UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])

Notes: 

[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here. 

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

USA: California: directors' duties and corporate social responsibility

Section 309 of the California Corporations Code provides that a director must act in good faith, in the manner in which he/she believes to be in the best interests of the corporation and its shareholders. A proposal to amend Section 309 is currently before the California State Legislature. Assembly Bill 2944 , introduced by Assemblyman Mark Leno, will provide that in acting in the best interests of the corporation, the director may consider:

(1) The long-term and the short-term interests of the corporation and its shareholders.

(2) The effects that the corporation’s actions may have in the short term or in the long term upon any of the following: 

• The prospects for potential growth, development, productivity, and profitability of the corporation.
  
• The economy of the state and the nation.
  
• The corporation’s employees, suppliers, customers, and creditors.
  
• Community and societal considerations.
  
• The environment. 
  

The draft Bill makes clear that the introduction of the above provision will not impose on the director any legal or equitable duties, obligations of liabilities, or create any right or cause of action against the director. According to Assemblyman Leno, the Bill "would promote socially responsible corporate conduct by authorizing boards of directors to consider the interest of the full community, the environment and employees, along with the interest of shareholders, when making official decisions on behalf of the corporation".  There has, quite predictably, been opposition. For example, the Corporations Committee of the Business Law Section of the State Bar of California has argued that the Bill would undermine director accountability to shareholders without effectively promoting interests of non-shareholder stakeholders.

Notes:

[1] Progress of the Bill can be monitored here and for an overview of the legislative process in California, click here. 

[2] Bill 2944 does not go as far as the UK Companies Act (2006) which, in Section 172, requires the director to act:

in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company".

UK: Companies Act (2006) - the Companies (Disclosure of Address) Regulations 2008

The Department for Business, Enterprise and Regulatory Reform has published a revised draft of the Companies (Disclosure of Address) Regulations 2008 (available here in Word format).  The changes made to the draft Regulations, following a consultation period which ended last month, are explained in the Government's consultation response (available here in Word format).

UK: GC100 guidance on directors' duties

The GC100 - the Association for the General Counsel and Company Secretaries of FTSE 100 companies - has published further guidance on directors' duties under the Companies Act (2006), focusing on the provisions of the Act coming into force on 1 October 2008.

For further information see the following documents (all in MS Word format): Checklist for company secretaries | Briefing note on conflicts of interest | Questionnaire designed to identify conflicts of interest | Earlier guidance paper (January 2008) |

UK: England and Wales: CPR r 71.2 and the director of a corporate director

Part 71 of the Civil Procedure Rules contains rules which, to quote from Rule 71.1, "provide for a judgment debtor to be required to attend court to provide information, for the purpose of enabling a judgment creditor to enforce a judgment or order against him". Rule 71.2 provides that a judgment creditor may apply to the court for an order requiring an officer of a company or other corporation to attend court to provide information. Where that officer is a corporate director, does Rule 71.2 apply to the directors of the corporate director? It does not according to a unanimous Court of Appeal in Masri v Consolidated Contractors International Co SAL and others (No 4) [2008] EWCA Civ 876.

In the course of his judgment, Sir Anthony Clarke MR observed (para. [20]):

[It is argued] that, unless 'officer' is construed as including a director of a corporate director of the judgment debtor, companies will ensure that, so far as possible, they have corporate entities and not natural persons as directors. I very much doubt whether such a construction would be likely to have that effect. In any event, although I can see that it might be desirable for the rule to be widened to include such a case, I am not persuaded that 'officer' of the judgment debtor in the rule in its present form can properly be construed so as to include an officer of a corporate director of the judgment debtor".

Note: One of the changes being introduced by the Companies Act (2006) is the requirement that all companies must have at least one director who is a natural person (see Section 155, which is brought into force on 1 October 2008 by the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007).

UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".

Notes:

[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

UK: England and Wales: members of the company?

In Southall Court v Buy your freehold Ltd & Ors [2008] EWLands LRX_124_2007 (available in PDF here), the England and Wales Land Tribunal considered a company law question: whether individuals had become members of a company in accordance with Section 22(2) of the Companies Act (1985). Section 22 - titled "definition of a member" - provides:

(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company".

The individuals in question had agreed to become members but their names had not been entered in the register of members because no such register existed. The Tribunal held that they had not become members of the company and with reference to several cases - Nicol’s case (1885) 29 Ch D 421, Re a Company [1986] BCLC 391 and National Westminster Bank v IRC [1995] 1AC 119 at 127B - stated that the requirements of Section 22(2) are cumulative. As a result, a claim notice under Section 79(5) of the Commonhold and Leasehold Reform Act (2002) was invalid.

Note: The equivalent provision of the Companies Act (2006) - Section 112 - is due to come into force on October 1, 2009.

UK: Section 915 of the Companies Act (2006) - correction slip published

According to a correction slip published yesterday on the OPSI website (see here, pdf), the reference to subsection (3) in Section 915(5) of the Companies Act (2006) should be a reference to subsection (4).

