UK: The Supreme Court on the 'creditor duty' - its existence, content and engagement

And so we have it - one of the most important company law judgments of recent years: BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25. The existence of the common law 'creditor duty' (also known as the 'rule in West Mercia' after the case West Mercia Safetywear v Dodd [1988] BCLC 250) has been confirmed and its content and application explained. A summary of the judgment is available here and here (pdf). A summary was also read out by Lord Briggs in the Supreme Court yesterday - see below (if the video does not appear below, it can also be found here): 

UK: England and Wales: prejudicial, but not unfair

A good illustration that, in order to succeed in bringing a claim for unfair prejudice, the claimant must establish both unfairness and prejudice, is provided by the recent High Court judgment Hussain v Hussain [2022] EWHC 1880 (Ch). Chief ICC Judge Briggs found that conduct agreed to be prejudicial (withdrawals in excess of declared salaries) was nevertheless not unfair because of, amongst other things, an understanding regarding the rights of the family members to draw on the profits generated by the businesses.

UK: Secondary Capital Raising Review - report published

The UK Secondary Capital Raising Review, which launched last October, has today published its report and recommendations: see here (pdf). A summary is available here. The Financial Conduct Authority has welcomed the report: see here.

UK: England and Wales: common law derivative claims

The ICLR has published a summary for the recently reported decision McGaughey v Universities Superannuation Scheme Ltd [2022] EWHC 1233 (Ch): see here. To quote directly from the summary:

"In order to establish that they had standing or a sufficient interest to continue a claim, it was essential for derivative claimants to demonstrate both that the subject company had suffered a loss and that that loss was reflective of their own loss. The availability of an alternative independent claim against the wrongdoer, for example a breach of trust claim, did not prevent the derivative claimant from having standing. A derivative claimant relying on the fraud on a minority exception to the general rule had to establish a prima facie case that the defendants had committed a deliberate or dishonest breach of duty or that they had improperly benefitted themselves at the company’s expense. It did not provide much assistance to adopt the analysis of a fraud on a power".

UK: England and Wales: unfair prejudice petitions - long delays and acquiescence

The circumstances in which a shareholder's petition under section 994 of the Companies Act 2006 - the unfair prejudice remedy - will be dismissed on the grounds of delay, or acquiescence by the petitioner, have recently been considered by the Court of Appeal in Bailey v Cherry Hill Skip Hire Ltd [2022] EWCA Civ 531. Noting that there was no statutory period of limitation applicable to unfair prejudice petition, and with regard to the issue of delay, Lady Justice Andrews (with whom Snowden and Lewison LJJ agreed) observed (emphasis in the original): 

.... there is a distinction to be drawn between a shareholder who knows he has been excluded from active involvement in the company's affairs and fails to complain about that for many years, and a passive shareholder who knows he is not getting the company's accounts or an invitation to the AGM and is not receiving dividends and does nothing about any of those matters, but then discovers years later that money or corporate opportunities have been diverted from the company for the benefit of its directors ... The distinction lies in the fact that in the absence of evidence to the contrary, a shareholder is entitled to assume that the company is being managed properly by its directors in accordance with their fiduciary and statutory duties, and that its constitution has been followed" (para. [46]). 

 

UK: England and Wales: the director's duty to promote the success of the company

In IBM United Kingdom Ltd v Lzlabs GmbH [2022] EWHC 884 (TCC), Mr Justice Eyre has explored the circumstances in which the director's duty to promote the success of the company, under section 172 of the Companies Act 2006, will be broken where the director causes the company to breach a contract or other legal obligation. Drawing heavily on Antuzis & Ors v DJ Houghton Catching Services Ltd & Ors [2019] EWHC 843 (QB), [2019] WLR(D) 254, his Lordship observed (at para. [36]): 

... not every instance of causing a company to breach a contract or a legal obligation will involve a director in a breach of the section 172 duties ... The key will be whether the director was properly acting to promote the success of the company taking account of the matters to which he or she is required by section 172 to have regard. In that exercise it will be necessary to consider the circumstances as a whole. Those will include the motivation of the director and the nature of the duties said to be broken but in addition the nature of the obligations being broken by the company and the consequences of the company's breach can be relevant to the question of whether the director can properly have been said to have been acting in the interests of the company."

