The case1, a summary judgment application/interim payment application, provides important guidance on the discharging of the director's duty of care. It can be seen as a warning to all directors, especially those of companies that form part of a larger structure where other interests might come into play. It is a timely reminder to offshore directors of English companies as to their obligations under English law. The judgment sets out the minimum standard of care expected from all directors and makes clear that falling short of that standard is not acceptable.
The central question in this case was whether the directors of Angelmist Properties Limited ("Angelmist") were in breach of their duty of care to the company when they approved the sale of a company asset for a very substantial undervalue in comparison to its market value. A valuable property was sold to the sole, corporate, shareholder of Angelmist, i.e. to its parent company. That corporate shareholder was owned by the trustees of an offshore trust. While the directors should have been acting in the sole interest of the company, the Court found that they were influenced by the interests of both the shareholder and the beneficiaries of the overlying trust, interests which conflicted with those of the company, and that as a result they failed in their duty to the company..
While each case is decided on its facts, this judgment affirms that in transactions that involve parent companies or subsidiaries, the duty all directors owe is to the company for which they act as director. As fiduciaries, directors owe a duty of utmost loyalty and good faith and should not take into account others' interests when acting as such.
The first and second Defendants ("the Defendants") were directors of Angelmist from 2 August 2005 until 12 October 2006. The third Defendant was a Jersey company which provided trust administration services and which employed the Defendants. The transaction in question was one of a series of transactions whereby a large office block on the south bank of the Thames ("the Property") was to be brought within an offshore trust structure in a tax efficient way.
Angelmist owned the Property. Angelmist was originally not part of the offshore trust structure, but that changed when its shares were purchased by a company owned by the trustees ("HoldCo"). Thereafter the shares were to be transferred in specie to HoldCo as part of a solvent members' liquidation of Angelmist.
In the event, the Property was transferred to HoldCo by a straightforward sale and purchase of the Property. It is that sale and purchase which was in question in this case.
Angelmist's claim was that the Directors, in breach of their duty of care to it, allowed the Property to be transferred at a very substantial undervalue. The sale price was £148m, however Angelmist's expert at the hearing valued the Property at £189m and the Defendants' expert at £180m. On any view, therefore, the Property was undersold to the extent of at least £32m.
As a result of the the sale at undervalue, Angelmist was left without any significant assests, but with very substantial tax liabilities. These arose as the sale, although to its own holding company, was a sale to an offshore company and by reason of section 17 of the Taxation of Chargeable Gains Acts 1992, Corporation Tax became payable upon the true gain in the value of the Property. The resultant liability was £7.7m with penalties of £1.5m. With additional interest at £1.3m and a further sum of £3.2m in respect of liquidation expenses and other creditors, a total liability of £13.7m arose. Angelmist was, on any measure, insolvent. In the event Angelmist was not wound up on the basis of this assessment, which was raised by HMRC in July 2012, but due to unpaid corporation tax arising from its tax return dated May 2008.
Angelmist sought summary judgment in the sum of £40.5m or an interim payment in respect of, or arising out of, the undervalue. The figure of £40.5m refelcted the estimated undervalue given by the Claimant's expert with reference to the value at which the property was actually sold.
Directors' duties – the standard required
The Court set out the minimum standard that is expected from a director when discharging his duty of care. It made reference to a judgment2 of in respect of the statutory obligation upon a director to exercise appropriate care, skill and diligence, as now set out in section 174 of the Companies Act 2006. This section was not in force at the date of the transaction but as it was a codification of existing law it, provided helpful guidence. The duty is to:
"exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that might reasonably be expected of a person carrying out the functions carried out by the director in respect of the company and with the general knowledge and experience that director, in question, had."
The Court also referred to another case3, which held that the standard of care required is to be measured both subjectively, against the actual knowledge, experience and skills of a given director and also, by the application of objective criteria.
The Court summarised the authorities referred to as setting out the minimum objective standard of care to be expected of a director carrying out his functions in respect of the company. In particular, it concluded that a director should carry out those functions at no lower standard than he would apply if he were acting on his own behalf. The particular skill, experience and expertise of the director in question may well raise the standard to be expected of him in the exercise of a particular function. However, any lack of experience or expertise cannot justify any lower standard of care than the director would give to his own affairs.
It followed that on the facts of this case, if there were no real prospect that the Directors would have sold at such an undervalue if the Property had been theirs, summary judgement could be given in respect of the Directors' alleged breach of duty, irrespective of any detailed investigation of their particular skills or expertise.
There was argument as to whether expert evidence should be admitted as to the conduct of the Directors. However, while both Directors were professional people, neither was sued as such and their professional standing was not in issue. They were sued on the basis that they had failed to exercise the ordinary care to be expected of them in respect of their own affairs.
