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  • Claims against a Director for Breach of Duties

    Claims against a Director for Breach of Duties

    If a director breaches these duties, it may be possible for shareholders to bring a claim. Contact one of our solicitors.

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    What are the directors’ duties?

    The general duties of a company director are found in sections 171-177 of the Companies Act. They are:

    • A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
    • A company director must act in good faith and promote the success of the company for the benefit of its members (section 172 (1)).
    • A company director must exercise independent judgment. They may take on board the advice or opinion of others, the ultimate decision must be theirs (section 173).
    • A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
    • A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
    • A company director must not accept any benefits which are conferred on them due to their position as a company director (section 176).
    • If a company director has an interest in a proposed transaction or arrangement with the company this must be declared to any fellow directors (section 177).

    Examples of breach of directors’ duties cases

    • In 2019, ClientEarth sued, as a minority shareholder, Polish energy company Enea alleging that the company’s strategy to build a 1GW coal-fired power station in northeast Poland as part of a joint venture with another Polish energy firm, Energa posed an indefensible risk to investors in the face of rising prices for carbon and growing demand for renewables. Moving forward with the project would constitute a breach of the board of directors’ fiduciary duties of due diligence and acting in the best interests of the company and its shareholders.
    • In Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143 the director of a company that owned a lake and surrounding land was ordered to repay £350,000 after failing to declare his interest in a water skiing school that operated on the lake at a particular directors’ meeting.

    Breach of directors duties penalties

    What can be imposed?

    There are several sanctions the court can make if a director is found to have breached their duties, including:

    • Damages – if the director has been negligent in performing their duties they may be required to pay damages to the company.
    • Injunctions – an injunction order can be made to prevent a director from conducting a breach or continuing to breach their duty.
    • Restoration of property and/or profits – the court can order a director to return property and/or repay any profits gained through the breach.
    • Reversing of a contract – if a director signs an agreement that goes against the company’s intentions it can be rescinded.

    Can the company ‘forgive’ a director for a breach of duty?

    Yes, section 239 regulates the company’s right to ratify (forgive) conduct by a director amounting to negligence, default, breach of duty, or breach of trust in relation to the company. The ratification decision must be made by resolution of the members and neither the director nor anyone connected with them can be part of the resolution.

    Most importantly, a breach of duty that results in a decision that threatens the solvency of the company or causes a loss to its creditors cannot be ratified.

    In cases of negligence, default, breach of duty, or breach of trust claims, the court can relieve a director of liability in whole or in part if:

    • They acted honestly and reasonably, and
    • Having regard to all the circumstances of the case, the court believes it is reasonable to excuse the director.

    Concluding comments on breaching directors duties

    Civil litigation in cases involving directors’ duties is a highly complex area of law and requires the involvement of commercial disputes solicitors.

    Take for example the Enea case mentioned above which concerned shareholders bringing a claim against the board for, in broad terms, failing to consider environmental and climate change matters in their decision making.
    These types of directors’ duties claims are guaranteed to rise as the science around the impact of company actions on climate change becomes clearer.

    This, and other types of directors’ duties claims, such as conflicts of interests or negligence, can involve cross-border and joint venture elements, adding to the complexity of the matter.

    If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice immediately.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.

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  • Furlough Fraud – Eldwick Law Fraud Solicitors

    Furlough Fraud – Eldwick Law Fraud Solicitors

    What is the furlough scheme?

    On 20 April 2020, the government introduced the ‘Coronavirus Job Retention Scheme’ (CJRS). This is commonly referred to as the ‘Furlough Scheme’. A furlough is defined as a ‘temporary leave of absence’ from work. Whilst this scheme is ultimately helping struggling businesses and individuals, there is scope for abuse of the system, also known as ‘furlough fraud’. It is important for individuals and businesses to understand the implications of the scheme and take steps to prevent fraud.