 

UK: FCA consultation - guidance for firms seeking to limit their liabilities through compromises

The Financial Conduct Authority has published, for consultation, proposed guidance for firms seeking to limit their liabilities through compromises including schemes of arrangement, restructuring plans and voluntary arrangements: see here (pdf). In the consultation paper, the FCA explains (at para.1.2):

With this guidance we aim to help firms understand what information we need and how we approach compromises in line with our statutory objectives to protect consumers and the integrity of markets, with a view to reducing the number of proposed compromises that we do not consider to be appropriate. We also remind firms of their regulatory obligations, in line with Principle 11, to notify usimmediately and provide relevant information at an early stageif they are considering proposing a compromise. Where firms determine there is no better alternative outcome for consumersthan to propose a compromise, the guidance will help firms to propose acceptable compromises that are compatible with our rules, including the Principles for Businesses, and statutory objectives. In particular, if firms do propose a compromise in respect of redress liabilities, they should ensure it is the best proposal that the firm can make, which includes the firm providing the maximum amount of funding for the compromise so that consumers receive the greatest proportion of what is owed to them."

UK: shadow directors and the register of directors

In a recent decision of the First-tier Tax Tribunal - Bagri Services Ltd v HMRC [2021] UKFTT 482 (TC) - an interesting question arose: is there an obligation to include, as part of the register of directors required by the Companies Act 2006, details for shadow directors? The Tribunal held that no such obligation existed, although it noted that the position was different under the Companies Act 1985 with section 288(6) making explicit, for the purposes of the register of directors and secretaries, that "a shadow director of a company is deemed a director and officer of it".

UK: England and Wales: Court of Appeal considers ultra vires and directors' liability

Today has seen several Court of Appeal judgments handed down and published on the BAILII website. Two have caught my eye, the first of which is Ceredigion Recycling & Furniture Team v Pope [2022] EWCA Civ 22. Of note is what the court said about the operation of section 39 ("A company's capacity") of the Companies Act 2006. To quote the Chancellor: "The fact that section 39 abolishes the ultra vires doctrine as between the company and third parties does not relieve the directors from liability to the company for their breach of duty or wrongdoing merely because, qua members, they agreed with the course which was taken" (para. [47]). 

UK: England and Wales: unfair prejudice claims - personal acts and a causal connection

Judgment was given earlier today in Primekings Holding Ltd v King (Re Kings Solutions Group Ltd) [2021] EWCA Civ 1943. The court was required to consider whether, and if so in what circumstances, it was permissible to include in a statement of case in a section 994 petition allegations of personal conduct by the respondents which were not, of themselves, within the scope of Section 994 of the Companies Act 2006. Lord Justice Snowden, with whom Lords Justice Nugee and Green agreed, stated (at paras. [66]-[67]):

Although designed to overcome some of the limitations which beset the oppression remedy under section 210 of the Companies Act 1948, neither section 459 of the Companies Act 1985 nor Section 994 were drafted on the basis that a shareholder could simply complain, for example, that "a course of conduct in relation to the company" had unfairly prejudiced his interests. The potential breadth of what is now Section 994 has been limited and kept within manageable bounds by the express statutory requirements that the acts complained of must either (i) be an act or omission of the company, or (ii) be conduct of the company's affairs rather than acts done in the conduct of a shareholder's personal affairs.

Satisfaction of these requirements should not be overlooked or minimised. Petitions and statements of case in unfair prejudice cases should make it clear which limb of Section 994 is being relied upon and should contain a concise statement of the facts upon which the petitioner relies to make out that requirement. On the basis of the majority judgments in Graham v Every [2015] 1 BCLC 41, it may be legitimate for a concise statement of personal acts of the respondents which are causally connected to an act or omission of the company, or causally connected to conduct of the company's affairs, to be included to support the primary allegation. There is, however, no such justification for allowing other allegations of personal conduct of the respondents, which are not causally connected to an act or omission of the company, or not causally connected to conduct of the affairs of the company, to be included in a statement of case under Section 994. "

UK: England and Wales: the duties of non-executive directors

A recent judgment of the High Court - Secretary of State for Business, Energy And Industrial Strategy v Selby [2021] EWHC 3261 (Ch) - is of interest because of the discussion it contains regarding the duties and expectations placed on non-executive directors (NEDs) and the message it sends about what NEDs are expected to know, and concern themselves with, in respect of their companies. The NED in the case was disqualifed from acting as director for four years. ICC Judge Prentis found that the NED had, amongst other things, failed to investigate thoroughly the reasons for an "extraordinary uplift" in the company's turnover, something the judge said was a "reprehendable abrogation of duty ... whether the uplift was owing to business which was legitimate or not" (para. [234]).

