This article was written for the benefit of other solicitors published in late July in the summer 2021 edition of Solo, the Sole Practitioners Group of Solicitors' Journal
By Nicholas Woolf, Director and Principal of Nicholas Woolf & Co
The case of Alan Burnell (Claimant) v (1) Trans-Tag Limited and (2) Robert Aird (Defendants) (Judgment 28-05-21) is an interesting read. All 83 pages of the Judgment of Deputy Judge Greenbank in the High Court conjure up pictures of characters who we are all familiar with in our litigation practices. The facts are lengthy and technical but the lessons learned from eight days in the High Court are fairly straightforward.
The Facts (at their simplest)
D1 was a limited company whose business was the development, manufacture and distribution of both the hardware and software of tracking devices. The majority shareholder in D1 was a company called “Monogram” controlled by D2. C became an investor in D1 and CEO at the behest of D2. C invested £250,000 by way of loan in D1. C claimed repayment of the loan and also breach of contract against D2 by failing to procure C shares in D1. D2 counterclaimed against C. The grounds of the counterclaim included a claim for breach of director’s duties despite C never having been formally appointed a director of D1. C served a statutory demand on D1 for the return of the £250,000 during his period as CEO of D1. After his departure from D1 took control of X Co, which had licensed the software for the tracking devices to D1 and terminated D1’s licence.
That C was a de facto director of D1 between certain dates. De facto directors have the same statutory duties under sections 170 to 177 Companies Act 2006 as properly appointed directors. These duties should be read within the terms of the Companies Act. The duty of confidentiality was a continuing duty and C had breached that duty by using the knowledge he had accumulated during his “directorship” to his benefit in acquiring control of X Co and thereafter terminating the licence with D1. C was, therefore, liable in damages to D1 and D2 and liable to account. Interestingly the service of the statutory demand whilst a de facto director was not a breach of the statutory duty to act in the best interests of D1. D1 was liable to repay the loan.
What should we tell our clients?
- To make sure that all your and your company agreements are in writing and enforceable.
- When being involved with a company ensure that the Articles of Association are complied with. Please note the Duomatic principle is becoming increasingly hard to satisfy.
- That registrations at Companies House are not evidence of compliance with the law and may prove irrelevant.
- Even if your client has not been appointed a director, if he or she is part of the corporate governance of the company and assumes the status and function of a director he or she may be a de facto director, shadow director or both. If they are either a shadow or de facto director the following consequences will flow:
(1) a liability to the company (whether or not in liquidation);
(2) incurring extensive personal liability;
(3) having statutory duties to comply with under sections 170 to 177 of the Companies Act 2006, which may be summarised briefly as follows:
To act within powers (s171)
To promote success of company (S172)
To exercise independent judgement (S173)
To use reasonable care, skill & diligence (s174)
To avoid conflicts of interest (s175)
Not to accept benefits from 3rd parties (s176)
To declare interests in transactions (s177).
It is important to advise clients that the duties under s175 (and s176) continue after a “director” has resigned or severed his or her relationship with the Company.
© Nicholas Woolf, Director and Principal, Nicholas Woolf & Co 14th June 2021
This note comprises the view of the author as at 14th June 2021. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.