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Directors’ duties – don’t take short cuts

Directors’ duties – don’t take short cuts

Trainee Solicitor, Emma Armstrong, explains a High Court case relating to a director's authority and responsibilities and the importance of not taking short cuts.

When a director of a company makes a decision, he must ensure that it is authorised and does not contravene the law or the Company’s Articles of Association.

In a recent case, the decision of the High Court illustrates the importance of following the correct procedure when making decisions and demonstrates the consequences when these are not followed.

The facts

Mr Dickinson was a director of a company called Norton Aluminium Ltd. In 2005, Mr Dickinson caused Norton Aluminium Ltd to transfer a factory to him for less than the market value. Following this, in 2007 a claim was brought against Norton Aluminium for nuisance. When Mr Dickinson was defending the claim, his plan was to carry out certain transactions in order to devalue the company and therefore deter the claim. Firstly, Norton Aluminium bought Mr Dickinson’s shares from him, but the money which was owed to Mr Dickinson was left outstanding as a loan. Secondly, Norton Aluminium sold one of its subsidiary companies to Mr Dickinson for the sum of £1.00.

Norton Aluminium went into liquidation and the liquidators tried to recover the assets from Mr Dickinson by claiming that the transactions were void. The court came to the following conclusions on each transaction;

Property sale

The sale of the factory to Mr Dickinson was not approved by the directors pursuant to a valid resolution and therefore it was void. No properly constituted meetings of the directors ever took place and Mr Williamson, a fellow director, was never involved. In addition, because Mr Dickinson was connected to the transaction, as he was buying the factory from the company, his vote in the meetings which did take place did not count and therefore the meetings did not have the necessary quorum. The court held that the sale of the factory was not properly authorised and therefore Mr Dickinson held the factory on trust, and was liable to give it back to the company and pay compensation.

Buy back of shares

The court held that the buy-back of shares was void for two reasons. Firstly, Mr Dickinson’s objectives in entering into the buy-back transaction were to ensure that his interests ranked ahead of the other claims against the company. Secondly, because the purchase price of the shares was left outstanding as a loan, this contravened the law, as it is a requirement in a company purchase of own shares that the shares must be paid for at the time of purchase.

Sale of the subsidiary

The judge found that the value of the subsidiary company at the date of the sale was in fact £214,000. Under the law, a transaction of this value is subject to shareholders approval. As this was not granted the transaction was held to be voidable. The judge also said that Mr Dickinson had not acted in the best interests of the company by selling the subsidiary for £1.00, as in doing so he preferred his own interests.

Practical implications

Transactions between companies and their directors are quite common, and it is sometimes assumed that they are essentially "in house" arrangements which require little or no formality. However, in this instance a failure to follow proper procedures meant that all three of the transactions were held to be invalid. This case is a reminder that company directors and shareholders must always follow the correct procedures and avoid short cuts. The steps required to secure authority can be time consuming but failure to take them can be costly.

If you would like more information on directors' authority and responsibilities, please contact Emma Armstrong at ea@burnetts.co.uk.

About the author

Emma Armstrong profile photo

Emma Armstrong

Emma is a Trainee Solicitor in the firm's Family law team.

Published: Thursday 23rd February 2017
Categorised: Corporate Law, Legal Services in Newcastle, Penrith, West Cumbria

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