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Director who failed to take professional advice on company transaction breached his duties to the company

A director who carried out a share buy-back for his company without professional advice and got it wrong, breached his duties to his company and was ordered to pay compensation equal to the amount paid for the shares, the High Court has ruled.

A limited company bought its own shares back from a shareholder. Company law contains complex rules and procedures governing share buy-backs and failure to comply makes the transaction unlawful. The director did not take professional advice on the transaction.

The company later went into liquidation. The liquidator argued that company law rules and procedures had not been followed, and the transaction was unlawful. He took the company’s director to court alleging he had breached his fiduciary duties to the company by making unauthorised payments to the relevant shareholder without having taken professional advice on the transaction.

The Chancery Division of the High Court ruled that the director had breached his duties. Even though he had not been dishonest, his failure to take professional advice was unreasonable. The court ordered him to pay to the company the amount paid for the shares on the buy-back.

Recommendation

Directors should always take advice on company law transactions unless they are expert in the relevant law in their own right. These transactions could include not just share buy-backs but other payments to shareholders, the sale of company assets to a director (and vice versa) and loans to directors.

Case ref: In the matter of Ruscoe Ltd (In Liquidation) sub nom Mark Robert Fry (Liquidator Of Ruscoe Ltd (In Liquidation)) v Nicholas William Sherry, Ch D (Companies Ct) (Registrar Jones) 07/08/2012

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]