What is the position if a director arranges for assets properly belonging to his company to be appropriated by another company owned and controlled by him? Can he rely on the principle of corporate personality to say that, although he committed the breach, he does not have the assets? And can the company that holds the assets protest that it was not responsible for the breach and prevent the claimant company from recovering them?
The claim in Pennyfeathers Ltd v Pennyfeathers Property Company Ltd [2013] EWHC 3530 (Ch); [2013] PLSCS 300 arose out of the proposed development of land on the Isle of Wight. The land was subject to an option in favour of individuals who subsequently became two of the founder members of a company, Pennyfeathers, which was set up to introduce new expertise and funding for the project.
Pennyfeathers and the option holders complained that two of the company’s directors, who were brought on board to help move the project forward, had acted in breach of their fiduciary duties. The directors had incorporated their own company, Pennyfeathers Jersey, which then entered into a conditional contract to acquire the option land itself, on terms that prohibited the seller from renewing or extending the option agreement with Pennyfeathers when it expired. They also complained that Pennyfeathers Jersey had entered into options to acquire surrounding land that should have been secured for Pennyfeathers.
The trial judge rejected the defendant directors’ claim that they had agreed a buyout with the option holders in order to take the project forward themselves. He accepted that the parties had discussed terms, but decided that they had never reached a legally binding agreement. He also ruled that the directors would have remained bound by their fiduciary duties in any event, unless and until they had actually gained control of Pennyfeathers and had been released from their duties by the company.
A company director is in breach of duty if he exploits for his personal gain opportunities that come to his attention through his role as director, or indeed any other opportunities that he could and should exploit for the benefit of the company. The judge held that the directors were in clear breach of their fiduciary duties to Pennyfeathers because the contract secured in the name of Pennyfeathers Jersey was inimical to the interests of Pennyfeathers, which was incorporated to pursue the development of the option land.
The judge dismissed the defendant directors’ claim that the company’s shareholders had consented to their conduct. He ruled that the directors had withheld or provided misleading information about what they were doing and that it was no defence to say that the shareholders could have found out more about the contracts in favour of Pennyfeathers Jersey through searches at the Land Registry. The directors were supposed to be pursuing opportunities for the benefit of Pennyfeathers, and not for any other company, and the judge was not prepared to allow them to use Pennyfeathers Jersey to disguise their conduct, or evade Pennyfeathers’ rights. The directors were the beneficial owner of the shares in Pennyfeathers Jersey and the judge ruled that the contracts were impressed with the same trusts as they would have been, had the directors made them personally.
Allyson Colby is a property law consultant