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