Company – Redemption of shares – Misfeasance – Breach of trust – Respondent husband and wife directors of company owning entire share capital – Shares being allotted to first respondent husband – Company and shareholders resolving to make shares available for redemption – Company entering into creditors’ voluntary liquidation – Applicant liquidators applying for declarations – Whether defendants being guilty of misfeasance and breach of trust – Whether claimants entitled to return of specific properties – Claims allowed in part
The respondent husband and wife were the directors of a company and owned its entire issued share capital. The company, whose principal activity was property development, had taken over the property development trade of the husband’s former business.
In the year ending January 2003, 875,000 shares of £1 each were allotted to the husband and fully paid for cash at par during the year. The shares were redeemable on not less than one month’s notice in writing. It was agreed that no redemption would be made until at least 31 January 2009. However, in January 2008, the respondents decided that the shares should be redeemable on demand and wrote to the company seeking the sum of £875,000 for the redemption of the shares. The company entered into creditors’ voluntary liquidation in July 2008. The largest creditor was a bank which was owed £837,000.
The applicant joint liquidators applied to the court for declarations that: (i) the respondents were guilty of misfeasance and breach of trust in relation to the issue, allotment and/or redemption of the 875,000 redeemable shares; (ii) the crediting to the director’s loan account of £875,000 in January 2008 constituted a preference in favour of the respondents; and (iii) the respondents or either of them were guilty of misfeasance and breach of trust in retaining properties which beneficially belonged to the company. The preference claim extended to the return of the properties to the company.
One of the principal issues raised was the extent to which the company had acquired the beneficial title to properties in St Leonards on Sea in the names of the respondents, which had formed part of the husband’s trading stock, or which were later acquired in the individual names of the respondents, rather than in the name of the company.
Held: The claims were allowed in part
(1) On the evidence, the legal concept that best fitted the dealings between the parties was that of a sale by the trust, acting by the husband as its investment manager, to the company, acting by the husband as its lead director, of the beneficial interest in each of the properties that were subject to the commercial arrangement, coupled with a call option in favour of the trust, again acting by the husband, entitling it to call for a re-transfer of the beneficial interest in the properties in return for the payment to the company of their assigned value. Any non-compliance with any technical requirement of the Companies Acts in that regard was cured by the application of the principle in Re Duomatic [1969] 2 Ch 365 since the commercial arrangement had been expressly endorsed and approved by both respondents as the only two shareholders of the company at a time when the company had been neither solvent nor on the verge of insolvency. Therefore, the applicants’ claims for declarations that the respondents were guilty of misfeasance and breach of trust in procuring the company to issue and/or allot the 875,000 redeemable shares failed: Re Duomatic Ltd and Street v Mountford [1985] AC 809 applied.
(2) Once the husband had given notice to the company immediately demanding £875,000 for the redemption of all of the relevant shares, he became a creditor of the company for the purposes of section 239 of the Insolvency Act 1986. By making the adjustments to his director’s loan account against the monetary liability on the part of the company under which the husband sought to achieve the return of the properties which were the subject of the commercial arrangement, the company had put the husband into a position which, in the event of the company going into insolvent liquidation, would be better than the position; namely, the properties would form part of his assets rather than those of the company.
The requirements of section 239(4) of the 1986 Act were satisfied. Since the company had gone into creditors’ voluntary liquidation less than six months later, any preference had been given at a relevant time. Since, as a director of the company, the husband had been a person connected with the company, by section 239(6), a desire to put himself into a better position if the company went into insolvent liquidation was presumed unless the contrary was shown. Moreover, the liquidators had discharged the burden of showing that the company was insolvent. It had been entirely dependent upon the continuing support of the bank which could no longer be assured. That realisation had motivated the husband to redeem his shares and to seek the return of the properties which were the subject of the commercial arrangement.
Furthermore, by section 160 of the Companies Act 1985, read in conjunction with sections 181(a) and 263, redeemable shares could only be redeemed out of profits available for distribution by the company. According to the last audited and filed accounts, the company’s net profits available for distribution were only £240,502. There was no other sum on which the respondents could rely. Permitting the redemption of more than 240,502 shares had been unlawful and had constituted a breach of the respondents’ duties as directors and all the necessary elements of a preference within the meaning of section 239 of the 1986 Act had been made out: Lexi Holdings plc v Luqman [2007] EWHC 2652 (Ch) applied. Re Idessa (UK) Ltd [2011] EWHC 804 (Ch) [2012] BCC 315 and Goldtrail Travel Ltd v Aydin [2014] EWHC 1587 (Ch) considered.
(3) In the light of the court’s findings as to the husband’s motivation and his failure to seek any legal advice on his duties as director, there was no question of the grant of any relief to him under section 727 of the 1985 Act or section 1157 of the 2006 Act, whichever was applicable in the present case. He had not acted honestly or reasonably, nor ought he fairly to be excused. Nor would such relief be granted to the wife, who had completely abrogated the discharge of her duties as director, leaving everything to her husband. Complete inactivity as a director was by definition unreasonable: Lexi Holdings plc v Luqman [2007] EWHC 2652 (Ch) applied.
(5) The liquidators’ claims for the return of specific properties failed since, on the evidence, all those claims had been addressed. Accordingly, the liquidators’ claims would be dismissed, save in relation to the cancellation of the share redemption and the consequent effect upon the properties which had remained in the commercial arrangement as at 31 January 2008.
Katherine Hallett (instructed by Bermans, of Manchester) appeared for the applicants; Simon Hill (instructed by Direct Access) appeared for the respondents.
Eileen O’Grady, barrister
Read a transcript of Henry and another v Finch and another; Re Finch (UK) plc (in liquidation) here
