in Lighting under a separate agreement. The current agreement was made as these nominees were aware of the intentions of Lighting’s shareholders to terminate their earlier agreement.

The Court held that it was established in the case of Piercey S Mills & Co, that a director could not use their powers to perpetuate their or their friends’ control of their company even if they asserted that their actions were bona fide in the interest of the company. The function of appointing directors lies with shareholders in general meetings.

Question 53

Runciman v Walter Runciman

Answer 53

Directors do not need to disclose interest in terms of their service contract which have been or are to be considered by a meeting of the directors or a committee of the directors appointed for that purpose.

P was the chairman of D. Following a takeover of D, P was dismissed from his position. P commenced proceedings for wrongful dismissal. Prior to the anticipated takeover, the board decided to vary all the directors’ terms and conditions of engagement to make them determinable on five years’ notice by D. The decision was made informally in consultation with non-executive directors which was then notified to each of the directors. At that time, P was in no serious prospect of being sacked and changed was applied across the board to achieve uniformity between directors. No declaration of interests was made by P in relation to the increase in his earnings or his notice period. D, after the takeover, claimed that the variation was not binding as there were no formal board meetings.

The Court that the articles of association did not lay out the manner in which matters were to be determined by directors. In regards to the variation, it could be shown that all other directors concurred to it. Provided that they act unanimously, directors can act informally. The interest of P in the variation need not be declared as it is plainly obvious that the variation would affect the director’s service contract.

Question 54

Guinness plc v Saunders

Answer 54

Nature and manner of disclosure of interest in transaction? huh?

Guinness plc appointed a committee of 3 directors to handle the company’s affairs during a takeover bid of another company. During this period, the three directors agreed to pay one of them £5.2m as ““fee””. Guinness’s articles gave the whole board power to fix directors’ remuneration. The new owners of Guinness plc argued that no such powered had been delegated to the 3 directors.

The House of Lords held that the power to pay remuneration under the articles were only given to the Board and not individual directors. He must restore the money to Guinness.

Question 55

Re Neptune (Vehicle Washing Equipment)

Answer 55

Nature and manner of disclosure of interest in transaction? huh?

D was the sole director of Neptune. At a board meeting attended by D and the company secretary, D resolved to terminate his service contract and pay £100k by way of compensation. The company sought to return the money and argued that there had been no proper declaration of his interest. In making the resolution, he was in breach of his fiduciary duties.

The Court held that D acted in breach of his fiduciary duties and failed to make sufficient declaration of his interests at the meeting. One the resolution had been passed, he ceased to be a director and had no authority to authorise the payment.

Question 56

Re Marini

Answer 56

Nature and manner of disclosure of interest in transaction? huh? No make sense.

The liquidator of Marini sought reliefs against its directors which included the repayment of dividends paid to them. The directors contended that the dividends were paid on the advice of Marini’s accountant.

The Court held that even though they acted reasonably and honestly on their accountant’s advice, their honesty did not allow them to enjoy a benefit at the expense of Marini’s creditors.

Question 57

Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker

Answer 57

Duty to exercise reasonable care, skill and diligence. Directors must maintain sufficient knowledge and understanding of business to properly discharge duties.

A trader of Barings Bank doctored bank’s accounts and reported large profits while trading at a loss. The Secretary of State sought director disqualification orders against three directors of the bank for failure to supervise his activities. They were alleged to be incompetent and therefore ““unfit to be concerned in the management of a company””

The Court held that the three directors should be disqualified. Directors must inform themselves of company affairs and join in with other directors to supervise those affairs. Having no adequate system of monitoring was therefore a breach of this standard.

Question 58

Bishopsgate Invesmtent Mangement Ltd (In Liq) v Maxwell (No 2)

Answer 58

Duty to exercise reasonable care, skill and diligence.

Robert Maxwelled who controlled the Maxwell Group used company pension funds to fund his own lifestyle. His Son was the director of Bishopsgate Investment which was meant to be safeguarding the company pension plans. He signed shares transfers from Bishopsgate to Maxwell Group for no consideration. The liquidators of Bishopsgate sued his son to compensate for the value of the shares.

The Court held that Ian Maxwell was liable for the value of the shares, not even on the basis of any negligence, but merely by misapplying the assets.

Question 59

Secretary of State for Trade and Industry v Goldberg

Answer 59

Duty to exercise reasonable care, skill and diligence.

A director of a football club which had financial difficulties went into administration shortly after he left. He knew of important financial details about the club manager’s contract which he had not conveyed to the board. The Secretary of State sought to disqualify him as a director.

The Court found that he is unfit to be concerned in the management of a company. Despite being found that he may not be consciously dishonest by remaining silent, his failure to disclose the club manager’s actions to the board amounts to a breach in fiduciary duties as he was under a positive duty of loyalty to act within he best interests of the company.