It remains to be seen whether a court in an offshore jurisdiction with a developed and highly regulated professional fiduciary sector, such as Jersey, would approach the matter differently and require a higher standard of professional directors. In this case a lower standard was required and the Directors failed to meet even that. By way of note, the 2014 case of Nolan v Minerva4 case made frequent refences to the "statutory and regulatory obligations" of the directors and used these as a yardstick by which the honesty of their actions was measured. Although dealing with different law and facts it seems highly likely a court in Jersey would have applied these higher standards.
Having emphasised that a director owed his duties to the company for which he acts, and in its best interests, the Court also made some interesting comments about duties of directors in the context of a company forming part of a group. This issue is not uncommon in an offshore context. He said this:
"There is equally no doubt but that, where a company forms part of a group, circumstances can arise where a transaction which, on its face, is entered into for the benefit of another company in the group can be sensibly regarded by directors as being in the overall, albeit indirect, interest of 'their' company and, thus, that the directors in endorsing or implementing such a transaction will not be in breach of their duty.
In entering into such a transaction, however, the directors must still exercise appropriate care in the interests of the company of which which they are director. They cannot forego the interests of their company in favour of the group, or in favour of the trust [in this case], or other entity, of which 'their' company is an asset, or part."
The Court said that if they do that, there may be grounds to excuse them from liability under section 1157 of the Companies Act 2006 or by ratification of their conduct by shareholders. A similar provision exists under Jersey company law under Article 212 – Power of court to grant relief in certain cases.
Application of the facts to the standard expected
The Directors were appointed to the Board on 2 August 2005 and authorised the purchase of the Property on 3 August 2005. One of the directors had executive responsibility for the overall structure while the other did not, acting as a "so-called independent director", quoting the Court directly. Subsequent internal re-organisations within the corporate services provider for which the defendant Directors worked meant that both directors ceased to have any day-to-day role with Angelmist. They were only brought back into the picture the day before the sale of the Property on 1 August 2006, one year after its purchase.
The Directors raised a defence that they had relied upon valuation advice given by a property advisory company ("the Adviser") which gave advice on property matters to the beneficiary of the overlying trust. The Directors asserted that their approval of the sale transaction was based on professional advice from a law firm as to tax matters and the valuation advice. However, neither defendant recalled whether the valuation advice that they later relied on, was given to them orally or in writing even though, as will be seen, it was wrong to have relied on this advice in any event.
The Court noted that both Directors were asked to act at short notice and, in the case of the disposal, "under some pressure of time."
The Defendants' position during the hearing was that the Directors regarded the Adviser as Angelmist's property adviser and that the central question was whether, in doing so, they had fufilled their obligation to "exercise an appropriate degree of care and skill in relation to the transaction". In other words, did they deal with the Property as they would have done had it been their own?
Angelmist contended that no property owner would conceivably have sold a very valuable commercial property without an independent valuation.
In support of this it was contended that the Directors should have had reference to a number of particular matters, which were:
- the acquisition cost of the Property in 2005 for £150.5m (made up of a contract price of £145m and an uplift of some £5.5m representing a total value attributed to it by the vendor)
- the valuation in July 2005 by independent valuers at £167m;
- an earlier valuation by by the same independent valuers in March 2006 that put the value of the Property at just under £214m
- that in August 2005 (the time of the purchase) a draft report prepared by the tax advisers had suggested a "Directors' Valuation'" of £152.6m;
- that at the time of the tax advisers' report the Property Adviser's explanation of the difference between the contract purchase price of £145m and the "Directors' Valuation" was that a desktop valuation had been carried out and shown a valuation 'a little higher' than the contract figure;
- that as at the date of the sale, the value of the Property was shown in Angelmist's books as £150.5million; and
- That in balance sheets for April 2006 and subsequently, the value of the Property was shown at £150.5million.
In essence, it was said by Angelmist that the Defendants, had they been exercising the standard of ordinary care that they would have applied to their own affairs, should have concluded that no sale could be safely effected for full value without the precaution or protection of an independent valuation.
The Defendants said they took the position that as the transaction was between two companies in the same group there was no need to call for an independent valuation, particularly where such valuation would cost the company hundreds of thousands of pounds. The view was taken that the Property Adviser's advice was sufficient and that, in light of a contract purchase price of £145m, in a rising market, £148m seemed a sensible figure. Further it was not plausible to gainsay an expert in the field of valuation.
Given the weight of indicators as to a higher value as referred to in i to vii above the Court concluded that the Directors failed to exercise appropriate care in resepct of the sale of the Property on the basis that they had failed to exercise the ordinary care to be expected of them had it been their own. The Court said that:
"An owner of a Property of a value measureable in very many millions of pounds selling that Property for himself would, manifestly, not have conducted the sale in the way that was allowed to take place in this case."