UK: England and Wales: equitable constraints and unfair prejudice

Last week - a week ago today, in fact - the Court of Appeal delivered its judgment in Loveridge v Loveridge [2021] EWCA Civ 1697. I note the decision here because of the discussion it contains regarding the scope of equitable constraints in the context of claims for unfair prejudice under section 994 of the Companies Act 2006. One of the alleged equitable constraints related to the circumstances in which a director could be required to repay a loan received from the company. Mrs Justice Falk (with whom Nugee and Bean LJJ agreed) stated (at para. [95]): 

"As Lord Hoffmann explained in O'Neill v Phillips at p. 1099F-G, 'a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty'. In circumstances where a loan is interest free and legally repayable either immediately or on demand, it seems to me that the court should be very reluctant to impose equitable constraints that, if recognised, would fetter the exercise of directors' duties and could in reality significantly impair the value of the chose in action that the loans represent".

UK: England and Wales: fraudulent trading under section 993 of the Companies Act 2006

Judgment was delivered today by the Court of Appeal in R v Hunter v [2021] EWCA Crim 1785, a case concerning what has become known as 'ticket touting'. The judgment is now a leading authority on the scope of the fraudulent trading offence found in section 993 of the Companies Act 2006. Section 993(1) provides: "If any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of the business in that manner commits an offence". 

In considering the scope of section 993, the court rejected the following arguments: that an intention to deceive is a necessary component of the offence; that the conduct must involve deliberately putting another person's property in jeopardy; that section 993 should be construed as being subject to the common law limitations applicable to the offence of conspiracy to defraud. Moreover, the court observed (para. [120]):

The focus upon purpose means that the law is prophylactic. A fraudulent purpose might be proven before anyone is actually defrauded or becomes an actual victim of the fraud. In the present case if the Prosecution had charged the defendants after they had acquired the relevant bots and other software and the multiple credit cards and had set up a system for using an array of false identifies, but before the defendants had put that system into operation and used it to trick ticket vendors into selling them tickets and/or to place end consumers at risk, then the offence would still have been committed even though there was no actual fraud and no actual harm to end consumers and therefore no victims. A fraudulent purpose would still be in existence and business acts to achieve that purpose would have been carried out. Of course, evidence of implementation might afford powerful additional evidence of the fraudulent purpose, but implementation of a fraudulent purpose is not an essential ingredient of the offence". 

UK: England and Wales: standing to pursue an unfair prejudice petition after ceasing to be a member

Judgment was delivered today by Deputy ICC Judge Kyriakides in Motion Picture Capital Ltd [2021] EWHC 2504 (Ch). The case required the court to consider an interesting question concerning the unfair prejudice remedy (sections 994-996 of the Companies Act 2006): if a member ceases to be a member after presenting a section 994 petition, do they continue to have standing to pursue the petition? The trial judge answered 'yes' and observed (para. [38]):

As a matter of construction, it seems to me that section 994(1) is directed to the commencement of proceedings for unfair prejudice and to those parties who have standing to bring them. It provides that the proceedings must be started by petition and only those who are members or to whom shares have been transferred or transmitted have locus to apply. The provisions of section 994(2) support such a construction in that the pre-requisite to a person who is not a member having standing to bring a petition is that shares must have been transferred or transmitted to him, that is, by the time the petition is presented. There is no requirement, however, that the shares must continue to be held by him up until the hearing of the petition".

UK: England and Wales: unfair prejudice - a majority shareholder's petition and an order regulating the company's affairs

Judgment was delivered today by His Honour Judge Hodge, sitting as a judge of the High Court, in Macom GmbH v Bozeat & Ors [2021] EWHC 1661 (Ch). The case - a successful petition brought under sections 994-996 of the Companies Act 2006 (the unfair prejudice remedy) - is noted here because in two respects it is unusual: first, the petitioner was a majority shareholder; second, the relief provided was an order regulating the affairs of the company.

UK: England and Wales: Court of Appeal confirms that shares were not alloted at a discount

Section 580(1) of the Companies Act 2006 provides that "[a] company's shares must not be allotted at a discount". Last Friday, in Chalcot Training Ltd v Ralph [2021] EWCA Civ 795, the Court of Appeal unanimously upheld the trial judge's decision (at [2020] EWHC 1054 (Ch)), that shares issued as part of a tax avoidance scheme had not been issued in contravention of section 580.  In what is - I believe - the first appellate decision to consider section 580, Lewison LJ (with whom Arnold and Edis LJJ agreed) observed (paras. [43], [50] and [73]):

The idea behind the limited liability company is that people will be encouraged to be associated in a business enterprise if they are able to limit their personal liability for the debts of the enterprise. The way in which this is achieved is by the creation of a corporation with limited liability. What that means is that the personal liability of the members of the company is limited to the amount that they have subscribed or agreed to subscribe to the capital of the company. The capital in this instance is the company's nominal share capital. It is part of the very definition of a limited company in section 3 of the Companies Act 2006. That provides that a company is a company limited by shares if the liability of its members "is limited to the amount, if any, unpaid on the shares held by them." This fundamental feature of corporate liability has been recognised for a very long time. It was introduced by the Joint Stock Companies Act 1856; and repeated in the Companies Act 1862". 