Question 60

Secretary of State for Trade and Industry v Swan

Answer 60

Duty to exercise reasonable care, skill and diligence.

The SOS applied to have Mr Swan and N disqualified as directors. They were directors of a parent company. The corporate group practiced ““cheque kiting”” which was under the control of the finance director. Mr Swan was the one who authorised the cheques while N was notified of irregularities in the accounting system but did not take further actions.

The Court held that there was no direct evidence that Mr Swan had been informed about the kiting but he ought to have known as it was a transaction of irregular value (doesn’t usually transact so much). N failed to exercise reasonable care and skill that is required of a director. Both Mr Swan and N were disqualified.

Question 61

Re Park House Properties Ltd

Answer 61

Directors must be informed about the company’s affairs - inactive director.

C incorporated Park House Properties and sold his business of leasing industrial buildings to it. The shares in the company were held by him, his wife and his children but he was the only director who actively take part in the running and management. None of the others received payments for their positions. The company was unable to meet its liabilities and the Secretary of State applied to disqualify all four directors. The others who did not take active part in the management applied for the proceedings against them to be dismissed.

The Court disqualified all four directors. C’s actions merited disqualification while the others were disqualified due to their inactivity. The inactivity showed themselves unfit to be directors.

Question 62

Re Galeforce Pleating Co Ltd

Answer 62

Directors must be informed about the company’s affairs - inactive director.

The Secretary of State applied for a disqualification of 3 directors (P, B and his wife) of Galeforce Pleating Co Ltd which went into voluntary liquidation. B was the director of two other companies, one of which his wife was also a director. P was the auditor of these two comapnies. The two companies subsequently went into liquidation. The companies did not pay many of its liabilities such as VAT on due dates. It was also found that inadequate accounting records were maintained.

The Court disqualified the directors. It was the duty of a director, continuing to hold office, to inform himself as to the financial affairs of the company and to play an appropriate role in the management of its business. A director who was not prepared to do so should resign.

Question 63

Re Brian D Pierson (Contractors) Ltd

Answer 63

Directors must be informed about the company’s affairs - inactive directors. Huh?

A married couple were the only directors of the company. Since a period, its liabilities have always exceeded its assets by half a million. They eliminated the company’s overdraft by paying sums personally. Those sums were later repaid to them by the company. The company later went into ceditors’ voluntary winding up. The liquidator sued him for preference in relation to repayments of loans.

The Court ordered them to repay the sum repaid to them by the company. Each would be disqualified from acting as directors.

Question 64

Re Queen’s Moat House plc, Secretary of State for Trade and Industry v Bairstow

Answer 64

Directors must be informed about company’s affairs - delegation of duties.

Bairstow founded Queen’s Moat House and served as the chairman and managing director. Due to its accounting policy, the resulting financial statements in face of a recession appeared to be ““false and misleading””. The Secretary of State sued and applied for disqualification. Bairstow was not an accountant but had considerable business experience. He claimed that he was entitled to rely on his finance director for the preparation of financial statements and the auditor who did not qualify the statements.

The Court granting the application, that Bairstow could not rely on the fact that preparation of the financial statements had been delegated to other board members. Although he was not expected to oversee the performance of the finance director, his business experience and knowledge were such that he should have been aware of the false and misleading treatment of profits, losses and costs in the financial statements.

Question 65

Lindsley v Woodfull

Answer 65

Directors’ liabilities for breach of duties - Extent of liability

RW, J and GW were partners for 16 years and RW gave notice of his intention to retire at a specified date. Prior to this, RW incorporated his own company, T. J and GW alleged that RW had misrepresented his interest in T and was liable to account for profits earned by T.

The Court held that J and GW had affirmed RW’s retirement date. Although his misrepresentation had made the agreement voidable, they had qualified the affirmation by reserving the right to sue for their subsequent losses. However, there was no right to sue for profits arising on or after the date of retirement since the intention of the parties was to achieve finality. Nevertheless, RW should not benefit from his misconduct and should still be held liable to account.

Question 66

Murad v Al-Saraj

Answer 66

Directors’ liabilites for breach of duties - Extent of liability.

Al-Saraj proposed to Murad that they should together buy a hotel. The capital will be paid by Al-Saraj in cash, Murad will fund a portion while the remaining be loaned from a bank. It appeared that Al-Saraj did not fork out the amount in cash, but instead they were made by setting off obligations owed by the vendor to Al-Saraj.

The Court held that where a fiduciary had made a profit from inducing the respondents by his fraudulent representation to enter into a joint venture to acquire a hotel, the appropriate remedy was that the fiduciary should disgorge all the profits, whether of a revenue or capital nature.