At the heart of the matter was the fact that the Property Adviser was also the purchaser's agent and that the purchaser was an asset of the trust. In essence, the Property Adviser was acting in the interests of the purchaser and the trustees and not in the interests of Angelmist. There was a clear conflict of interest which should have been apparent to the Directors in that as agents of an owner of a very valuable property, to whom they owed fiduciary obligations, they should not have entrusted the valuation to a valuer not acting solely in its interest. As the Court noted:
"A[t] the barest minimum such an owner would require a truly independent valuation. Such a valuation was lacking in this case. Additionally it is realistically inconceivable that a vendor of the Property, acting in his own right, would have allowed the sale to go ahead upon the basis of what must, on any view, have been a cursory valuation, lacking explanation, or detail."
Given the welter of indicators that the sale price of £148m was not in the best interests of the company, the Defendants' approach to comparing the £145m purchase figure to it "was not good enough."
The inter-group transfer argument
The Defendants argued that because the sale of the Property was an inter-group transfer no independent valuation was required and, had one been commissioned, it would have been a costly exercise. The Court gave this short shrift, citing Charterbridge Corporation Ltd v Lloyds Bank Ltd , and said:
"Mr Brown was quite wrong in thinking that the inter-group nature of the transaction justified, or explained, the failure to procure independent valuation advice. His duty was to Angelmist; not to the group and not to the overall transaction of which the transfer formed a part."
As to the cost of the valuation the Court was also equally scathing, noting that the valuation for the purposes of the proceedings had cost £27,500 and that no enquiries had been made of the independent valuers who already had knowledge of the matter. Even if the valuation had been as expensive as thought by the Directors, the Court thought that given the value of the Property, this would have been a sensible way of ensuring the Property was not sold at an undervalue.
Another defence raised: ratification by the members
Another unsuccessful defence deployed by the Defendants was that of authorisation. The sale of the Property had been approved by Angelmist's sole shareholder. If the execution of the transfer had had no effect upon the solvency of Angelmist, ratification of the transfer by the sole shareholder would have provided a complete defence to the claim. However, because the sale pejudiced the solvency of Angelmist owing to the crystallisation of tax liabilities and caused prejudice to its creditors, then because the duty of the directors extended beyond the company to its creditors, the shareholders did not have the authority or power to absolve the directors from the consequences of any breach of duty.
The Defendants also claimed that they would receive an appropriate level of financial support from the trustees, the shareholder and the beneficiaries and relied upon this assistance when deciding to go ahead with the transaction. However, in the absence of realistic evidence that Angelmist had a legally binding entitlement to support, the prospects of support constituted no more than a hope or, at best, an expectation, that funds would be provided. The support was in the form of a letter from the shareholder which did not constitute a legally binding commitment and, as to the trustee, reference was made to letter of support but this could not be located, and was in unknown terms between unknown parties.
This 'hope' of support was insufficient to establish a realistic possibility that the company could pay its debts arising from the transfer and raised a strong possibility that the transfer would render Angelmist cashflow insolvent following the transaction. Had the true value of the Property been ascertained, at £180m, then the prospect of tax liabilities arising would have been very real. The fact that the Directors did not know that the sale would render Angelmist insolvent did not matter.
Arguments were made by Angelmist that the Directors' employer, the Jersey professional corporate services provider, acted as a shadow director of Angelmist. The Court dismissed this claim, primarily on the basis that the Directors' own evidence was that they always exercised independent judgment.
Summary judgment was given and an interim award of £12m was ordered to be paid by the Directors. The decision is subject to a potential appeal.
The Court was satisfied that there was no realistic prospect of the Directors successfully resisting the claim that they acted in breach of their duty of care and skill in respect of the sale of the Property.
There are many useful lessons from this judgment for directors. The judgment reminds us that it is imperative for directors:
- To have in mind what the duty of care is, and to whom it is owed. Had the Directors had this at the forefront of their minds when making decisions, the Property would not have been sold at the price which they sold it.
- To recognise conflicts of interest when they arise in transactions such as this. The Directors were directors of both Angelmist and the shareholder and they should have strictly focused on the interests of Angelmist. They should have also identified the conflict of interest in taking valuation advice solely from the purchaser's adviser. Taking independent advice will always be the most robust option.
- To have close regard to the documents relevant to an impending transaction, regardless of the time constraints imposed. The Directors had avaliable to them all the documents they needed to be able to identify that they needed an independent valuation and that the price at which they were about to agree to sell the Property was at a significant undervalue. The Directors should have also taken into consideration the financial standing of the company before entering into such a transaction and ensured that any financial support offered in the event of financial difficulties was legally binding.
- To remember that the ratification of their acts by shareholders, while a useful risk mitigation tool, does not provide a defence to claims by creditors (and liquidators) if those acts lead to the insolvency of the company.
 Decision of Master Bowles in Angelmist Properties Ltd v Leonard and others  EWHC 1858 (Ch)
 Popplewell J, in Madoff Securities International Limited v Raven and Others  EWHC 3147 (Comm.)
 D'Jan of London Ltd, Copp. v D'Jan  1 BCLC 561
 Nolan & Ors v Minerva & Ors  JRC078A
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