Director of company purchasing property – Director offering to pass property on to another company of which he was also a director – Offer accepted – Arrangement that no loss to be borne by director – Arrangement not approved in general meeting – Collapse in property market – Whether loss of value of property subsequent to arrangement recoverable – Whether costs of holding and realising property recoverable
In April 1989 Offer Venture Ltd, a private company of which the second respondent, C, was a director and in which all the shares were owned by him and his wife, contracted to purchase a freehold property, 10 Corporation Street, High Wycombe, Bucks, for £495,000. Offer Venture paid a deposit of £49,500 and completion was fixed for October 31 1989. At that time C was also one of the four directors of Duckwari plc. On August 24 1989 C offered to pass the property on to Duckwari at cost. Duckwari accepted and it was a part of the arrangement that Offer Venture or C would take 50% of any profits arising from Duckwari’s development of the land, but would not bear any loss. Duckwari’s directors met to approve a bank loan of £350,000, secured by a legal charge over the property, but the arrangement was not put to the shareholders in general meeting.
The purchase was completed on November 9 1989. Duckwari paid £445,500 to the vendor and £49,500 to Offer Venture to repay the deposit. Soon afterwards the property market collapsed. Duckwari defaulted on its payments to the bank, which replaced the directors with its own nominees. In March 1992 Duckwari sought a declaration that the purchase by it of the property was voidable as a transaction contrary to section 320 of the Companies Act 1985. The judge found the value of the property between 1993 and May 1996 to have been no more than £90,000. It was, however, sold in May 1997 for £177,970. In 1994 the Court of Appeal held that the arrangement contravened section 320. On January 8 1996 Duckwari issued a summons for the assessment of damages. The judge found there had been no loss since the “loss or damage resulting from the arrangement” under section 322(3)(b) was to be assessed at the completion of the purchase, when there had been no loss. Duckwari appealed contending, inter alia, that the indemnity against loss and damage to which it was entitled under section 322(3)(b) included compensation for subsequent loss of value. Following the Court of Appeal’s decision, there was a further hearing on the extent of the relief to be granted: see holding 3.
Held The appeal was allowed.
1. The general distinction between the decision-making powers of directors and those of trustees was not relevant, and the judge had erred in restricting the mischief addressed by the statutory provisions to acquisition at an inflated value or disposals at an undervalue. The purpose of sections 320 and 322 was to protect shareholders against arrangements benefiting directors to the detriment of the company and a broad approach to section 322(3)(b) was to be adopted, particularly considering the inter-relationship between subsections (3)(b) and (2)(a). Section 322(3)(b) provided for a remedy “for any loss or damage resulting from the arrangement”, which included a loss incurred by Duckwari on a realisation of the property for less than the cost of acquisition. The arrangement was one-sided, it had not been put to a general meeting, and C and Offer Venture were jointly and severally liable to make good to Duckwari the loss caused to it by the depreciation in value of the property.
2. A liability to indemnify a company under section 322(3)(b) was a liability in respect of default within section 727. Section 727 applied and the decisive consideration was that C, or Offer Venture, was not to bear a share of any loss. That was a one-sided arrangement detrimental to Duckwari and, in the circumstances, it could not be said that either C acted reasonably or that he ought fairly to be excused.
3. At a subsequent hearing on November 19 1998, damages were awarded to Duckwari.
a. The loss and damage recoverable under section 322 was limited to that resulting from the breach, namely from the acquisition itself. Therefore, Offer Venture was liable to restore Duckwari the difference between the amount borrowed from the bank, plus the remaining amount of the purchase price paid by Duckwari, less the amount obtained on the sale of the property.
b. Although in general the costs of holding and realising the property would not normally be recoverable, each case was to be judged on its own facts. Between 1993 and May 1996 the value of the property had not been more than £90,000 and, since it was sold in May 1997 for £177,970, it could be seen that the planning permission obtained in March 1995 substantially contributed to the amount finally obtained. On that ground the planning costs, rates and insurance premiums were to be allowed, since they were properly incurred in preserving the property and thus in achieving the best price possible on its realisation.
David Richards QC and Kenneth Craig (instructed by Clarks, of Reading) appeared for the appellant; Edward Bannister QC and Philip Hoser (instructed by Vizards) appeared for the respondents.
Thomas Elliott, barrister