"The prohibition on issuing shares at a discount to nominal value thus long pre-dated section 580. Although it was described as a "common law" prohibition, it is, I think, more accurately described as inevitably flowing from the statutory machinery for the creation of a limited liability corporation".

".... the mischief against which section 580 is directed (as confirmed by all the cases that we have been shown) is the depletion of the company's nominal share capital".

UK: England and Wales: resignation and the director's continuing duty to avoid conflicts of interest

Sitting as a Deputy Judge of the High Court, Mr Ashley Greenbank delivered judgment today in Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch). The decision, while first instance, is nevertheless important because of the discussion it contains of section 170(2)(a) of the Companies Act 2006, which provides that a person ceasing to be a director continues to be subject to the duty in section 175 to avoid conflicts of interest as regards "the exploitation of any property, information or opportunity of which he became aware at a time when he was a director".

Deputy Judge Greenbank stated (at paras [411] and [412]):

... the extended duty imposed by s170(2)(a) is a continuing duty and ... it must therefore be possible for a breach of that continuing duty to be founded on acts which take place after a director has resigned his or her directorship. It follows that, following the introduction of the general duties by CA 2006, it cannot be an absolute requirement for a breach of the extended duty that a director's resignation must have been prompted or influenced by his or her wish to acquire a business opportunity of the company.

Such a conclusion is of course contrary to the reasoning in some of the cases which discuss the common law rules and equitable principles on which the general duty in s175 is based, in particular, that of Rix LJ in Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200 and Cockerill J in Recovery Partners GP Ltd v Rukhadze [2018] EWHC 2918 (Comm) ... However, the courts did not have to address in Foster Bryant or Recovery Partners the question of the interaction of the existing case law principles with the statutory code. My conclusion also, in theory, risks creating circumstances in which duties are extended beyond the scope of the duties imposed by common law rules and equitable principles on which the general duty is based and imposing liabilities for breach in cases where liability might not arise based on those principles. However, it is, in my view, an inevitable result of the codification.".

UK: England and Wales: unfair prejudice petitions and changes in control during proceedings

Judgment was delivered several days ago in McMonagle v Harvey & Ors [2021] EWHC 1374 (Ch). While first instance, the decision is noteworthy because of the discussion it contains about whether those in control of a company can be unfairly prejudiced for the purposes of a petition presented under sections 994 to 996 of the Companies Act 2006 (the unfair prejudice remedy).

The petitioner had become the company's only director and de facto majority shareholder after his petition had been presented. While noting that the authorities suggest that there are limited circumstances in which a company's controller may bring a section 994 petition, ICC Judge Mullen said that no authority had been cited to support the proposition that a change in control during the proceedings should halt any consideration of the allegations of unfair prejudice where they had an effect on the company's value.

UK: England and Wales: directors, bribery and section 176 of the Companies Act 2006

Judgment was delivered yesterday in Kings Security Systems Ltd v King & Anor [2021] EWHC 325 (Ch). While first instance, it is nevertheless noteworthy for the trial judge's discussion of whether the introduction of section 176 ("Duty not to accept benefits from third parties") of the Companies Act 2006 had removed the availability of tort based claims against a director in respect of bribery. The trial judge, Andrew Lenon QC, held that section 176 did not have this effect, observing that if section 176 had indeed removed the ability to bring such claims:

.... the liability of the briber and the liability of the bribed director would be governed by different rules. In the absence of clear words, I do not consider that this was the intention of the legislator. Even if the effect of section 170(3) is to substitute the general duties for the tort of bribery ... section 170(4) provides that '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.' The law relating to bribery therefore remains relevant. Advancing a separate cause of action in bribery where there are grounds for claiming a breach of section 176 of the 2006 Act may, however, add nothing more than colour". 

UK: Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021

A draft of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021 was laid before Parliament on 11 February under the affirmative procedure. The accompanying (draft) explanatory memorandum - available here (pdf) - explains the purpose of the Regulations as follows (para. 7.1): 

This instrument extends the expiry date of the period during which the power in section 20 [of the Corporate Insolvency and Governance Act 2020] can be used, from 30 April 2021 to 29 April 2022. The section 20 power enables the Secretary of State to make regulations temporarily modifying corporate insolvency or governance legislation for various purposes in connection with mitigating the impact of coronavirus. An example of a previous exercise of this power is the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020/1349. 

Further information is also available in the announcement made earlier this week by the Department for Business, Energy and Industrial Strategy: see here.