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Directors duties – how far can consequences reach?

13/07/2017 | ACUMEN BUSINESS LAW
A recent decision of the Court of Appeal highlights the actions a shareholder can take on behalf of a company when a director of that company has failed to fulfil his or her statutory and fiduciary duties and how far reaching the potential remedies for such a dereliction of duty could be. 

Company directors owe numerous duties to their companies. These duties, which apply equally to executive and non-executive directors, include a duty to avoid conflicts of interests, to promote the success of the company and not to profit from their position as a director at the company’s expense. The Court of Appeal considered these duties in Clegg v The Estate and Personal Representatives of Pache (Deceased) and others [2017]. 

Clegg and Pache were both co-directors and equal shareholders of GAP, a limited company in the steel trade industry. In 2004 Pache began trading steel for his own benefit through another limited company, FPL, and concealed his ownership of this company. In 2007 Clegg discovered what Pache had been doing and objected however Pache continued trading until 2008 via FPL. GAP went into insolvent administration in 2008. 

Pache and FPL entered into an agreement in 2010 to pay the sum of £85,000.00 to a company owned by Pache’s wife. Pache died the day after the agreement was made and subsequently payments totalling £50,500.00 were made to the company owned by Pache’s wife under the agreement reached in 2010. Clegg at this point issued proceedings against Pache’s estate and a number of other defendants, most notably Pache’s wife, which was heard in the High Court initially before being brought in front of the Court of Appeal. 

Clegg sought an account of the profits made by Pache, via FPL, during the period between 2004 and 2008 meaning that the defendants would be liable for the gross profits made as a result of Pache’s breach of his duty to avoid a conflict of interest and not profit at the company’s expense.  The basis for such a remedy was that GAP missed out on those profits by virtue of Pache trading as FPL. Pache’s estate tried to argue that Clegg himself was in breach of his duties from 2007 when he discovered Pache’s actions and did nothing and also asserted that the burden of proof was on Clegg to show that Pache’s breaches lead to GAP’s loss.  The court rejected the arguments of Pache’s estate, finding no breach of duty on the part of Clegg and stating that the burden of proof could not be on Clegg given that Pache concealed his breach of duty for most of the relevant period. 

The above is not particularly surprising given the clear breaches on the part of Pache. What may be somewhat more intriguing is the fact that Clegg’s claim against Pache’s wife succeeded and resulted in a restitutionary remedy of unjust enrichment being awarded against her.  Consequently she was personally liable to GAP for the sum of £50,500.00, which was received by her as an unjust enrichment.  It should be noted that the court commented that there was no requirement for the recipient, in this case Pache’s wife, to be aware of the interest of the claimant, in this case Clegg. 

Generally speaking this case demonstrates the type of remedies available in situations where directors have breached their statutory or fiduciary duties. In particular, the successful claim against Pache’s wife shows the extent of any potential liability in respect of a breach of director’s duties. The  basis for this element of the claim was rooted in long established law but it still serves a pointed reminder that in certain circumstances a party related to a director, in particular a spouse, can be liable for the director’s actions even if he or she has no involvement in the dispute itself. This should also serve as a note to shareholders highlighting the potential claims and remedies available when pursuing a director who has failed to carry out his or her duties.

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