    The Chancellor took the unprecedented move of offering government assistance to all employers, operating on a PAYE scheme, who otherwise would not be able to pay their staff. To prevent redundancies, the government offered support by subsidising 80% of their wages. From 1 August 2020, the government will start to slowly withdraw their support. They will first require employers to meet National Insurance and pension contributions in August. Throughout September and October, the percentage of contribution to employees’ wages will subside. The scheme ends on 31st October 2020.

    Under the scheme employees are not allowed to undertake any work at all for their employer. This excludes training, for any hours that their employers claim furlough assistance from the government for.

    The CJRS has been hailed as a lifesaving measure to prevent mass unemployment and to support the ‘stay-at-home’ orders that were necessary to contain the pandemic. However, as the total cost of the scheme has swelled to £28.7bn in 12 July 2020, the obvious question becomes how the Treasury is going to be able to recoup on this unprecedented public investment.

    Furlough fraud

    In a powerful statement of intent, HMRC arrested a 57-year old man from Solihull for allegedly defrauding the CJRS of £495,000. The man had his bank accounts frozen and is alleged to be part of a wider multi-million-pound tax fraud. He is one of eight men from the West Midlands area to have been arrested as part of the investigation. Whilst the HMRC were forced to suspend its investigatory activities in April due to capacity issues, the department is back with a vengeance to clamp down on any instances of fraud.

    HMRC reported over 1,900 complaints in May alone. These were arising from alleged mis-use of the CJRS scheme. Employers were claiming government support for furloughed workers while still requiring those workers to come to work. This is a clear abuse of process. However, given the raft of Coronavirus assistance packages that have been on offer for employees, self-employed workers and small businesses , the lines are easily blurred. It can be easier than people think to essentially ‘double-claim’ on government assistance.

    HMRC have set out additional safeguards to prevent fraudulent activity within the scheme which include:

    • Proof that the employee was on the payroll from 28 February 2020, in order to prevent the creation of fake employees
    • The requirement for an employer to have already been authenticated by HMRC.
    • A four- to six-day processing period to make background checks, which should flag high-risk claims.
    • Checks made after payout to verify a claim was real.
    • A whistleblowing facility so that abuse can be reported.

    The Finance Bill 2020

    HMRC has indicated the new Finance Bill will offer a 90-day grace period. This will allow employers to refer themselves to the authorities. You can refer yourself if you believe you have benefitted too much from the CJRS and voluntarily submit yourself to a reassessment. HMRC will pursue enforcement proceedings all the way to criminal sanction for those deliberately attempting to defraud the scheme. They will show leniency in cases where over-benefitting from the scheme was not intentional and take a co-operative approach to employers who have sums that they might need to repay.

    If you are an employer benefitting from the furlough scheme, it is important to ensure you have complied with your relevant obligations. It is imperative to ensure you have read the relevant guidance, properly trained HR and payroll staff in the scheme and updated your policies and procedures.

    Eldwick Law has specialist practitioners able to give tailored advice to businesses of all sizes.

  • Reflective Loss: A Clarification by the Supreme Court

    Reflective Loss: A Clarification by the Supreme Court

    On the 15th July 2020 the Supreme Court handed down its judgment in the case of Sevilleja v Marex Financial Ltd [2020] UKSC 31. In this case the court grappled with the history and development of the ‘Reflective Loss’ principle and was tasked with clarifying the width of its applicability.

    Facts of the Case

    The original case was brought by an investment company, Marex Financial Ltd (‘Marex’). This was against Mr Sevilleja, the owner and controller of two companies incorporated in the British Virgin Islands. Marex had obtained judgment against the two companies, which were vehicles through which Mr Sevilleja conducted foreign exchange trading. Mr Sevilleja was accused of moving the two companies’ assets out of the jurisdiction, into accounts under his personal control. This was done in such a way as to deprive Marex of being able to enforce the judgment. Marex issued against Mr Sevilleja personally for the judgment sums, interest and costs of pursuing him. Mr Sevilleja resisted their action, contending that Marex could sue him for the losses incurred to the BVI companies, which have been placed in voluntary insolvent liquidation and relied on ‘Reflective Loss’.