UK: England and Wales: derivative claims under the Companies Act (2006)

The High Court gave judgment today in Stainer v Lee & Ors [2010] EWHC 1539 (Ch). Although only a first instance decision, it is nevertheless important because of the guidance it provides on the operation of the new statutory regime governing derivative claims under Chapter 1, Part 11, of the Companies Act (2006). There have been only a handful of reported cases so far and Stainer is of interest because permission to continue a derivative action was granted, subject to various conditions including one relating to costs. Two points of immediate interest are:

[1] Section 263 sets out the matters which the judge must consider in deciding whether to grant permission. In this regard, the trial judge observed (at para. [29]):

I consider that section 263(3) and (4) do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view. In particular, under section 263(3)(b), as regards the hypothetical director acting in accordance with the section 172 duty, if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the Company to continue even a less strong case if the amount of potential recovery is very large".

[2] With regard to the claimant's costs, the trial judge observed (at para. [56]):

The Applicant seeks an indemnity for his costs, relying on Wallersteiner v Moir (No 2) [1975] 1 QB 373. I think that is clear authority that a shareholder who receives the sanction of the court to proceed with a derivative action should normally be indemnified as to his reasonable costs by the company for the benefit of which the action would accrue. But where the amount of likely recovery is presently uncertain, there is concern that his costs could become disproportionate. Accordingly, I place a ceiling on the costs for which I grant an indemnity for the future ...".

UK: Limited Liability Partnership Accounts Regulations published

The following Regulations have been published on the OPSI website and come into force on 1 October 2008. Their purpose is to apply to limited liability partnerships the accounting provisions of the Companies Act (2006). For further information see these FAQs prepared by BERR. 

[1] The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 - see here for the explanatory memorandum.

[2] The Small Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

[3] The Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

UK: Companies Act (2006) - The Companies (Reduction of Share Capital) Order 2008

The Companies (Reduction of Share Capital) Order 2008 has been published on the OPSI website, together with an explanatory memorandum. The Order was made on 17th July and comes into force on 1 October 2008. It sets out the form of the solvency statement for private companies wishing to reduce their share capital in accordance with Sections 642 to 644 of the Companies Act (2006). For background information see these FAQs provided by BERR. 

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

UK: Companies Act (2006) - 7th Commencement Order published on OPSI

The Companies Act 2006 (Commencement No. 7, Transitional Provisions and Savings) Order 2008 was laid before Parliament on 17 July and has today been published on the OPSI website along with an explanatory memorandum. This Order brings into force various provisions of the Companies Act (2006) on 1 October 2008, including those relating to the reduction of capital by a private company supported by a solvency statement.

UK: Companies Act (2006) implementation - BERR update

Yesterday BERR published an update on its Companies Act (2006) website concerning (a) statutory instruments with a 1 October 2008 commencement date, (b) the restoration to the register of companies dissolved prior to 1969, (c) the amendment of Tables A to F of the Companies Act (1985), (d) the draft Overseas Companies Regulations and (e) accounts and reports guidance.

For further information see: 

BERR update | Regulations made or before Parliament | Application of the Companies Act (2006) to Limited Liability Partnerships | Frequently Asked Questions | Companies Act (2006) |

UK: issuer liability - Government response to the Davies review

Section 1270 of the Companies Act (2006) inserted Section 90A of the Financial Services and Markets Act (2000) and established a statutory civil liability regime for issuer misstatements to the market. A review of this regime was conducted by Professor Paul Davies FBA QC - the Davies review - and recommendations published in June 2007.  The Government has published its response in "Extension of the statutory regime for issuer liability", in which it outlines its proposals which include the following:

• There is to be no change to the current basis of liability (which is based on fraud).
  
• The liability regime should apply to [a] issuers of all securities admitted to trading on a UK regulated market or multilateral trading facility and [b] issuers of securities admitted to trading on an EEA regulated market or multilateral trading facility, where the UK is the home state for the issuer under the Transparency Directive (2004/109/EC) or the issuer has its registered office in the UK.
  
• The regime should apply to "transferable securities" as defined in Section 102A(3) of the Financial Services and Markets Act (2000).
  

A draft statutory instrument - The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2008 - has been included in the Government's response document.

For further information see:

HM Treasury: Davies review page

UK: Hector Sants calls for directors' duties reform

Hector Sants, the chief executive of the Financial Services Authority, today delivered a thought provoking speech - available here - titled Do regulators have a role to play in judging culture and ethics? Whilst careful to note that he was offering his personal views, his comments are noteworthy because of the influential position he will occupy, under the new financial regulatory structure, as the chief executive of the prudential regulator and deputy governor of the Bank of England. Of particular interest are his thoughts on the scope of directors' duties:

I would thus strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement [in Section 172 of the Companies Act (2006)] is for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need to have regard to, for example, the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good".

