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RECENT CASES |
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Can a director and controlling shareholder also be an employee? See CLM ¶2010+, ¶2187, ¶2627+ Secretary of State for BERR v Neufeld and another [2009] EWCA Civ 280 The Court of Appeal has given fresh guidance on the approach to be taken when considering whether a company director, who is a majority shareholder, can also be an employee of the company. This case is interesting as it concerned claims by the directors, Mr N and Mr H, of two different failed companies for payments from the National Insurance Fund in their capacity as employees. The claims were made even though the directors concerned were also majority shareholders of the companies. Mr N held 90% of one company’s shares, had given personal guarantees in respect of its business and had made a personal loan to the company. Mr H held 100% of the other company’s shares and was the sole director. He had also given personal guarantees in relation to that company’s business. Both directors were paid a salary from which income tax and National Insurance contributions were deducted. On the companies’ insolvency they each claimed money from the National Insurance Fund in respect of redundancy payments; Mr N also claimed payments in relation to notice pay and holiday pay. The court confirmed that whether or not an individual is an employee is always a question of fact and that there is nothing in principle to prevent a controlling shareholder and director also being an employee if the facts support that conclusion. The court must first determine whether the purported contract of employment is a sham and then, if it is genuine, consider whether it amounts to a true contract of employment rather than, for example, a contract for services. In deciding these issues: a. ordinarily, ownership of a controlling shareholding in a company, lending it money, or personally guaranteeing its liabilities, will not be relevant to the question of whether or not there is a valid contract of employment with the company. However, it may be relevant to: » whether the alleged employment contract is a sham; and » if the contract is genuine, whether its terms and the way in which it operates in practice are consistent with it being a contract of employment; b. the existence of a written contract places the burden of proof that it is genuine on the party seeking to rely on it, which may require the production of additional evidence to prove its true nature; and c. the lack of a written contract should not, by itself, be taken as an indicator that an oral contract is not genuine, although it can be an important consideration. In relation to claims for payment from the National Insurance Fund, the court will also need to be satisfied that the contract was in force at the time of the company’s insolvency. On the facts, the court found that there was no question of either purported contract of employment being a sham and that each contract was subsisting at the time of the relevant company’s insolvency. Despite the fact that each director had personally invested in the company and had assumed personal liabilities for it, both were employees and so they were entitled to the payments claimed from the National Insurance Fund. Employees can claim certain payments owing to them, known as guaranteed debts, on the insolvency of their employer from the National Insurance Fund. Its purpose is to make payments which the insolvent company is liable to make, but cannot make because of a lack of funds (see CLM ¶8045 for a list of the payments that can be made). In 2008 some 12,000 claims were made by directors on this fund and it has been suggested that a considerable number of these may have been by directors who were also controlling shareholders of the failed company. Shareholder’s right to appoint directors linked to shareholding See CLM ¶2230+ Attorney General of Belize and others v Belize Telecom Limited and another [2009] UKPC 10 A company's articles of association entitled the holder of a special share (and only that shareholder) to appoint or remove two “C” directors, so long as it was also the holder of C shares amounting to at least 37.5% of the company's total issued share capital. The articles contained no express provision to deal with what would happen if a change in shareholding occurred so that the shareholder no longer held the requisite majority of C shares. In these circumstances the shareholder was no longer entitled to remove the C directors, nor was any other shareholder entitled to do so. This situation did occur following a transfer of shares and the question arose whether the two C directors that had been appointed by the shareholder remained members of the board. The Privy Council implied a term into the company’s articles so that if the special shareholder existed but his C shares amounted to less than required 37.5% of the issued share capital, the C directors appointed by him automatically ceased to hold office. Comment: Although a decision of the Privy Council is not strictly binding on the English courts, it will be highly persuasive. Do nominee directors owe duties to the company and their appointer? See CLM ¶2317+ Re Neath Rugby Ltd, Hawkes v Cuddy and others [2009] EWCA Civ 291 A nominee director’s overriding duty is owed to the company and the fact that he has been appointed by a shareholder does not, on its own, impose any duty on the director to his appointer. However, he may take his appointer’s interests into account, provided that his decisions as a director are taken in what he genuinely considers to be in the