Law case review

Edited by Denis Keenan
Voluntary arrangements and secret deals

The Court of Appeal has decided that, where one or more creditors had been promised additional payments provided they agreed to a voluntary arrangement at the creditors' meeting, the arrangement is void. This is because the information presented to the meeting was false or misleading, or contained a material omission under s 276 of the Insolvency Act 1986, even though the inducements came from a third party. The court was therefore entitled to make a bankruptcy order on the petition of a dissenting creditor (see Cadbury Schweppes plc v Somji, The Times, 16 January 2001).

The law

Section 276(1)(b) of the Insolvency Act 1986 states that the court may make a bankruptcy order where there has been a default in connection with a voluntary arrangement if it is satisfied that information the debtor supplied in connection with the voluntary arrangement was false or misleading. Section 262 allows a creditor with voting rights (among others) to make application to the court to challenge the decision of a creditors' meeting at which the voluntary arrangement was approved.

The facts

Cadbury was a dissenting creditor in a voluntary arrangement proposed by the debtor and approved by a creditors' meeting. Cadbury was owed US$1,717,000 out of claims totalling US$8,381,000 and had a 22.7% share of the vote. Cadbury applied under s 262 for the creditors' approval to be revoked on the grounds that it was prejudicial to Cadbury's interest as a creditor. It also alleged secret collateral payments to two creditors and said that failure to mention these offers in the voluntary arrangement proposal was a material omission within s 276(1)(b). It appeared that two creditors, Byblos Bank Europe SA and Banque Français de L'Orient, had been offered a beneficial assignment of their debts to Jersey company Leaf Holdings Ltd, if the voluntary arrangement was approved. The same offer was also made to Cadbury, which had declined on the grounds that 'any funds which were available should be offered to all creditors pro rata'. Byblos's voting share was 8.48% and that of Banque Français 13.68%.

The decision

The Court of Appeal concluded that the voluntary arrangement was void and affirmed the High Court's decision that it had jurisdiction to make a bankruptcy order against the debtor.


The debtor had submitted that the money Leaf offered to Byblos and Banque Français was not part of the debtor's estate, nor was Leaf an 'associate' of the debtor within the meaning of s 435 of the 1986 Act (mainly 'relatives'). The money was not provided as part of the proposed voluntary arrangement but as part of a separate commercial transaction dealing in distressed debt, which Leaf had entered into for good commercial reasons. The Court of Appeal held that the judge was right to reject the suggestion that the deal was an ordinary debt purchase transaction. It was material, and it was not right for such a deal to be kept from the other creditors.

Denis Keenan

Signing company cheques

In dealing with a non-executive director's liability for a policy concerning non-payment of Crown debts, the High Court has ruled that evidence that the non-executive director is a cheque signatory is not sufficient to saddle him with responsibility for such a policy (see Re Stephenson Cobbold Ltd (in liquidation), Secretary of State for Trade and Industry v Stephenson and Others [2000] 2 BCLC 614).

The law

Section 6 of the Company Directors Disqualification Act 1986 places a duty on the court to disqualify insolvent companies' unfit directors. It requires an investigation into the director's involvement and his responsibility for the offending policies.

The facts

Stephenson was the chairman of executive search consultants Stephenson Cobbold Ltd, and Henstock was one of its non-executive directors. The company ceased trading in late 1995 and went into creditors' voluntary liquidation in June 1996. No audited accounts had been produced after September 1994. The company's auditors also provided it with management accounting services, including the preparation of monthly management accounts, which were presented at board meetings. Mead, the auditing firm's partner responsible for the company's audit, usually attended the monthly board meetings. At the time when it went into liquidation, the company had an estimated deficiency of £114,625, including £72,000 owed to the Inland Revenue and £14,000 owing for VAT.

Proceedings against Stephenson had concluded with his disqualification from acting as a director of any company (see Carecraft Construction Co Ltd [1993] BCLC 1259), but proceedings against two other non-executive directors had been discontinued.