UK: England and Wales: directors' liability for inaction

The High Court has today given judgment in Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch). The case concerned allegations of breach of duty made against several directors. It was argued that the inaction of these directors - including their failure to disclose to the board information known to them - had caused the losses resulting from the misappropriation of the company's assets by the managing director. The trial judge (Briggs J.) rejected this argument because causation could not be established but he nevertheless made some interesting points with regard to directors' duties.  In evaluating the claims Briggs J. considered the duties of directors (under the law before the codification of directors' duties in the Companies Act (2006)) and held that that the standard of care expected of directors is assessed using a dual objective/subject test. In this regard, Briggs J. observed (paras. [37] and [38]):

The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has. To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited [1925] Ch 407 that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property".

Briggs J. then proceeded to consider the proper course of action for a director resigning from his/her position in circumstances where he/she is concerned about the conduct of the other directors.  The comments of Briggs J. in this regard are of particular interest because he recognised that resignation alone may not be a sufficient response (at para. [39]):

The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd [1999] 2 BCLC 704, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company's shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern".

UK: Companies Act (2006) - Overseas Companies Regulations 2008

A revised draft of the Overseas Companies Regulations 2008 has been published and is available here (in Word format). The revised draft has been published following a consultation in December 2007. In its response to this consultation (available here in Word format), the Government notes:

In line with the wider Companies Act 2006 (the 2006 Act) implementation timetable, the overseas companies regulations (including the accounting provisions) will be commenced on 1 October 2009. These regulations are intended for use by both overseas companies with an existing UK branch or UK place of business, and overseas companies that register a UK establishment on or after 1 October 2009.

The regulations apply to overseas companies as defined in the 2006 Act. The Government’s approach to these companies remains the same as it was in December 2007 and the regulations have continued to be developed with the intention of minimising obligations on overseas companies while complying with European legislation, as well as ensuring that UK creditors will have access to transparent information about the business of such companies. This is particularly the case with regard to accounting provisions within the draft regulations, which we have developed further in response to comments received in light of the consultation".

UK: Companies House - appeals against late filing penalties

The Companies House adjudicator, Dame Elizabeth Neville DBE QPM, has published her first report (for the period 1 August 2007 - 31 March 2008). One of the roles of the adjudicator is to hear appeals against late filing penalties imposed by Companies House (and upheld, internally, by the Senior Appeals Manager). In this regard, the following extracts from Dame Elizabeth's report are of interest (paras. 2.8 and 2.16):

There were seven cases where directors experienced some serious problem which delayed the submission of the accounts. These included bereavement, and illness. However, in none of these cases was the individual a sole director. All directors have equal responsibility to ensure that accounts are submitted on time. Where one director has primary responsibility for submitting accounts and some catastrophe overwhelms him or her, other directors must be prepared to step into the breach. It is apparent that some directors are that in name only, and are either unable or unwilling to act when it becomes necessary. 

I upheld one appeal. In this case, property developers had been the directors of a property management company. They had managed it so badly that Companies House had dissolved it. The residents of the property development were obliged to apply for the company to be reinstated because of restrictive covenants on their properties, incurring the late filing penalties of the previous directors. Whilst supporting the policy of Companies House that outstanding late filing penalties must stand when a dissolved company is reinstated, notwithstanding a change of directors, I considered the circumstances of this case to be exceptional as the residents had no choice but to reinstate the company, had been ill treated by the property developer, and had already incurred considerable expense".

Notes: 

[1] The directors' duty to file accounts with the registrar of companies is imposed by Section 441 of the Companies Act (2006). Note also Part 35 - "The Registrar of Companies" - of the Act. 

[2] In July 2008, Companies House published revised guidance on late filing penalty appeals: see here. 

[3] All limited companies in England, Wales and Scotland are registered at Companies House, an executive agency of the Department for Business, Enterprise and Regulatory Reform. There are over 2,000,000 registered companies. There is a Registrar for England and Wales and another for Scotland. For information about incorporating a company, see here. 

UK: culture and corporate governance - recommendations from the Future of Banking Commission

The Future of Banking Commission published its report yesterday: see here (pdf). This sets out wide ranging recommendations concerning the regulation of banks. Chapter 4 - titled "Culture and Corporate Governance" - contains recommendations under the following headings: boards and directors, remuneration, accounting and auditing, shareholder oversight, credit rating agencies and the adoption of a code of conduct for banking. Some of the specific recommendations include:

• The duties of directors under the Companies Act (2006) should require them to consider the effect of the company's activities on the stability of the financial system as a whole.
• Fundamental questions should be asked about the purpose of the audit.
• Auditors should be asked to attest that banks' accounts represent a "true, fair and comprehensive statement" of the affairs of the company.
• The Stewardship Code for Institutional Investors should be mandatory for those fund managers which own bank shares.
• Non-executive directors should be charged with particular tasks and particular areas where their "challenge" is expected.