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Director Proper Purpose Test

Section 171 of the Companies Act 2006 sets out what is the Director proper purpose test ie. Directors must act only strictly in accordance with the powers given to them by a company:

A director of a company must—

(a ) act in accordance with the company’s constitution, and

(b) only exercise powers for the purposes for which they are conferred.

The Director proper purpose test is NOT a dishonesty test; it is a three stage exercise to establish if a company transaction by a Director is proper by identification of the:

  1. Power being exercised.
  2. Proper purpose for which the power is delegated to Directors.
  3. Purpose for which the power was in fact utilised and if it was proper.

These are part of core Director duties which dictate that given a Director is in control of and trustee of a company’s assets he or she must apply them only for proper purposes.

Burden To Show Proper Purpose

In GHLM Trading Limited v Maroo and ors [2012] EWHC 61 (Ch), the court considered where the burden of proof was where there was an allegation that a Director had misapplied company funds. Once it had been shown that a company Director had received company money, it was for him to show that the payment was proper.

The issue of the burden of proof was also considered in Reynolds v Stanbury [2021] EWHC 2506 (Ch) where ICC Judge Barber summarised the position as follows:

8.  In my judgment the correct approach is as follows. Overall, the burden of proof is on the Applicant. He must prove his pleaded case. To the extent, however, that the Applicant’s pleaded case rests on the wrongful transfer to the Respondent (or those connected with her) of money or other assets belonging to SC1, a two-stage process is involved. First, it is for the Applicant to prove, within the bounds of his pleaded case, the transfer of given sums or other assets belonging to SC1. As part of this first stage, where ownership of the asset or money in question is in issue, it is for the Applicant to establish on a balance of probabilities that the asset or money in question belonged to SC1. It is only once the Applicant has established the transfer or payment of assets or money belonging to SC1 that the second stage is engaged. At the second stage, the evidential burden is on the Respondent to prove that the payment or transfer was proper.

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Disclaimer: What Is The Director Proper Purpose Test?

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