15 March 2017 #Directors' Duties
The latest instalment of the long running Bhullar v Bhullar litigation has given further insight into what constitutes a breach of a director’s fiduciary duties. It also showed how such a claim can give an effective remedy where the obvious defendant is insolvent and the events in question took place outside the standard limitation period.
The case concerned a family business (BBL & BDL). Two brothers (as well other family members) were directors and shareholders. One brother, Jat, set up his own company (Torex) and caused BBL & BDL to make very substantial payments to Torex. Upon discovering the payments, the other brother (Inder) obtained permission to bring a derivative claim through BBL & BDL against Jat, alleging that the payments had not been approved by BBL or BDL’s boards and represented a breach of Jat’s fiduciary duties. Inder claimed an inquiry into the losses suffered by BBL & BDL and / or the profits made by Jat.
Although some monies were repaid, by the time the case came to trial a net balance of almost £800k had been transferred from BBL & BDL to Torex. Torex had very significant debts and would have been unable to repay what was owing, leading to Inder seeking a remedy against Jat personally.
Jat defended the claims on grounds that the payments were loans and had been tacitly approved by BBL and BDL’s other directors. The court disagreed. It was unimpressed by the fact that no provision was made for interest on the alleged loans, the taking of security or even the ultimate repayment of the ‘loans’. It also found that Inder had not been aware of the payments when they were made, less still had approved them.
Having reached this conclusion, it followed the Jat was in breach of his fiduciary duties as director of BBL & BDL. On no interpretation could the various payments have been in the best interests of BBL & BDL. The court declined to grant relief to Jat under s1157 Companies Act 2006. Although it had not been established that he acted dishonestly, he could not be said to have acted reasonably.
The vast majority of the payments to Torex were made more than six years before proceedings were issued, so ordinarily would have been statute barred. However, the court accepted that the use by a director of company funds for the benefit of another company owned by him amounts to conversion of trust property. This gives rise to a claim for equitable compensation for breach of fiduciary duty, which is not subject to the standard six year limitation.
Finally, the court considered what was the appropriate order to make. It rejected Inder’s request for an inquiry into losses and / or profits and simply ordered that Jat pay to BBL & BDL the outstanding monies, with interest.
The case is an interesting example of the deployment of a derivative action to bring a claim for breach of fiduciary duties, leading to a successful outcome that would otherwise have been unavailable.