Director's breach of duty
- John Deane
- Updated: Wed, 7th Dec 2016
A director, in a breach of duty, took sole ownership of a lucrative property development deal, after his company expressed an interest in the deal. Our clients were the company’s majority shareholders. We successfully claimed the profits obtained by the conflicting director.
Stepping in to resolve the commercial dispute between the company and the director
As a result of our input, the company will be entitled to:
- The profits the company would have made, had it taken the deal;
- Remove the director from the company;
- Proceed with a company buyback to cancel the director’s shares; and
- Obtain full control of the company.
Events leading to the director’s breach of duty
The company is owned and run by a family comprising four directors and four shareholders, all with equal shareholdings. The company:
- Buys rural parcels of land;
- Obtains planning permission;
- Often builds on the land; and
- Then sells individual parcels of land to property investors.
Option agreements to facilitate development
The director in question negotiated option agreements. These are agreements between prospective purchasers and landowners, and give prospective purchasers an “option” to purchase the development land at a specified price:
- Within a specified time; and
- Subject to certain conditions, e.g. planning permission.
In 2008, the director negotiated a verbal option agreement to purchase a parcel of land, once planning permission was obtained. The landowner personally knew the director.
The director informed the other directors and shareholders of the deal. The other directors and shareholders expressed an interest. Between 2008 and 2013, the director incurred expenses, on behalf of the company, in seeking planning permission.
In late 2013, it transpired that the planning permission had been granted. We had advised the company to check the council’s planning register. The register showed the director’s name as the applicant, as opposed to the company itself. Thus, the director would purchase the parcel of land in his sole name. This was despite the disclosure to the company and the use of company funds to obtain planning permission.
Director’s breach of duty: our action
On learning of the director’s breach, the company could have applied for an interim injunction. This would prevent the director purchasing the developed land. We advised against this, due to the associated costs and clear breach of duty, which could be evidenced.
Rather, we told the company to let the director exercise the option and purchase the land. He did this. In early 2015, the land value increased due to the planning permission. Then we took action against the director in the High Court. In the name of the company we claimed the director, through his clear breach of independence:
- Be forced to account to the company for all and any current or future profit made on the deal,
- Including future sale costs;
- Indemnify the company for any taxes to be incurred, e.g. capital gains tax.
The director argued that the claim failed due to lapse of time. We stated that any lapse was due to covertly obtaining evidence.
The court’s decision
The court found in the company’s favour, and held that:
- The director knew his duties due to his length of office.
- The landowners knew the director was acting on behalf of the company.
- The Companies Act 2006 made it simple for directors to understand their duties; and
- The director could not claim negligence as a defence.
The order made by the court
The court made an order:
- Stating that any future profit to be obtained was to be held on trust for the company;
- Removing the director from office;
- Ordering the director’s disqualification for a period of five years.
We then used the court order as leverage for the company to buyback the director’s 25% shareholding. We used the “profits” from the development land. Thus we:
- Protected the company’s cash position;
- Entitled the remaining shareholders to cancel the director’s shares;
- Removed the director from any affiliation with the company.
The company now trades unconcerned about lost business opportunities, unaccounted expenses, or lost profits.
The right approach to litigation
This shows the correct case tactic can bring a conflicting director to account for any profits obtained through a breach of duty. Directors’ duties have been codified. No knowledge or no understanding is no defence. The judiciary does not treat a director’s breach lightly.
John Deane is the partner running the company team. In the event of a dispute, John can act for both the company and the individual directors. Acting on both sides, we appreciate the issues at stake and the arguments that can run.