Ball (PV Solar Solutions Ltd) v Hughes and another  EWHC 3228 (Ch), considered whether directors of a company who had caused it to adopt an employer-financed retirement benefit scheme and went on to apply a number of credit entries against their director loan accounts had, in applying those credits, breached their fiduciary duties and been guilty of misfeasance.
The key question was whether the directors, neither of whom had a contract of employment with the Company, were permitted to withdraw remuneration, and to create the credit entries in the way that they did.
Directors must act in accordance with the company’s constitution. Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as whole. At common law, where a company is insolvent, the directors must consider the interests of the creditors as paramount. This duty (the creditors’ interests’ duty) arises at an earlier point than actual insolvency.
The following elements must be present for the principle to apply:
- The consent of the shareholders to the relevant matter must be unanimous.
- The consent must be given by the shareholders in full knowledge of what they are consenting to.
The principle will only help people looking to uphold a transaction if, as a substitute for a resolution at a general meeting, the shareholders had questioned as to whether to approve or ratify the transaction. The principle doesn’t apply where the company is insolvent or rendered insolvent by the transaction. The party, seeking to cite the principle, must prove that the company was solvent at the time.
If when winding up a company, it appears that an officer of the company has misapplied or retained or become accountable for, company property or been guilty of misfeasance or breach of duty in relation to the Company, the court may examine the officer’s conduct and make an order that they repay, restore or account for such property, with interest, or pay such sum as is just by way of compensation.
Absence of documentation at trial
The absence of documentation at trial does not necessarily lead to liability. However, if a judge is satisfied that the documentation is to have existed were the oral evidence correct, and that party adducing oral evidence is responsible for that non-production, the absence of such documentation may lead the judge to draw inferences.
In the absence of a service contract, provision in a Company’s articles of association or other form of approval by members, directors are not entitled to remuneration.
From September 2011, PVSS had two directors each holding 50 of the 100 issued ordinary shares. There was imported into the Company’s articles of association (Articles) The Directors shall be entitled to such remuneration as the company by ordinary resolution determine. No resolution has been passed for the purposes of this article.
The directors awarded themselves significant sums by way of “management fee” and “bonus” payments, each payment increasing the loan account of the relevant director. In 2012, PVSS set up a form of employer-financed retirement benefit scheme (EFRBS). The scheme was set up as a discretionary trust; PVSS covenanted to make payment to the scheme to be held on trust for itself. PVSS entered into a deed of addition and contribution by which it transferred to the EFRBS the beneficial right to enforce the covenant, so that it became exposed to a debt for that sum of money to the trustee of the scheme, and the trust fund was used to reduce the sums outstanding in the directors’ loan accounts.
In 2013, PVSS was placed into administration with an estimated deficiency of £600,000. It exited via creditors voluntary liquidation in late 2014. By 2016, the estimate deficiency as regards to creditors was £819,712.
Both the liquidator of PVSS and PVSS made an application under section 212 of the Insolvency Act 1986 against the directors, alleging that the directors were in breach of their fiduciary duties and should be ordered to pay or restore the sum of £750,800, together with interest, on a joint or several basis.
Specifically, the liquidators inserted that :
By March 2012, when the EFRBS scheme was put in place, a credit of £220,000 each came to be applied. PVSS was experiencing cash flow issues and its solvency was questionable for the creditors’ interests duty to have arisen.
By June 2012, when a credit of £75,000 each came to be applied, PVSS position has worsened and its cashflow insolvent.
By December 2012, when the third credit of £62,400 for H and £98,400 for W, the Company was both cashflow and balance sheet insolvent.
This was contested by the Directors but H conceded to the December 2012 credit at trial.
Since neither director had a contract of employment nor had a resolution been passed for the purposes of the remuneration article– any withdrawal of remuneration was a breach of the Articles.
The registrar rejected the submission that, since the directors held 100% of the share capital of PVSS and had arranged the transactions giving rise to the Credits, they must be taken to have approved of them by analogy of the Duomatic principle.
The directors were guilty of misfeasance. In applying the credits, they had acted in breach of their fiduciary duties to act in the best interests of the creditors; misusing the assets of the company for their own benefit and failing to exercise their powers for proper purposes.
The registrar made an order, compelling the Directors jointly or severally to repay in excess of £750,000.
Directors should insist on a contractual right to be paid for their services. In this case, an ordinary resolution for the purpose of the Articles would have sufficed.
It was rejected by the registrar that since the directors held 100% of the issued share capital of PVSS, they must be taken to have approved of the way in which the credits were applied by analogy of the Duomatic principle.
EFRBS’s were once marketed as an effective form of tax avoidance. Parliament has taken steps to eradicate them and other disguised schemes.
For advice and guidance on directors service agreements or any disputes between a business and its directors please contact Farleys expert corporate and commercial teams on 0845 287 0939 or contact us online.
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