A recent challenge in the High Court by liquidators to recover assets from a director of an insolvent company has highlighted various points of company law. In particular, the court had to consider directors' authority, share buybacks, and transactions between a company and its directors.
The claimant (D) was the managing director and controlling shareholder of the defendant company (the Company). The Company at first had one other director, D's wife, and later a second (W).
The liquidator challenged three transactions:
- the transfer of the Company's factory to D for less than its market value (the Factory Sale);
- a buyback by the Company of most of its shares from the shareholders for £2.5 million, but with the price payable by the Company left outstanding as a loan on D's director's loan account secured against the Company's assets (the Buyback); and
- the sale by the Company of one of its subsidiaries to D for £1 (the Share Sale).
All but the first of these transactions took place when the Company was facing claims for environmental nuisance and had the effect of reducing the Company's assets available to meet claims.
The court considered each of these transactions and came to the following conclusions:
- The Factory Sale: D had acted outside his authority in relation to the Factory Sale. At the relevant time, the Company had only two directors. Under the Company's articles the quorum for a valid directors' meeting to approve the transaction was two and as an interested director D could not count in the quorum. The other director could not have passed the resolution herself. The court, therefore, found that the Factory Sale was void and that D held the property on trust for the Company.
- The Share Buyback: The Share Buyback was also void, as a company can only buy its shares as permitted by the Companies Act 2006. On the facts, the Company had failed to comply with section 691(2) of that Act. This provides that: "Where a limited company purchases its own shares, the shares must be paid for on purchase." The court rejected the argument that the loan arrangement counted as payment: recognising a debt by making an entry in the Company's books did not constitute payment. There had to be a movement of funds (which the court suggested could be by payment of cash, transfer of funds, transfer of some other property, set-off or some other way) on purchase, even if an equivalent amount was then loaned back to the Company.
- The Share Sale: In this case, there had not even been the pretence of a board meeting. D had taken all decisions alone without involving the other (by now) two directors. This raised similar points about his authority to those raised in relation to the Factory Sale.
- Directors' duties: The court found that all three directors were in breach of their duties to the Company. D had not acted in the best interests of the Company and so had failed in his duty to promote the success of the Company. The other two directors, by entirely abrogating their responsibilities, had also breached their duties as directors. However, the immediate cause of the Company's loss was that D had procured it to enter transactions for which he required, but did not get, the authority of the board or shareholders. The court therefore found that, on the facts, neither of the other two directors was financially liable.
The court also held that a share buyback can be a transaction at an undervalue under section 423 of the Insolvency Act 1986 (transactions defrauding creditors), and that in this case the Share Buyback was such a transaction.
Further, although D had paid only £1 for the subsidiary, it had in fact been worth £214,000 at the time. This meant the transaction was a substantial property transaction needing the approval of the Company's shareholders under section 190 of the Companies Act 2006. The shareholders had not given that approval and the Share Sale was therefore voidable at the instance of the Company. It was also a transaction at an undervalue under section 423 of the Insolvency Act 1986.
This decision covers a wide range of issues and much of it is inevitably fact specific. However, of particular general interest from a corporate law perspective is the court's consideration of the share buyback rules and what constitutes payment on purchase. Another point which the case highlights well is that, when a director buys an asset from a company, it is the actual value of that asset (not what the director is paying for it) that determines whether shareholder approval is necessary.
Dickinson v. NAL Realisations (Staffordshire) Ltd  EWHC 28 (Ch)