Director’s breach of duty

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Gannons successfully claimed profits, illicitly gained by a company director, on behalf of the company.

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.  The company is owned and run by a family comprising four directors and four shareholders, all with equal shareholdings. Our clients were the company’s majority shareholders. The company buys rural parcels of land. Then it obtains planning permission and often builds on the land. The company then sells individual parcels of land to property investors. We successfully claimed the profits obtained by the conflicting director in this case.

Events leading to the director’s breach of duty

The dispute between the director-shareholders arose over several years. It concerned the rogue director’s attempts to purchase and develop a tract of land himself, without involving the company, despite them expressing interest.

Option agreements to facilitate development

The director in question negotiated option agreements. These are agreements between prospective purchasers and landowners. They give prospective purchasers an “option” to purchase the development land at a specified price, within a specified time, and subject to certain conditions (such as obtaining planning permission).

Purchase of land using company funds

In 2008, after obtaining planning permission for some land, the director negotiated a verbal option agreement to purchase a parcel of land. The landowner personally knew the director. The director informed the other directors and shareholders of the deal, who expressed an interest. Between 2008 and 2013, the director incurred expenses, on behalf of the company, in seeking planning permission.

Excluding the company

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.

Instead, 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 should be forced to account to the company for all and any current or future profit made on the deal, including future sale costs. He also should be required to compensate the company for any taxes incurred, such as capital gains tax.

The director argued that the claim failed due to lapse of time. We stated that any lapse was due to him covertly obtaining evidence.

The court’s decision

The court found in our client’s favour, and held that the director knew his duties due to his length of office. Furthermore, the landowners knew the director was acting on behalf of the company.

This was on the basis that the Companies Act 2006 made it simple for directors to understand their directors duties and therefore 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. The order also removed the director from office and disqualified him from holding office for a period of five years.

Share buy back

We then used the court order as leverage for the company to buy back the director’s 25% shareholding. We used the profits from the developed land. Thus we protected the company’s cash position, entitled the remaining shareholders to cancel the director’s shares and removed the director from any affiliation with the company.

The company now trades unconcerned about lost business opportunities, unaccounted expenses, or lost profits.

Result of our intervention

As a result of our input, the company will be entitled to the profits the company would have made, had it taken the deal. Additionally, the company would be able to remove the director from the company and proceed with a company buyback to cancel the director’s share. Our clients thus obtained full control of the company.

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. 

  • Our case was handled impressively intelligently