The applicant liquidator (F) sought relief from misfeasance by the respondent company director (S) in respect of money his company had allegedly paid to a shareholder (H) to purchase its own shares.
The company had paid H £259,200 in weekly payments over two years. S claimed that the payments were for the purchase by the company of H's shares pursuant to an agreement that it would pay H a total of £300,000 for his shares. The company had not actually received any of the shares. S asserted that before entering the alleged agreement he had obtained advice from an accountant. The nature of the advice given was unclear, but the accountant had advised that a payment of £300,000 for H's shares was a good deal for the company. The accountant gave evidence that no matters other than the valuation of H's shares were raised. The issues were whether (i) there was an agreement for the company to purchase its own shares and S had acted in breach of his fiduciary duties by authorising the payments; (ii) if so, it was appropriate for the court to grant S relief for misfeasance under the Companies Act 1985 s.727 on the basis that he had acted honestly and reasonably and ought to be excused.
S submitted that he had acted honestly and reasonably by obtaining professional advice from an accountant in respect of the company's purchase.
(1) The evidence established that there was an agreement for the purchase by the company of the shares. However, that agreement was in breach of s.143(1) of the Act and was therefore void under s.143(2): none of the statutory requirements were complied with, in particular there were no distributable profits for the payments to H and there was no declaration of solvency for the purposes of a payment out of capital. Accordingly, no money should have been paid by the company to H. S had misapplied the company's monies and acted in breach of his fiduciary duties by authorising the payments pursuant to an agreement which was void. He was also in breach of duty in causing the company to transfer its money for no consideration. S's actions constituted misfeasance and as such he was accountable for those monies, subject to whether he should be excused under s.727 because he had acted honestly and reasonably (see paras 10-11, 16-17 of judgment). (2) There was nothing to gainsay S's evidence that he had no knowledge of the statutory requirements when he entered into the agreement with H, which supported the conclusion that he was honest. However, S had not obtained professional advice concerning whether and if so how the company could and should enter into and implement an agreement to purchase its own shares: the evidence did not establish that S had sought advice from the accountant on the form of the agreement or upon company law requirements. It was reasonable to expect a director to obtain such advice in the circumstances of a company purchasing its own shares. It was not sufficient to rely upon the fact that the accountant was advising upon whether the value was fair and reasonable for the company. S had caused the company to enter into the agreement without having sought professional advice upon the law applicable to company purchasing its own shares, and by failing to do so S did not act reasonably for the purposes of s.727. In any event, S had subsequent knowledge after entering the agreement of the fact that it did not comply with the requirements of the Act and had sought to hide that knowledge. Therefore even if his actions were reasonable when entering the agreement, they were certainly not reasonable once he had gained that knowledge and he should have ceased the payments. Further, it was unreasonable for S to have allowed the company to make the payments without receiving the transfer of any shares in return. The appropriate remedy was to order S to repay the sum of £259,200 to the company with interest (paras 30-31, 58-60, 63, 65, 69, 76).
A director had acted in breach of his fiduciary duties by authorising weekly payments by his company to a shareholder for the purchase of its own shares pursuant to an agreement which was in breach of the Companies Act 1985 s.143(1). The director was ordered to repay the company in respect of those payments because, despite acting honestly when entering the agreement, he had not acted reasonably in failing to obtain professional advice on the company law requirements for such agreements.