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A director has been held not to have breached his fiduciary duties during his notice period, despite arranging to work for his company’s principal client. The Court of Appeal stressed that this case, as with all breach of fiduciary duties cases, was decided on its particular facts and that a similar case had not been before the courts before. Mr B and Mr F were the only two directors of FBS Ltd, a company which undertook surveying and project management work mostly from one client, ALS Ltd. Mr B, Mr F and Mrs B were all chartered surveyors at FBS Ltd. Mr B and Mr F also held the company’s shares, 40% and 60% respectively. Mr B obtained two other clients, but FBS Ltd lost that work when one of them was taken over by another company and the other went into receivership. This triggered the breakdown in the relationship between the two directors, with Mr F blaming Mr B for the loss of these clients. When Mr F announced that Mrs B was being made redundant, Mr B also handed in his resignation. He left the company 2 months later. Mr B informed ALS Ltd that he had resigned the following day, as a matter of professional courtesy. ALS Ltd then approached Mr B to ask if he would continue to work with ALS Ltd when he joined another firm or whether he would like to work for ALS Ltd directly. ALS Ltd was concerned about providing a consistent level of service for its clients, who had been happy working with both Mr B and Mr F. He said he would think about it, and over the following couple of weeks they discussed the options and he agreed to work for ALS Ltd on a retainer basis. Meanwhile, ALS Ltd offered to continue to provide FBS Ltd with as much work as Mr F could perform, but this proposal was rejected. During his notice period, Mr B continued to work for FBS Ltd; he was still a director according to the shareholders’ agreement, but he was not involved in company management or decision making in this capacity and Mr F had filed Form 288b in respect of Mr B at Companies House. FBS Ltd claimed that Mr B was in breach of his fiduciary duties to it and that he should be liable to account for the profit he made from carrying on work which would otherwise have been done by FBS Ltd. In the particular circumstances of this case, the court found that Mr B was not in breach of his fiduciary duties to FBS Ltd. He had not sought work from ALS Ltd, and he did not start working for ALS Ltd until after his resignation took effect. He had no ulterior motive for resigning; there was no evidence of disloyalty or conflict of interest. Further, on the evidence presented, the court was not able to make a finding that any specific business opportunities or property had been taken or exploited by Mr B. |
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Director’s breach of fiduciary duties See CLM: ¶2392, ¶2406 |
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Foster Bryant Surveying Ltd v Bryant, and Savernake Property Consultants Ltd [2007] EWCA Civ 200 |
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RECENT CASES |
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In the first case to be brought on this question in relation to post-Enterprise Act administrations, a local council applied for a declaration that non-domestic rates in respect of premises occupied by a company in administration should be payable out of the company’s assets as an expense of the insolvency procedure. Existing case law established that rates were not payable as expenses of administration in respect of “old” administrations (Centre Reinsurance International Co v Freakley [2006] 4 All ER 1153). However, there was no provision in the Rules setting out which expenses could be paid out of the company’s assets in respect of these administrations. The Rules now set out an order of priority for certain expenses which can be paid out of the company’s assets in the case of “new” administrations, similar to the provisions in liquidation (see CLM ¶7958). In respect of liquidation, case law has established that rates accruing on premises occupied by a company are payable as an expense of the liquidation, under the category of “disbursements” (Re Toshoku Finance UK plc [2002] 3 All ER 961). Since this was a case on such an important point which would affect the conduct of most administrations, the court sought the views of the insolvency practitioners’ profession as well as considering how the issue is dealt with in other types of insolvency proceedings. The profession advanced several arguments against categorising rates as expenses of the administration, including that the cost may prevent administrators from conducting as many administrations as going concerns, secured lenders may be more reluctant to fund company rescues as they would be deferred to another priority claim, and the company’s unsecured assets and floating charge realisations would be depleted further, making it difficult to meet other expenses and claims. The court concluded that non-domestic rates were payable as expenses of administration, under the category of disbursements. The relevant Rule for new administrations had been modelled on that for liquidation, and case law had interpreted the liquidation Rule as including rates. The question of what should be paid out of a company’s assets while it is subject to an insolvency procedure is a matter of policy, to be determined by the rule-making authorities, not the courts. Since the Insolvency Service must have been aware of the Re Toshoku Finance UK plc decision when it formulated the Rule for new administrations, the court felt that it had to respect that policy decision. The relevant Rules are: r 2.67(1)(f) IR 1986 for administration, and r 4.218(1)(m) IR 1986 for liquidation. It will be interesting to see whether the Insolvency Service takes the opportunity during its review of secondary legislation to disagree with this decision when it drafts the new Insolvency Rules. |
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Can rates be paid as an expense of administration? See CLM: ¶8927 |
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Exeter City Council v Bairstow, Martin and Trident Fashions plc [2007] EWHC 400 (Ch) |
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The court has held that a fee payable by a company to an agent who introduced the company to the buyer of its shares did not constitute financial assistance. The question to be answered was whether, as a matter of commercial reality, the company’s commitment to pay the agent a fee if the buyer completed the purchase amounted to the provision of any relevant “financial assistance” to anyone which was directly or indirectly “for the purpose” of that acquisition. The answer in any particular case is likely to be fact-sensitive. In this case, after the introduction, the agent played no role in the negotiation of the acquisition and was neither intended nor required to. The payment of the fee was not a condition of the acquisition; it would not serve to reduce the buyer’s acquisition obligations by a single penny; and it was neither intended to, nor did it, smooth the path towards the acquisition. Therefore, although the reason for the payment was because the agent had introduced a party which had acquired the company, it was not “for the purpose” of the acquisition. It is generally prohibited for a company to give financial assistance for the purpose of an acquisition of its own shares (see ¶5557+). The prohibition is drawn widely and has been held to include payment of the fees of the seller’s or buyer’s professional advisers. |
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Payment of fee to introducing agent not financial assistance See CLM: ¶5569+ |
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Corporate Development Partners LLC v E-Relationship Marketing Ltd [2007] EWHC 436 (Ch) |
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In a recent decision concerning whether a buyer of a business had used its reasonable endeavours to obtain the novation of one of the business’ contracts, the court considered the meaning of that phrase. As regards the relationship between the phrases “reasonable endeavours” and “best endeavours”, it found that: » an obligation to use reasonable endeavours probably only requires a party to take one reasonable course of action, not all of them; » an obligation to use best endeavours probably requires a party to take all the reasonable courses of action he can; » therefore, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours; and » an obligation to use reasonable endeavours is less stringent than one to use best endeavours. As regards what reasonable endeavours actually entail, the court found that they do not require a party to sacrifice its own commercial interest, subject to one important exception: where the contract specifies that certain steps have to be taken as part of the exercise of reasonable endeavours. If the contract does specify other steps, they will have to be taken, even if that could involve the sacrificing of a party’s commercial interests. In the case before the court, the buyer was obligated to enter into a direct covenant with the other party to the contract which was being novated, if requested to do so. The buyer had carried out the business acquisition through a newly incorporated special purpose vehicle so the other party requested a parent company guarantee from the buyer as a condition of novation. The buyer refused to give the guarantee, the contract was not novated and eventually the other party sued the seller (as the original contracting party) for non-performance. Since the buyer had not given the parent company guarantee when requested, the court found that it had failed to use its reasonable endeavours to obtain the novation and was liable for the non-performance. |
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Meaning of “reasonable endeavours” See CLM: ¶5762+ |
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Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 (Comm) |