Property – Transfer at undervalue – Breach of duty – Claimant seeking damages against former sole director and shareholder alleging transfer of properties at undervalue – Judge dismissing claim – Claimant appealing – Whether judge erring in dismissing claim on basis not pleaded before him – Whether judge giving sufficient reasons for alternative decision – Appeal allowed
The first defendant was the former sole director and shareholder of the claimant company and the second defendant company. In May 2012, a third party (S) purchased four freehold investment properties in Croydon at auction. However, the purchase was not completed in the name of S, but that of the claimant, to which the properties were transferred. The total cost was £1,137,000, £763,000 of which was borrowed from two lenders, secured by charges against each property.
In October 2012, the claimant, acting by the first defendant, transferred the properties to the second defendant for £2,230,000. No money in fact changed hands and the properties were transferred subject to the charges.
In 2013, the second defendant sold and transferred the properties to two purchasers for a total of £1,865,000. The liabilities to the lenders were discharged out of the proceeds of sale. The claimant alleged that the transfer was at an undervalue and in breach of the first defendant’s duties as director and claimed damages.
The judge dismissed the claim, primarily on the ground that the properties were, both before and after the transfer, held on trust for S and all that had been transferred by the claimant to the second defendant was a bare legal title which had caused the claimant no loss. Alternatively, the beneficial ownership in the properties was held by the claimant and, by transferring the properties to the second defendant on terms under which the claimant did not benefit from the expected gain, the first defendant had acted in breach of his duties. However, as the first defendant was acting on behalf of S, for whom he held the shareholding in the company, he could rely on ratification by S pursuant to the principle in Re Duomatic Ltd [1969] 2 Ch 365 that anything a company’s members could do by formal resolution could be done informally if they all assented to it: [2019] EWHC 2584 (Ch). The claimant appealed.
Held: The appeal was allowed
(1) The first defendant was right not to seek to uphold the judge’s decision that the properties had been held on trust for S. He had not taken issue with the claimant having been the legal and beneficial owner up to the date of the transfer, or with the transfer having passed the legal and beneficial ownership to the second defendant. The judge had decided the case on a basis that had not been pleaded or canvassed before him. That was impermissible and a misunderstanding of the judge’s function, namely to try the issues the parties raised: Al-Medenni v Mars UK Ltd [2005] EWCA Civ 1041 followed.
(2) Although the first defendant did not raise ratification as a defence, he did plead that he held the shares in the claimant and the second defendant on express trust for S and that the sale from the claimant to the second defendant was undertaken in accordance with S’s instructions. That was sufficient to enable the first defendant to rely on the transfer having been authorised or ratified by S as the sole beneficial owner of the claimant. The judge found that the shares in both companies were held by the first defendant on trust for S, and that the transfer was on his instructions. That factual finding was sufficient to satisfy the Duomatic principle. However, if, in accordance with that principle, an impugned transaction was an unlawful return of capital, that principle could not be relied on because the transaction would be ultra vires the company, and the corporators could not do informally what they had no power to do formally: Ultraframe (UK) Ltd v Fielding [2003] EWCA Civ 1805 and Progress Property Co Ltd v Moore [2010] UKSC 55 followed.
The principle was potentially engaged if the assets of the company were transferred at an undervalue to the sole shareholder, and the same applied if instead of transferring the assets to himself the sole beneficial shareholder transferred them to a company of which he was again the sole beneficial shareholder. It was therefore capable of applying to the present transfer on the basis that it was a transfer at an undervalue of the claimant’s assets on the instruction of S to the second defendant of which he was the sole beneficial owner. But the question was not simply whether the impugned transaction was in fact, viewed objectively, at an undervalue.
In the present case, the judge had not found what the actual value of the properties was at the time of the transfer, and the conclusion that the properties had been sold at an undervalue did not by itself lead to the conclusion that there had been an unlawful return of capital. There were insufficient findings of fact to enable the court to determine on which side of the line the transfer fell.
(3) The Duomatic principle did not apply unless the transaction was bona fide and honest. However, it was not any dishonesty associated with the transaction which brought it into play but only relevant dishonesty which connoted dishonesty or bad faith towards the company. The principle was that the members of the company could not simply help themselves to its assets. But if the members were not acting dishonestly towards the company, the fact the transaction was intended to be used subsequently as an instrument to defraud someone else did not preclude the application of the Duomatic principle: the restriction on the application of the principle appeared to be for the protection of the company and its creditors, not the court’s response to fraud more generally. The fact that the judge found that the transfer contained a deliberately inflated price so as to enable a fraud to be committed on a future lender, although undoubtedly dishonest, was not relevant dishonesty such as to prevent the application of the Duomatic principle: Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21 applied. Bowthorpe Holdings Ltd [2002] EWHC 2331 (Ch) considered.
(4) Since the judge had decided the case on an unpleaded and unargued basis, and failed to make crucial findings of fact on pleaded matters in issue, the case would be remitted for further hearing.
Robert-Jan Temmink QC and Gabriel Buttimore (instructed by Teacher Stern LLP) appeared for the appellant; Peter Shaw QC and Philip Brown (instructed by Richards Solicitors) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Satyam Enterprises Ltd v Burton and another
