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Directors’ Duties In An Unhappy Family Company Overview

The case of Hussain v Hussain & Ors [2022] EWHC 1880 (Ch) is an utterly lugubrious tale about Directors’ duties in an unhappy family company setting, excellently articulated and fleshed out by Chief Insolvency and Companies Court Judge Briggs (“Judge Briggs”).

Disappointing has been the array of Directors’ duties cases in 2022 that have been served up by the Chancery Division. The wait is over.

We have had Hunt v Balfour-Lynn [20022] EWHC 784 (Ch) which culminated in our article Blowing The Embers Of A Long-Abandoned Fire – Liquidator Tax Avoidance Claim. However, unless Emloyee Benefit Trusts and HMRC Tax Debts keep you wide awake at night it arguably struggles to match this one. But then of course the anticipated appeal in Balfour might.

For Python enthusiasts sent out to scrape for a 2022 Directors’ duties case, well you can switch off Beautiful Soup as here it is.

Judge Briggs jumped out of the starting blocks highlighting the war without peace with reference to Leo Tolstoy’s conspicuous commencement in Anna Karenina:

Happy families are all alike; every unhappy family is unhappy in its own way.

An opening difficult to bypass; impossible to overlook.

This was an unfair prejudice case. The notable irony was highlighted if for no other reason that Director duties were not a feature that Judge Briggs found to be all that impressive, saying:

Khadim and Allah had no regard to Company law. No meetings were held. Dividends were taken from the Company by Khadim at will. Money was paid into and out of the Company’s bank accounts without regard to the Company’s separate personality. Although Khadim pleads that salary was to be agreed by he and Allah as shareholders/directors there is no record of an agreement made in advance of takings, no evidence of a discussion resulting in an oral agreement or any discussion about remuneration and emoluments. The bank accounts were treated as a mere extension of personal family wealth. The evidence shows that family members were paid by the Company even though they were not employees. Some takings were not disclosed to HMRC by either side of the family. There was no regard for the articles of association and no shareholder agreement had been thought of let alone agreed. Generally, no mechanisms had been, until about 2020, adopted to ensure that the directors would act in accordance with their company law duties. The background is peppered with instances of directors’ breach of duties without penalty or enforcement inter se.

Yet in this proceeding, Khadim relies on a breach of duty to the Company by a director, Tanvier, as a springboard to petition for unfair prejudice.

Pleaded Case Of The Petitioner

The pleaded case was as follows:

… relies on two grounds of prejudice. First it is said that “the management of the Company was…to be conducted…on the basis that [Khadim] would be treated as having an equal right to involvement in the management” of the Company…The second ground of prejudice relies on the failure to comply with the statutory duties of directors as provided by the Companies Act 2006.

An Unhappy Business

This was a classic case of a family fallout involving a successful commercial business involving more than one generation. Informality, chaotic accounting, unwritten ways of conducting business affairs, and a lack of company records meant Judge Briggs had no easy task to unscramble.

However, it is perhaps axiomatic that a party seeking to rely upon Director’s duties, even in a complex unhappy family company setting may need to look at their own hands when claiming unfair prejudice. Conceivably it might have been no surprise by paragraph 175 Judge Briggs resolved to dismiss the petition.

Dangers Of Unwritten Conduct Based Company Governance

When a family is getting along just fine the need to commit procedures and agreements to print might seem otiose. However, as this case shows it is conceivably unwise.

Need For Written Agreements To Protect The Family

It is ironic that perhaps this is the easiest time to get written understandings reduced to writing. After all, if you cannot get it in writing when everyone is singing from the same hymn sheet you ain’t going to when daggers are drawn – or are you?

Unwritten governance

When the number of mouths a family business has to feed multiplies and disquiet starts to fester such that board meetings turn into noisy fests, then having clear agreements writing down facts, figures and rights could potentially avoid certain points of dispute:

The self-elevated importance Khadim credits to his role in the business, is likely to be one of the seeds of his discontent. His evidence suggests his entitlement (passed to his family) to run the Company and use its assets as he pleased. I have little doubt that he believes that the business was his, that he had a right to decide what is to be done with the business, who could be employed and when money could or could not be taken out of the Company. He was mistaken. Given that nothing was recorded in writing, and no evidence of any oral agreement advanced, the business was owned and managed on an unspoken understanding. Such an understanding is liable to misunderstanding. The family ties, financial investments (earned from the businesses) and commitment of the individuals point toward a finding of a shared ownership from early days. The shared ownership and management manifested itself in the structure of the Company on incorporation.

HMRC Tax Investigation

The business caught the eye of HMRC and a serious COP 9 tax investigation resulted.

HMRC Cop 9 investigation

The unhappy family company was said by Judge Briggs to operate without proper regard for the statutory director duties:

The investigation, responses and compromise reached demonstrates (i) that the Company was run without regard to the seven statutory duties imposed on directors by the Company Act 2006; (ii) Khadim and Allah’s family sought to benefit from extractions from the Company, without declaring the extractions to HRMC; (iii) there was a failure to keep or retain adequate or any books and records and (iv) there was no record of any agreement to permit the extractions by the directors or shareholders. The investigation and outcome provides evidence that the directors and shareholders knew and accepted undeclared extractions from the Company.

Oliver Elliot Observation: Directors’ Duties In An Unhappy Family Company

This case demonstrates why a company Director must keep company records. It is for the benefit of everyone, not just HMRC, and not a perfunctory company law procedure.

What Next?

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Disclaimer: Directors’ Duties In An Unhappy Family Company

This page Directors’ Duties In An Unhappy Family Company is not legal advice and should not be relied upon as such. This article Directors’ Duties In An Unhappy Family Company is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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