Skip to main content

Directors’ conflict of interest was highlighted as an issue in the case of Kendall & Anor v Ball & Anor [2024] EWHC 746 (Ch).

In a nutshell, this case involved a ransom strip as it was claimed by the Administrators (which was in effect a bus stop) transferred for £156,500 from a local council to a company’s directors relating to land the company was developing. The Administrators claimed it.

Notably, the director, Mr Ball said the following in his statement:

… money used to purchase the Land was loaned to Holdings by me and appears in my Director’s Loan Account

The case here turned on the question of the matter legally of a constructive trust. The court rejected the notion there was a resulting trust, director ratification or any alternative relief for the directors.

directors' conflict of interest

Director Duty To Avoid Conflicts Of Interest

Director’s duties flow from the central starting point of the proper purpose test that a director has to act within the scope of their powers provided to them under the company’s Articles of Association.

director duty to avoid conflicts of interest

The overarching duty a director has is to act in the best interests of the company with a duty of loyalty. This means they must avoid conflicts of interest. Section 175 of the Companies Act 2006 reminds directors of this position as a matter of law. It has long been the case.

It was the key basis of the Administrators’ case that the ransom strip was the property of the company in Administration:

It was therefore plainly stated, albeit perhaps somewhat summarily, that the constructive trust claim was brought by reference to a breach of the Respondents’ duties as directors, on the basis that the Land was intended to be an integral part of the development, was very valuable to the companies, was paid for by Homes, and yet had been transferred to the Respondents for no discernible reason, and certainly not for a reason of any discernible benefit to the companies, which could not, as a result, complete the development as intended…

Constructive Trust Due To Directors’ Conflicts Of Interest

The court said the constructive trust was correct as follows:

Whether or not it comprises a ransom strip, the Land certainly was, and is, a valuable, integral part of the development project, required by the companies and intended to be used by them to construct the presently (and long) contemplated means of access to the Site. As Shakespeare Martineau wrote to MDC on 3 December 2021: “During the extensive 7 year planning process, the removal of the existing bus stop on the MDC Bus Stop Land as part of the main site access has been in the contemplation of all parties for the duration of the planning processes.” Similarly, the draft Section 278 agreement exhibited by Mr Kendall named Holdings and Homes as parties, but not the Respondents. Accordingly, the commercial opportunity to buy the Land arose in the context of the development, and for its purposes, as the Respondents knew; it was an opportunity which the companies had long thought to exploit. It was not until about April 2023 – only the month before the eventual acquisition – that the proposed arrangement was changed, and the Respondents interposed themselves as owners.

The Respondents were bound to protect the companies’ interests, and to act with undivided loyalty, in good faith and in their best interests. Manifestly, the acquisition in their own names of the Land, needed by the companies for the purposes of their business, placed the Respondents – as is now abundantly plain from the fact of this litigation – in a position where their interests and those of the companies were in sharp conflict. They exploited and diverted to themselves an opportunity to acquire property which the companies themselves needed. On their own evidence, they placed themselves in a position in which it would at some point be necessary (albeit there was no alleged obligation) to negotiate for a re-sale of the property to Holdings, at a “purchase price [to be] agreed”. In no sense did any of that promote the companies’ interests.

Furthermore, despite ample opportunity to do so, the Respondents have failed positively to advance any good reason for having acquired the Land themselves, consistent with the best interests of the companies. In their evidence, they referred to the companies’ funding having been “exhausted”, and in her skeleton argument, Ms Shuffrey said that the Respondents were “not in fact seeking to exploit an opportunity for profit but rather to protect their position (in light of the Companies’ indebtedness to Mr Ball) pending an intended re-sale to Holdings”. Those points however are not in their favour: in effect, they accepted that they were acting to protect their own private interests, not those of the companies for which they were fiduciaries.

Moreover, the evidence that the companies’ funding had been “exhausted” is not consistent with the admitted fact that Homes paid the purchase price. Similarly, Mr Ball’s evidence that he funded the acquisition personally, himself, “without any assistance from banks or funders”, using monies that he had loaned, was not true, as explained above – the money came from Homes, even if in some sense, possibly, the product of Mr Ball’s previous lending. At best, the advantage to the companies was that Holdings might at some point have come to owe less to Mr Ball on his Loan Account. In any event (in consequence of s.175(2)) it would not excuse the Respondents’ breach of duty to establish that the companies could not have taken advantage of the opportunity.

Why Did Ratification Fail?

Under Section 239 of the Companies Act 2006, a director can look to the members (shareholders) for ratification of their breach of duty:

ratification of acts of directors

(1) This section applies to the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company.
(2) The decision of the company to ratify such conduct must be made by resolution of the members of the company.