The secretary of state for trade and industry instituted proceedings seeking an order under s 6 of the Company Directors Disqualification Act 1986 against Henstock, on the grounds (inter alia) that he had caused the company to operate a policy of not paying Crown debts, and that he had allowed Stephenson to breach his fiduciary duty by misusing the company's funds for his personal use and by drawing excessive remuneration. The core of the case against Henstock was that he had been (since 1994) the second signa-tory on company cheques; the secretary of state argued that a company director who was a signatory of its cheques was involved in its financial affairs and if, while that director remained a signatory, payments were made that should not have been made and the company became insolvent, the director had shown himself to be unfit.

For his knowledge of the company's financial position, Henstock relied principally on the management accounts presented at the board meeting and on Mead's oral presentations at those meetings. When he signed cheques, there were supporting invoices or (in the case of petty cash or personal payments) explanations were given to him. Very occasionally he had signed blank cheques for salary payments. However, he had become alarmed at being asked to sign cheques in respect of school fees for Stephenson's son. Stephenson had assured him that all was in good order, and Mead confirmed that a P11D form would be filed at the end of the year in respect of all of Stephenson's drawings from the company. In addition, Stephenson was being compensated for not having drawn his full salary entitlement in some earlier years.

In respect of a second such cheque, Henstock raised the matter in a board meeting and Stephenson reassured him that National Insurance and PAYE deductions were being properly made in respect of such payments. When a third cheque for school fees was presented for signature in April 1995, Henstock signed it but said that he would sign no such cheques again.

But at the same time he signed a cheque for £8,000 in Stephenson's favour for 'arrears' of salary - over a period of eight months, Stephenson had drawn £20,645 in salary against his annual salary of £80,000. After July 1995, the company stopped paying NICs, PAYE and VAT. In October 1995, Henstock warned the board that the company could soon become insolvent; Stephenson said that he felt that it could trade out of the situation. Two non-executive directors resigned shortly afterwards, and Henstock resigned in December.

Deputy High Court judge Peter Leaver QC heard the secretary of state's application for a court order disqualifying Henstock. It was not suggested that the company had been trading while insolvent, nor was any suggestion of dis-honesty or commercially culpable behaviour made against Henstock.

The decision

The deputy judge said it was alleged that Henstock would (or ought to) have known that from July 1995 the company had made no NIC, PAYE or VAT payments, and had thus caused the company to operate a policy of not paying Crown debts. But this required the secretary of state to show that Henstock had caused the company to operate such a policy, and the evidence did not show that he had operated a policy of preferring other creditors to the Crown. Henstock had been entitled to rely on the monthly management accounts and Mead's explanations at the monthly board meetings as reassurance that the financial side of the company was being run properly. Although a director could not shrug off his responsibilities by claiming that he relied on others, each case must be viewed on its own facts; here, Henstock's reliance on Mead was not an abdication of his responsibilities as a director. (Secretary of State for Trade and Industry v McTighe [1996] 2 BCLC 477 distinguished on the facts.)

The deputy judge ruled that the allegation that Stephenson had been allowed to be in breach of his fiduciary duty by using company funds for his personal use and drawing excessive remuneration had not been made out. No cheque for school fees had been signed after April 1995 (when the company's NI and PAYE payments were up to date, although there had been arrears of VAT payments), and Henstock had the benefit of Mead's reassurance about these payments. He had also drawn them to the board's attention. In addition, the payments to Stephenson were for sums less than those he had been entitled to (again, McTighe's case could be distinguished on the facts).

The application was dismissed.

Paul Niekirk

Where directors acquire the company's profits

The very fact that a director, as a fiduciary, has made a profit, renders him liable to account. Whether the company could or would not have obtained that profit is irrelevant (see Gencor ACP Ltd and Others v Dalby and Others [2000] 2 BCLC 734).

The law

Company directors owe fiduciary duties to the shareholders. The duties are generally enforceable through the company. This means that directors must act in what they consider to be the shareholders' best interests. For example, directors must not place themselves in a position in which their personal interests conflict with their duty to the company, nor are they entitled to make secret profits.

