The recent case of Dickinson v NAL Realisations (Staffordshire) Ltd is a "101" guide to how not to run a small business, providing insight into the pitfalls that can await any director or shareholder that may wish to cut corners rather than ratifying decisions through the appropriate approval processes.
The case concerned a range of company law topics, but I will discuss here the three more commonplace scenarios dealt with by the proceedings: (i) the sale of freehold property; (ii) the purchase by a company of its own shares; and (iii) a sale of a subsidiary. Each of which also engaged ancillary points of company law, such as directors' authority and duties
Dickinson was the majority shareholder in NAL Realisations (Staffordshire) Ltd (previously called Norton Aluminium Ltd) ("NAL") holding 50.6% of the issued shares. The other shareholders were a pension scheme, of which the trustees were Dickinson, his wife and a professional trustee, and a family settlement. Dickinson and his wife were the only directors of NAL until 2008 when they were joined by Mr Williamson.
In 2005, NAL transferred its factory premises to Dickinson for £224,000. The company also took a four-year leaseback at a rent of £40,000 per annum. NAL's decision to approve the transaction was evidenced by a board minute of a meeting at which Dickinson and his wife were seemingly present.
In 2010, NAL sold its wholly-owned subsidiary, Norse Castings Ltd ("NCL"), to Dickinson for £1. No evidence of a board meeting was recorded and it was clear that the other NAL directors were not consulted about the sale: Mr Williamson was not told about the sale until after the fact and Mrs Dickinson was not sure when she first learned about it.
Later that year, NAL entered into an agreement with each of its shareholders to buy back a total of 2.5 million shares at nominal value. All the documents relating to the buy-back were signed by Dickinson and NAL did not make any payment for the purchase of the shares; rather the funds were left in the company as a debt to the shareholders secured by a debenture in Dickinson's name.
Transfer of factory premises
The judge found that the 2005 transfer of the factory premises was void for the following reasons:
- the board meeting, which was evidenced by the board minute, to approve the transfer had never happened;
- even if it had happened, the decision
would not have been properly approved as:
- Dickinson would not have been entitled to vote on the transaction or be counted in the quorum by virtue of being interested in the transaction; and
- Mrs Dickinson could not have approved the transaction on her own as the quorum for a directors' meeting was two directors; and
- it could not have been ratified under the Duomatic principle (i.e. unanimous approval of the shareholders) as Dickinson was not entitled to act unilaterally on behalf of the pension scheme (the professional trustee was not aware of the transaction).
As a result of the transfer being void, the judge ruled that Dickinson held the factory premises on trust for NAL and was liable to restore it to NAL and to pay NAL compensation equalling the amount of rent paid or credited by NAL to him.
Transfer of NCL shares
In relation to the 2010 transfer of NCL to Dickinson, the judge concluded that the decision to sell the subsidiary was taken by Dickinson alone and, similarly to the property transfer, without the requisite authority. The judge determined that Dickinson's delegated authority to act alone on certain company decisions stopped short of "selling assets to himself". Accordingly, the transfer was either void or voidable, and in any event avoided as a result of the litigation, because:
- the shares in NCL were a "substantial non cash asset" for the purpose of section 191 of the Companies Act 2006, the disposal of which required shareholder approval;
- the sale was a transaction at an undervalue under section 423 of the Insolvency Act 1986; and
- it was not in the interest of NAL to transfer NCL to Dickinson for £1 and in doing so Dickinson preferred his own interests over that of NAL's in breach of his fiduciary duties and Dickinson knew he was acting in breach of his fiduciary duties.
Buy-back of NAL shares
The buy-back was held as void as a result of the consideration not being "paid for on purchase" as is required by section 691 of the Companies Act 2006; rather, the consideration was left as a debt owing from NAL to the shareholders. The judge also found that the buy-back was also a transaction at an undervalue within section 423 of the Insolvency Act 1986.
[For more information on share buy backs, please see my colleague Adam Kuan's "Guide to share buybacks for private companies".]
Duties of Mrs Dickinson and Mr Williamson
According to the judge, Mrs Dickinson and Mr Williamson had breached their directors' duties to, amongst other things, inform themselves of the company's affairs and join in with the other directors to supervise such affairs and to form an independent judgment as to whether acceding to a shareholder's request is in the best interests of the company.
This judgment goes to show that directors and shareholders of companies have certain inescapable personal responsibilities that must be recognised and adhered to if decisions made by such directors or shareholders on behalf of the relevant company are to be lawful.
In Dickinson's case, the judge lamented that Dickinson had "not...sought to act in the best interests of, or even with any proper regard to the interests of, the company as distinct from himself". The lesson here for any dominant director is to ensure that they bring the other directors of the company along with them during the decision making process and guarantee that decisions are conducted in line with the company's constitutional documents and company law. This may mean having to argue one's case as to the merits of a decision more regularly, but it will result in decision-making processes that stand up to scrutiny.
Concurrently, passive directors, although perhaps not the instigators of company decisions, still need to satisfy themselves that they are sufficiently supervising their fellow directors, informing themselves of the company's affairs and coming to an independent view as to whether proposals are in the best interests of the company and its members as a whole.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.