In this case, ratification would be an uphill struggle because:

78.2. they cannot rely on the Holdings’ Board Meeting of 16 May 2023 as having authorised the acquisition because it was not quorate, and was therefore ineffective for the purposes of s. 175(6) of the CA 2006;

78.3. but in any event, at the time of the acquisition, even if they might have survived by means of further negotiated funding, the companies were plainly unable to pay substantial debts that had by then fallen due (and were not subsequently paid): see paragraph 23 above; if anything, Mr Ball’s own evidence (that funding had been “exhausted” and that further funding options were being “explored”) supported that conclusion; in those circumstances, an arrangement made by the directors which resulted in one of them being preferred within the meaning of s.239(4) of the IA (as was apparently its very purpose – “to protect their position”) is not one which benefitted the creditors as a class or was even intended to do so; there was nothing at all in the evidence to suggest that the creditors’ interests had been considered, let alone that they had in any sense been advanced or protected by the arrangements – quite the opposite;

78.4. it follows that the arrangement and the breach was not one which was properly authorised or forgiven by the companies.

Section 1157 Relief Rejected For Conflict Of Interest

If a director has acted honestly and reasonably it is within the gift of the court to relieve a default, breach of duty, breach of trust or director’s neglect under Section 1157 of the Companies Act 2006:

Section 1157 relief for directors

If in proceedings for negligence, default, breach of duty or breach of trust against—

(a) an officer of a company, or

(b) a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.

In this case, the court declined the claim to such relief:

81.2. second, Mr Ball’s evidence was that a purchase price for the future sale to Holdings would have had to be agreed; it was not his evidence that he had no intention of making a profit; moreover, it was not his evidence that the Respondents were obliged to sell the Land to Holdings at all, or even to negotiate for its sale;

81.3. third, whether or not they acted honestly and/or on advice and/or with any intention to make a profit on re-sale (rather than merely to reduce Mr Ball’s exposure as a creditor) the Respondents acted in breach of their duties as directors; the disputed arrangement entailed an acute conflict of interest, and was not beneficial to the companies’ creditors as a class; I was given no basis upon which to conclude that it was reasonable of the Respondents to protect their own interests – even if intended as some sort of temporary measure – at the expense of other creditors, or to conclude that the court ought now, in the exercise of its discretion, relieve them of liability to the detriment of the creditor class of companies in administration.

Result

The court said:

In the circumstances, for the reasons explained, I will declare that the Land is held on constructive trust for the companies, and make such consequential orders for its transfer as are appropriate.

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: June 12, 2024

Please enable JavaScript in your browser to complete this form.

Name

100% Confidential Advice
We Know Insolvency Inside Out

Share This Page!

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to Directors’ Conflict Of Interest Leads To Loss Of Ransom Strip then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

Please enable JavaScript in your browser to complete this form.
Name

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Opt in

Disclaimer: Directors’ Conflict Of Interest Leads To Loss Of Ransom Strip

This page is not legal advice and is not to be relied upon as such. This article Directors’ Conflict Of Interest Leads To Loss Of Ransom Strip is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

Recent Posts / View All Posts

Directors' conflict of interest

Directors’ Conflict Of Interest Leads To Loss Of Ransom Strip

| Director Transactions | No Comments
Directors' conflict of interest was highlighted as an issue in the case of Kendall & Anor v Ball & Anor EWHC 746 (Ch). In a nutshell, this case involved a…
Dividend Tax Avoidance Scheme Apppeal Fails

Dividend Tax Avoidance Scheme Appeal Fails

| Director Transactions | No Comments
A dividend tax avoidance scheme appeal fails after being rejected by the Court of Appeal. This is the case of Clipperton & Anor v Commissioners for His Majesty's Revenue and…
Can An Overdrawn Director’s Loan Account Be A Transaction At An Undervalue

Can An Overdrawn Director’s Loan Account Be A Transaction At An Undervalue?

| Director Transactions | No Comments
Can An Overdrawn Director’s Loan Account Be A Transaction At An Undervalue? It is perfectly possible for transactions that make up an overdrawn director's loan account to be transactions at…
Moving Inter-Company And Director Balances Around And The Effect Of Liquidation

Moving Inter-Company And Director Balances Around And The Effect Of Liquidation

| Director Transactions | No Comments
This article Moving Inter-Company And Director Balances Around And Effect On Liquidation is prompted by the case of Re Pappy Ltd BRIR 1451. Offsetting balances that involve connected parties is…
Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.

Leave a Reply