A director who has acted in breach of fiduciary duty may be relieved of any liability to account by the members passing an ordinary resolution ratifying the director's actions. The resolution is only valid if the director has disclosed all the facts to the shareholders. In the absence of fraud, a director who is not a controlling shareholder may vote, in his capacity as shareholder, to ratify his action as a director. A controlling shareholder may find that minority shareholders will try to recover the profit or benefit on the company's behalf.

It has long been accepted that, because he is a director and fiduciary, the very fact that a director makes a profit against the company makes him liable to account (see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378).

The facts

This summary action was brought by three companies in a group (ACP) that designed, manufactured and sold asphalt-making plant and machinery and ancillary products. In 1997, ACP had been taken over by the present owners, who acquired the entire share capital in the ACP holding company. The shares were acquired from the managing director, Mr Dalby (D), and the other shareholders - which were companies that D controlled - and trust funds, of which D was the settlor and a beneficiary. The claimants brought the action following an investigation into ACP's affairs before the takeover. The investigation revealed alleged misfeasance on the part of D and M, a director and company secretary of ACP, in that they had misapplied money and other property belonging to ACP. In addition, it was alleged that D, abetted by M, had dishonestly taken for himself or for B Ltd, a Virgin Islands company that D controlled, business opportunities and assets that came to D as a director of ACP, and which, therefore, belonged to ACP.

More specifically, it had been arranged for B Ltd to supply and be paid for orders from companies in Australia, Kenya, Malta, Mauritius and Sri Lanka for second-hand goods, and for equipment ancillary to goods that ACP had already supplied. In addition, it was alleged that D, while in Australia on ACP business, arranged sales of second-hand equipment on behalf of another company, and for the resulting commission to be paid to B Ltd. Sales of second-hand equipment were often made to ACP customers, and correspondence was often conducted on ACP headed paper and signed by D as 'group managing director'. In addition, equipment had allegedly been shipped and installed by ACP staff.

It was also alleged that D and M arranged to buy back shares in one of D's private companies, held by a Malaysian company, and that payment was made by assigning a debt owed to ACP to the Malaysian company. Finally, it was alleged that D's son was employed by ACP at a salary of £24,000 a year, plus the use of a company car, despite the fact that he was only a schoolboy at the time.

The decision

The High Court held that the fact that a company could or would not have been able to benefit from a particular opportunity was no answer to a director's strict liability to account for any personal benefit derived from a corporate opportunity. A director could only be absolved of liability by full disclosure to and prior approval from the shareholders. It followed that D was liable to account to ACP for all profits he had obtained through exploiting opportunities that came his way as a director of ACP. D therefore had to account for all profits made on the sales of new and second-hand equipment from which he had benefited personally, either directly or through B Ltd. D was also liable to account for commission payments that he had received because the opportunity to arrange sales had arisen from his directorship with ACP.

The court also held that the corporate veil should be lifted in relation to B Ltd, because this company was wholly controlled by D. The company acted entirely on his directions, had no staff, was incapable of carrying on business and, in effect, was little more than D's offshore bank account (Re H (Restraint Order: Realisable Property) [1996] 2 BCLC 500 applied).

The court decided that judgment would not be made against M in respect of profits diverted to B Ltd under the principle of 'dishonest assistance in a breach of fiduciary duty', as it had not been shown that he had assisted in the misapplication of trust funds or that he had acted dishonestly. An account would be ordered of all moneys paid to the Malaysian company under the debt assignment.

The salary and car benefit provided for D's son was invalid in that it was a misapplication of ACP's money and was designed to provide D with a salary increase without board approval and to lessen D's tax liability.


In this case, Rimer J appears to be restricting the manner in which a fiduciary may be absolved from liability by referring only to 'prior' approval. Previous case law has made it clear that a fiduciary may be absolved from liability by shareholders' prior or subsequent approval following full disclosure (see Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162). Clearly in cases such as this, where there has been a change of company ownership, Rimer J is correct, in that it would appear virtually impossible in such a case for a director to be able to secure absolution for actions that have resulted in a benefit to himself at the expense of those new owners. Nevertheless, it appears that, in principle, prior or subsequent ratification is still possible.

David Sagar

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