A director’s authority to bind a company
In this recent case, the High Court held that various transactions by the director of an insolvent company were void.
In the recent case of Henry George Dickinson v NAL Realisations (Staffordshire) Limited & Others  EWHC 28, the High Court held that various transactions by the director of an insolvent company were void. The case considered various points of company law, including directors’ authority and duties, substantial property transactions and share buy-backs.
Facts of the case
In 2000 Mr Dickinson (“D”) acquired the entire issued share capital in Norton Aluminium Ltd (“NAL”). Until 2008 D and his wife, Mrs D, were the only directors of NAL. In 2008 Mr Williamson (“W”) was appointed to the board. In 2005 NAL transferred the trading premises of the company to D for the sum of £224,000, a sum less than the market value of the property.
In 2007 NAL received a letter of claim on behalf of 27 potential claimants in relation to a nuisance claim. While disputing the claims NAL entered into a number of transactions which had the effect of running down NAL’s value and placing NAL’s assets out of the reach of any future liquidator. Two of the transactions having this effect were:
- in 2010, a share buy-back whereby NAL agreed with each of its shareholders to buy back most of its issued share capital, with the consideration payable left outstanding as a loan secured against NAL’s assets; and
- the sale of one of NAL’s subsidiaries to D for the sum of £1.
The nuisance claims went to trial in 2012. NAL went into administration soon after and a prepack sale was completed selling most of NAL’s assets to a company controlled by D. NAL ultimately went into liquidation and D commenced proceedings to recover just over £1,000,000 which he claimed was owed to him by NAL.
The liquidator’s claims
The liquidator responded with counter claims to try and recover the assets of NAL, claiming:
- the transfer of the property was void as D did not have authority to conclude this transaction and as such he was in breach of his duty under section 172 of the Companies Act 2006;
- the share buy-back was void as the shares were not paid for at the time of their purchase;
- the sale of the subsidiary shares was void because NAL had failed to obtain its shareholders’ approval of the sale; and
- the buy-back and the share sale were both made at an undervalue and so should be unwound as transactions defrauding creditors within section 423 of the Insolvency Act 1986.
The property transfer and the sale of the subsidiary shares
The court held that the sale of the property in 2005 and the sale of the subsidiary shares in 2010 were void.
The court found that NAL had failed to hold a board meeting to approve the sale of the property. Even if a meeting had been held, a resolution, approving the sale could not have passed as Mrs D would have been the only director entitled to vote (by virtue of D’s interest in the transaction) and the articles required the quorum at board meetings to be at least two directors. D therefore held the property on trust for NAL and was liable to restore it and to pay compensation equal to the amount of rent paid or credited to him.
The sale of the subsidiary shares was void as D did not have the authority to enter into the agreement. No board meeting was held to consider the sale and all decisions had been taken by D alone. Furthermore, the sale was a transfer at an undervalue for the purposes of section 423 of the Insolvency Act 1986 and D was in breach of his fiduciary duties to act in good faith and in the best interest of the company. The court held that D’s objective in entering into the share sale was to move assets out of NAL and to put them out of the reach of its creditors in the event the nuisance claims succeeded.
The buy-back was held to be void for two reasons: (1) under section 691(2) of the Companies Act 2006, the payment due on completion of a buy-back must be made at the time of the purchase; and (2) the court rejected the argument that the outstanding loans constituted payment as there had to be evidence of a funds flow. Furthermore, the buy-back was equivalent to a distribution or dividend as NAL did not receive any consideration.
What does this mean for my company?
This case serves as a reminder that a director does not always have authority to bind the company and it should not be assumed that a director has the requisite authority. Although the Companies Act gives directors powers to bind a company, this applies only where directors act in good faith and will not apply to transactions in which the director is a party. You should always ensure that each party to a transaction has secured the appropriate authority (or ratification) for such transaction.
Seray Kitchingman is a solicitor in our corporate team in London, and may be contacted on 0207 822 1935 or by email firstname.lastname@example.org.