    What is Reflective Loss?

    The principle has emerged from a line of cases spawned from the ancient judgment in Foss v Harbottle (1843) 2 Hare 461. In that case it was decided that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself.

    This case was followed by that of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 which applied the principle in a modern context. It was held that in a situation where a company suffers loss, which in turn affects the value of shares held by a shareholder, the principle in Foss applies to prevent the company and its shareholders both suing for the loss. Only one of those two claims can proceed and Foss makes clear that it is the company that should be preferred.

    It is at this point that the Lord Reed, in the present case before the Supreme Court, determined that things went wrong. The court in Johnson v Gore Wood & Co [2002] 2 AC 1 made several determinations that purported to follow Prudential but, in the view of Lord Reed, misinterpreted the core of that judgment. It was held by Lord Millet in Johnson that the basis of the decision in Prudential was a desire by the court to avoid double recovery. This led to a focus, by the benches that followed, on avoiding circumstances whereby anyone connected to a company, that had a right of action in a dispute, could recover for their loss – even in circumstances where the company chose to do nothing about their right of action. The latter circumstance was justified with reference to a secondary desire expounded by Lord Millet to preserve company autonomy. It was held in Johnson that a company’s refusal to prosecute its right of action in such a way as to compensate its creditors or shareholders was, in a sense, a novus actus. It wasn’t the original defendant who had resulted in the shareholder/creditor not being able to recover their losses by remedying the original wrong done to the company, but the company itself.

    How was Johnson Wrongly Decided?

    Lord Reed was respectfully critical of Lord Millet’s interpretation of the reasoning in Prudential and concluded that he had departed too far from the very limited scope that Prudential was intended to have. Lord Reed determined that there were two fundamental assertions that gave rise to Lord Millet’s misadventure. The first being a misjudgement of what shareholding in a company actually represents. He described a share as representing “a proportionate part of the company’s net assets” and that “if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares”. Lord Reed disagreed, instead concluding that shares are simply “a right of participation in the company on the terms of the articles of association”. He goes on to highlight that it is an “unrealistic assumption that there is a universal and necessary relationship between changes in a company’s net assets and changes in its share value”. Lord Reed also determined that to view Prudential, and therefore Foss, through the lens of ‘double-recovery’ was to mischaracterise the nature of legal loss. By linking the value of the loss to the company intrinsically to the value of the shares, Lord Millet is conceding that the shareholder has suffered a legal loss – albeit one that he then denies them recovery for. Lord Reed concludes that this is a perversion of Foss and entirely not what Prudential intended. He concluded that those two cases, when read together, in fact do not recognise the reduction in value of a company’s shares (as a result of a wrong done to it) as being a legal loss at all.

    Lord Reed, in support of his conclusion, highlighted the principal logical inconsistency with the fact that Lord Millet’s approach to Reflective Loss was based upon avoiding ‘double-recovery’ but led to situations where neither the company nor its shareholders had recovered for an actionable loss.

    Conclusion

    Lord Reed concluded in Sevilleja that “the critical point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it.” This is contrasted against creditors or employees, who may have other rights of action that arise separately from any shareholding, and does not prejudice those parties from pursuing their cases, as the law would otherwise allow. Thus it can be said that the rule on ‘Reflective Loss’ has been narrowed to account for what Lord Reed would suggest was a wrong-turn at Johnson that opened the door to the principle from Foss being more widely interpreted than the judgment in Prudential intended.

    It is important that those wishing to invoke the exception to the rule against reflective loss carefully explore whether claims can be brought by the company, rather than shareholders or creditors. It is crucial that legal advice is obtained early on to clarify the claimants position. At Eldwick Law, we are experts in commercial law. Contact our commercial lawyers today for a consultation.