best interests of the company. This case concerned an appeal against a decision in relation to a claim for relief from unfairly prejudicial conduct. Mr H and Mr C were equal shareholders in NR Ltd. NR Ltd’s two directors were Mr H and Mr C’s wife. NR Ltd was one of two shareholders in NSO Ltd, the other shareholder being SRF Ltd. Mr C was a director of NSO Ltd, having been nominated by NR Ltd, together with the nominee of SRF Ltd. It was alleged by Mr H that Mr C had breached fiduciary duties owed to NR Ltd, in his position as nominee director of NSO Ltd, which had unfairly prejudiced Mr H as a shareholder of NR Ltd. This allegation was dismissed but permission to appeal was given on the question of what duties Mr C owed to NSO Ltd and NR Ltd (i.e. what duties a nominee director of a company owes to that company and his appointer). The Court of Appeal upheld the first instance decision and held that Mr C could properly take into account the interests of NR Ltd (his appointer), but his duty was to act in what he saw as the best interests of NSO Ltd (the company). The court commented that duties owed by a director to his appointer may arise out of a separate agreement or employment relationship between them, but such duties could not detract from the director’s overriding duties owed to the company. Forged director’s signature can be binding on company See CLM ¶2361+, ¶3494 Re Carson Country Homes Ltd [2009] Ch D 1/5/2009 (unreported) In a recent case, the court found that a company’s bank was entitled to rely on a debenture as having been properly executed, despite the fact that one of the two directors had forged the other’s signature. The bank had appointed administrators of the company under the terms of the debenture, which had been drafted by the bank and sent to the company’s offices for signature. The debenture was returned to the bank showing the signatures of both directors of the company. Responsibility for the company’s affairs was divided between its two directors in such a way that Mr C dealt with the practical operation of the company’s activities, while Mr J dealt with all of the financial matters. Mr J would sometimes replicate Mr C’s signature on financial documents, as had been the case here. Mr C was happy for this to occur provided he had been informed of the documents to which his signature was being put. Mr C challenged the validity of administrators’ appointment under the terms of the debenture on the grounds that he was not aware of the document’s existence and that he had not signed it. Mr J admitted forging Mr C’s signature but maintained that this had been done after he had properly explained the document and its effect to Mr C. The court found that no discussion regarding the debenture had taken place and therefore Mr J did not have actual or implied authority to sign for Mr C on the document. However, Mr J did have ostensible authority to do so, as he had been appointed with the agreement of Mr C to deal with all issues relating to the company’s finances and all dealings with its bank. He had dealt with all such matters for several years and had replicated Mr C’s signature on previous occasions. If a document purports to be signed on behalf of a company by two authorised signatories (or by a director in the presence of a witness who attests the signature) it is deemed to be properly executed in favour of a purchaser acting in good faith and for valuable consideration (s 44(5) CA 2006). The debenture was entered into following an implied request from the company for the bank not to take enforcement steps against it and therefore the bank was a “purchaser” for these purposes. Accordingly, the bank was entitled to rely on the debenture as having been properly executed and the administrators had been validly appointed. Preparing to compete with the company’s business may amount to breach of fiduciary duty See CLM ¶2397, ¶2467+ G Attwood Holdings Ltd and another v Woodward and others [2009] EWHC 1083 (Ch) A director is free to compete with the company’s business in any way he chooses after he has resigned from office, but preparatory steps taken before leaving could amount to a breach of his duties to the company. Following three failed attempts at a management buy-out, Mr W resigned from his office as a director of MEG Ltd. Before his resignation he had agreed to set up in business together with Mr G, who was employed as management accountant of MEG Ltd. MEG Ltd alleged that Mr W had breached his fiduciary duties in taking steps before he left to establish a new company in competition with MEG Ltd. The High Court held that, in principle, Mr W was free to compete with MEG Ltd in any way he wished after his resignation as a director and to use for that purpose skill, knowledge and contacts that he had acquired while working for MEG Ltd. However, on the facts of this case Mr W was found to have breached his duties to MEG Ltd before he had resigned by: » failing to alert MEG Ltd to the emerging business threat of the new proposed company, even though Mr W was himself involved with that threat; » taking confidential information of MEG Ltd with him when he resigned to assist him in competing with MEG Ltd; and » taking preparatory steps to establish a new company in the UK which would be a direct competitor of MEG Ltd before he had resigned as a director. While preparatory steps such as discussions about future competition, the investigation of potential funding and the preparation of business plans will not necessarily lead to a director breaching his duties to the company, here the preparatory steps taken included the direct solicitation of MEG Ltd’s customers