Company – Director – Breach of fiduciary duty – Freehold of office premises purchased via second defendant joint venture company – First defendant sole director procuring second defendant to grant lease of premises with security of tenure – Claimant seeking declaration that lease void – Whether first defendant breaching duty to exercise powers pursuant to sections 171(b) and 172 of Companies Act 2006 – Whether lease void ab initio or avoided – Declaration granted
The claimant’s husband (C) was a solicitor and the first defendant was an accountant. They ran their businesses from office premises at 5 Theobald Court, Elstree, Hertfordshire (5TC) pursuant to written licence agreements with the then tenant of the premises.
In 2014, it was agreed that their families should buy the freehold of 5TC via a joint venture company (the second defendant). It was intended that 5TC would be purchased with a bank loan with each family equally contributing the balance.
On 12 January 2015, the first defendant was registered as the second defendant’s sole shareholder and appointed as its sole director. Two days later, he transferred 50 of the shares to his wife on the basis of an understanding or agreement that 50% of the shareholding would be held for the benefit of the claimant. Both parties recognised that there was an oral joint venture agreement (JVA) concerning 5TC.
The claimant brought a derivative claim under Chapter 1 of Part 11 of the Companies Act 2006, on behalf of the second defendant, alleging breaches by the first defendant of duties he owed to the second defendant as its sole director. The claim in particular concerned the first defendant procuring that the second defendant grant him a lease, with security of tenure, of 5TC, its principal asset. The claimant argued that the lease was void ab initio or had since been avoided.
Held: The declaration was granted.
(1) Pursuant to section 171(b) of the Companies Act 2006, the first defendant owed the second defendant a duty to exercise his powers for the purposes for which they were conferred and, pursuant to section 172 to act in a way that he, in good faith, considered would be most likely to promote the success of the second defendant for the benefit of its members as a whole. Those duties were fiduciary in nature such that to establish breach, the claimant had to show more than incompetence.
It was necessary to start with a consideration of the power whose exercise was in question, identify the proper purpose for which that power was delegated to the directors, identify the substantial purpose for which the power was in fact exercised and decide whether that purpose was proper: Extrasure Travel Insurances Ltd and another v Scattergood [2003] 1 BCLC 598 considered.
In the present case, the power whose exercise was in question was the second defendant’s power, as owner of the freehold, to grant leases of 5TC; the proper purpose for which that power was delegated to the directors was, in broad terms, to promote the company’s business for the benefit of its members or, in the circumstances of this case, that could be interpreted as obtaining a rental stream for the company without unnecessarily imposing upon it an obligation to comply with the terms of the Landlord and Tenant Act 1954 to regain possession or increase rent.
The substantial purpose for which the first defendant in fact exercised the power was to safeguard his own position as tenant, ensuring that despite the original lease being contracted out of the 1954 Act, the new lease was contracted in. Therefore, the first defendant’s exercise of the power was not for a proper purpose.
(2) The parties had agreed jointly to purchase 5TC via a joint venture company in which their two families would have equal interests. The terms of the JVA were intentionally susceptible to change. It either expressly (by oral agreement) or impliedly provided that for as long as the first defendant/the firm through which he practised his accountancy business paid a fair market rent, he/the firm would be able to continue to occupy as much of 5TC as he wanted, for as long as he wanted.
However, that right did not entitle him to procure that the second defendant gave him, in the new lease, the benefits of the 1954 Act which he had expressly recognised by statutory declaration were not included in the original lease.
Similarly, it was more likely than not that if C had wanted to continue practising as a solicitor from 5TC, provided he paid a fair market rent, and assuming there remained sufficient room to enable him to do so, he would be entitled to do so.
Whilst it was an implied term of the JVA that each party owed the other a duty to act in good faith, which required them to act honestly and fairly with each other, having found that the terms of the JVA were intentionally fluid, the duty extended to discussing with the other and honestly and fairly considering any proposals in relation to 5TC or desired alterations to the current arrangements.
(3) When the first defendant granted to himself the new lease, which did not exclude the 1954 Act security of tenure provisions, he knew he was procuring for himself a material advantage over and above that which he currently had and over and above that to which he was entitled under the JVA. He knew that by doing so he would gain an indefinite right to remain at 5TC because the second defendant could only terminate his occupation if one of the limited grounds set out in the 1954 Act could be proved. He did so because his relationship with C had irretrievably broken down and he wanted to put himself in the best possible position before being forced to transfer the agreed shares to the claimant and becoming the tenant of a deadlocked company.
Consequently, in granting the new lease to himself, the first defendant acted in breach of his duty under section 171(b) of the 2006 Act to exercise his powers as a director of the second defendant for the purposes for which they were conferred. Further, on the evidence, when procuring that the second defendant granted him the new lease, the first defendant acted in breach of the duties he owed to the company as codified at section 172(1).
The claimant was entitled to a declaration that the grant of the new lease by the second defendant to the first defendant was void.
Tim Calland (instructed by VMA Solicitors) for the claimant; Hugh Sims KC and Richard Ascroft (instructed by Vyman Solicitors, of Harrow) appeared for the defendant.
Eileen O’Grady, barrister
