Corporate Law Update: 4 - 10 May 2024

This week:

Director was personally liable for unauthorised share transfers despite losing his powers

The Court of Appeal has held that a director of a British Virgin Islands (BVI) company who purported, without authority, to transfer shares held by the company in a subsidiary was personally liable.

What happened?

Mitchell and another v Al Jaber and others [2024] EWCA Civ 423 concerned a BVI company (MBI) formed by an individual to hold real estate. The individual was MBI’s sole director and shareholder.

By 2009, MBI had come to acquire a significant minority holding in another company (JJW) owned by the same individual and of which the individual was also the sole director.

In 2010, the individual signed instruments of transfer purporting to transfer MBI’s shares in JJW to another company (JJWG), which was also ultimately owned by the individual. However, that share transfer was never completed.

In 2011, MBI was placed into liquidation following a winding-up petition by a creditor.

Under the law of England and Wales, the director of a company automatically ceases to hold office when the company is placed into liquidation, with the powers of management transferring to the company’s liquidators.

By contrast, under BVI law, when a company is placed into liquidation, the directors remain in office. However, with a few specific exceptions, those directors cease to have any powers, functions or duties.

In 2016, the individual, purportedly acting in the capacity as JJW’s sole director, passed a written resolution approving the transfer of MBI’s shares in JJW to JJWG. JJW’s share register was subsequently updated to reflect that transfer. Under BVI law (as under UK law), this caused the legal title to MBI’s shares to transfer to JJWG.

The liquidators subsequently brought proceedings against the individual, claiming he had breached his duties as MBI’s director and that he should pay compensation to MBI for loss of its shares in JJW.

What did the court say?

In short, the court found that the individual had acted improperly by mishandling MBI’s assets (namely, its shares in JJW) and was required to compensate MBI.

The individual had argued that, at the time he purported to approve the transfer (i.e. in 2016), he no longer had any powers or authority as a director and so it made no sense to speak of him breaching any of duties by abusing those powers.

The court acknowledged this. However, the judges said it is nonetheless feasible that a former director, or a director whose powers have ceased, might intermeddle with a company’s property.

This is so even though the director never actually owns the property themselves. As the managers of a company’s property, directors are fiduciaries and “quasi-trustees” and subject to the same duties and restrictions as if they owned (or came to own) that property themselves.

Also, although the individual had ceased to hold any powers of a director by the time the transfer was registered in 2016, he did have those powers when he signed the instruments of transfer in 2010. It did not make sense, therefore, to argue that he had not relied on his power as a director.

What does this mean for me?

Although the facts of this case were quite specific, the judgment demonstrates an important point.

A director cannot act with impunity and without regard to their company’s interests merely because they cease to hold office or any powers as a director.

Under UK law, a person remains obliged not to misuse property or information (including company property) after they cease to be a director if they became aware of that property or information while they were a director.

But the general principle no doubt extends more widely than the above. An attempt to interfere or deal with a company’s assets will most likely involve some element of breach of duty or intermeddling, in turn leading to potential litigation.

Access the Court of Appeal’s judgment on whether a director was personally liable for approving share transfers without authority

Shareholder suffered unfair prejudice when company’s principal asset sold at an undervalue

The High Court has held that a shareholder of a company suffered unfair prejudice when another shareholder, who was also the company’s sole director, directed the company to sell the company’s principal asset – its shares in a trading subsidiary – to a new holding company owned by the director.

Simpson v Diamandis and others [2024] EWHC 850 (Ch) concerned the sale of shares in a company, Tilon CG, by its holding company, AJHL.

The shares in AJHL were held as to 47.5% by a Mr Simpson, as to 47.5% by a Mr Diamandis and as to 5% by AJHL’s company secretary. Mr Diamandis was the sole director of AJHL.

As sole director, Mr Diamandis approved the sale of the shares to a company controlled by him for a price of £150,050, around £2.75m below their real value. This was despite having obtained professional advice to obtain a market valuation.

The court found that Mr Simpson had suffered unfair prejudice as a result of the sale, as it had diminished the value of his shareholding in AJHL.

Mr Diamandis had breached four of his statutory duties as a director of AJHL. He had also acted contrary to the relationship of trust and confidence that existed between him and Mr Simpson.

The judge ordered Mr Diamandis to buy out Mr Simpson’s shareholding in AJHL.

You can read more about the court’s decision that a sale at a substantial undervalue amounted to unfair prejudice in our separate in-depth piece.

Companies House clarifies how it will assess civil penalties for Register of Overseas Entities contraventions

Companies House has updated its guidance note on its approach to enforcement of the UK’s Register of Overseas Entities (ROE) regime.

Under the regime, an overseas entity that holds or wishes to acquire registered real estate in the UK must register with Companies House and provide details of its beneficial owners.

The legislation creates various offences in relation to the regime, including failing to register on the ROE when required to do so.

In its guidance, Companies House states that it will assess the level of any financial penalty based on the “value” of the property or properties held by an overseas entity. The updated guidance clarifies that Companies House will not carry out a valuation of any properties. Instead, it will use a tiered approach to the level of penalty to be applied based on the following hierarchy.

  • The property’s council tax band.
  • If there is no council tax band for the property, its business rateable value.
  • If no council tax band or business rateable value is available, the property’s value on the UK House Price Index.

If none of that information is available, Companies House will levy a medium-level financial penalty (currently, £20,000).

Read the updated Companies House guidance on enforcement under the Register of Overseas Entities