whilst Mr W was still a director, which was a clear breach of his fiduciary duties. Third party enforcement of transactions when directors’ authority invalid See CLM ¶2485, ¶2554, ¶2555 Ford v Polymer Vision Ltd [2009] EWHC 945 (Ch) A third party will not necessarily be prevented from enforcing a transaction which is called into question, because of a procedural defect in convening the board meeting at which the transaction was approved, merely because of his knowledge of that procedural defect. Mr F applied for summary judgment, asking the court for declarations that two transactions he had entered into with PV Ltd were valid and binding. The two transactions in question were a debenture and an option agreement. It had been argued that these were not valid because the two separate board meetings at which they had been approved had not been validly convened. There had been a failure to give notice of the meetings to directors entitled to be given notice and the meetings were held in the UK, when (under PV Ltd's constitution) they should have been held in the Netherlands. Mr F may well have known of these defects because of the surrounding circumstances. However, the High Court held that he was entitled to the protection in favour of a person dealing with a company in good faith to validate transactions that are beyond the powers of that company’s directors under its constitution. Good faith is presumed unless that contrary is shown. The court held that the contrary is not shown merely by proving that the person in question knows that the act is beyond the powers of the directors under the company's constitution. In addition, the court found that in this case the directors of PV Ltd had not acted improperly in granting the debenture to Mr F and were acting in PV Ltd’s best interests in doing so to secure further funding from Mr F. Accordingly, Mr F’s knowledge of procedural defects alone was not enough to show that he had not acted in good faith. On the evidence, the court therefore found that the debenture was valid and binding on PV Ltd. However, the court was not able to deal with the dispute in relation to the option agreement summarily and so this would, if necessary, proceed to a full hearing. Disputing the petition debt in winding up proceedings See CLM ¶7593, ¶7719 Bolsover District Council v Dennis Rye Ltd [2009] EWCA Civ 372 If a company claims that a winding up petition against it should be dismissed because it has a cross-claim against the petitioner, it must show sufficient evidence that its claim is genuine and serious, such as the fact that it has taken steps to advance its claim. DR Ltd had failed to pay council tax on its properties. The local council obtained liability orders and served a statutory demand on the company. The orders were not appealed and the statutory demand was neither complied with nor set aside. As a result, the local council presented a winding up petition against the company. During the winding up proceedings, the company disputed the debt on the ground that it was exempt from council tax. It also argued that, since it had already paid a significant sum to the council after the presentation of the petition, it had a genuine and serious cross-claim against the council for restitution of the sums paid, and that the petition should be dismissed. The judge made a winding up order and the company applied for permission to appeal. The court can dismiss the petition if the company had a genuine and serious cross-claim which was likely to exceed the petition debt. It will consider all the relevant circumstances, for instance, whether the company had attempted to litigate the cross-claim and, if not, its reasons for not doing so. In this case, DB Ltd had not claimed exemption when served with the council tax bills, and did not make any attempts to challenge or set aside the liability orders or statutory demand until the winding up proceedings. Therefore, the company had not adduced sufficient evidence to establish it had a genuine and serious cross-claim. The company’s application was refused. Court’s discretion on public interest petitions See CLM ¶7627 Secretary of State for Business, Enterprise and Regulatory Reform v Chartered Financial Solutions Ltd and others [2009] EWHC 1118 (Ch) When a court hears a public interest petition, it has complete discretion as to whether to make a winding up order. It can consider the company’s past conduct and any undertakings it has offered, as well as the secretary of state’s reaction to these undertakings. CFS Ltd was subject to a public interest petition from the secretary of state, who complained that the company gave false information to the authorities in order to obtain its regulatory licences, and made misleading statements to the public about its business. During the winding up proceedings, the company asked the court to dismiss the petition and accept its undertakings as to future conduct (which were rejected by the secretary of state). The court was satisfied that the company’s business was conducted with a serious lack of commercial probity. However, despite the company’s willingness to improve as evidenced by its proposed undertakings, the court was reluctant to dismiss the petition when the secretary of state considered the undertakings to be unacceptable. A winding up order was therefore ordered against the company. Set-off of mutual dealings between a creditor and an insolvent company See CLM ¶8072+, ¶8976+ Re Kaupthing Singer and Friedlander Ltd; Newcastle Building Society v Mill and others [2009] EWHC 740 (Ch) NBS had acquired three instruments of deposit issued by KSF Ltd for the aggregate sum of £11m repayable with interest on three different maturity dates between November 2008 and December 2008. KSF Ltd later acquired a certificate of deposit issued by NBS in the sum of £10m repayable with interest on 6 January 2009. NBS was subsequently informed that the certificate of deposit had been acquired by KFS Ltd on behalf of, and at the expense of, its indirect subsidiary, KSF(IoM) Ltd. KSF Ltd went into administration on 8 October 2008 and the three instruments of deposit acquired by NBS were not repaid when due. A provisional liquidator was appointed in respect of KSF(IoM) Ltd on 9 October 2008. NBS was concerned that it would become liable to KSF Ltd for the repayment of the certificate of deposit on the 6 January 2009 and sought a declaration from the High Court that KSF Ltd was not entitled to payment, or to enforce payment, because NBS had a legal right of set-off. The High Court dismissed the application as the certificate of deposit had been issued by NBS “without set-off, counterclaim or other deduction, save as required by law”. The legal right of set-off can be excluded by agreement, which had been the case here. In addition, the mandatory set-off of mutual dealings between a creditor and a company in liquidation and administration, under the Insolvency Rules was not applicable (even if KSF(IoM) Ltd were in liquidation), as the equitable interest of KSF(IoM) Ltd precluded the dealings between KFS Ltd and NBS being mutual. High Court gives guidance on proposed pre-pack sales and administrators’ pre-appointment expenses See CLM ¶8738, ¶8748, ¶9026 Re Kayley Vending Limited [2009] EWHC 904 (Ch) “Pre-pack” sales in administrations have received widespread coverage in the press recently and are becoming increasingly controversial. The term refers to an arrangement for the sale of all or part of a company’s business or assets which has been negotiated before an administrator is appointed, with the administrator effecting that sale immediately on, or shortly after, his appointment (see CLM 2009 Newsletter Issue 1 for a discussion on pre-pack sales generally and why they are so contentious). This case is fairly unremarkable in its facts, but is unusual in that the court was directly involved prior to the pre-pack sale. Such sales are most often implemented by an administrator appointed out of court by the company’s directors or a qualifying floating charge holder (see CLM ¶8762+). However, an application to court for an administration order may be necessary instead, as was the case here, where a winding up petition has been presented against the company by an unsecured creditor (preventing the directors from making an appointment out of court). The High Court has taken this opportunity to examine the way in which the legislation and case law to date have operated in relation to pre-pack sales and the nature of concerns about their use. It gave the following guidance on the approach of the court to administration applications which involve proposals for a pre-pack sale: a. the court must consider the merits of the intended transaction and be alert to the possibility of the procedure being abused to the disadvantage of creditors; b. the supporting affidavit (provided to assist the court in deciding whether to make the administration order) must include the fact that a pre-pack is proposed and the value likely to be achieved (if known); c. in most cases, such information should be provided in the affidavit as is required by SIP 16 (see CLM 2009 Newsletter Issue 1), so far as this information is available at the date of the application. Some of the information required by SIP 16 may be commercially sensitive, at least until the pre-pack sale has taken place. If so, this information could be protected by an order of the court restricting the right to inspect it (see CLM ¶7398); d. it would be unsatisfactory for the applicant to: » wait until an application is opposed before providing the relevant information on the proposals for a pre-pack sale. This is because sufficient information should be available to enable relevant parties to make an informed decision whether or not to oppose the administration application; and » say that such information is not available at the time of the application hearing and will be provided to creditors in due course; and e. it remains a matter for the judge in each case to decide whether sufficient information has been presented and whether the proposed pre-pack sale is to the benefit of the company’s creditors as a whole. The court also made a discretionary order in relation to the administrator’s pre-appointment costs, allowing them to be treated as an expense of the administration. The court stated that this was not something that would be appropriate in every pre-pack case, especially where the company’s existing management purchases the company’s business. However, here: » the sale was to a third party purchaser; » the administrator had negotiated with two interested parties (both competitors of the company) and had accepted the best offer; and » the pre-pack sale was of benefit to the company’s creditors and that benefit outweighed any benefit to other parties (such as the company’s management, if it had been the purchaser in the pre-pack sale). The use of the court’s discretionary power means that the court can approach the matter in future on a case by case basis. It must be noted, however, that this decision has no application in relation to the pre-appointment expenses of an administrator who has been appointed out of court. In such cases, it is likely that this will remain a matter between the administrator and those instructing him. |
