1. Facts

2. Judgment

3. See also

4. References

Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] BCC 885 (also, Eaton Bray Ltd v Palmer) is a UK insolvency law and company law case concerning directors' duties. It recognised that directors owe fiduciary duties to creditors when a company is on the verge of insolvency.

Facts

London Wharf (Limehouse) Ltd was a company set up to manage three flats at 28 Narrow Street, just near the Thames in London. Colin Gwyer & Associates Ltd owned flat one on the ground floor. Mr Gwyer owned that company. Mr Palmer owned flat two and Eaton Bray Ltd owned flat three. Each had one share in the company, which held the head lease. They did not get along. Mr Gwyer had been carrying out building work. It disturbed them. He did it without their permission, in breach of covenant. It disturbed Eaton Bray Ltd in particular, which brought proceedings to make Mr Gwyer's company forfeit the lease. Meanwhile London Wharf (Limehouse) Ltd was teetering on the verge of insolvency. Then Mr Gwyer nominated his builder (Mr Howell) to the board of the company. Eaton Bray Ltd was even more upset, and its nominated director refused to attend a board meeting to resolve the dispute. Mr Palmer wanted it settled. Mr Palmer and Mr Howell resolved that Mr Gwyer's terms for settling the matter would be accepted. Eaton Bray Ltd sued, arguing the resolution was ineffective because it was breach of a fiduciary duty.

Judgment

Leslie Kosmin QC held that the board meeting was validly convened and was quorate. Although London Wharf's articles of association allowed Mr Howell to vote on a resolution in which he had an interest, the provision' existence did not relieve him of a general duty to act in good faith for the interests of London Wharf. When they passed the resolution, the two directors were in breach of fiduciary duty. Moreover, since insolvency was imminent, they also had a duty to act in the interests of company creditors. They did not properly consider creditors either. Therefore the resolution accepting the settlement was invalid.

73 Where directors fail to have regard to the separate interests of their company but act instead in the interests of what they perceive to be, for example, the interests of the group of companies of which the company is a member, the court will apply a different test. In Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at p.74 Pennycuick J held that the proper test in the absence of actual separate consideration of the interests of the company, is whether an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company. The effect is therefore to substitute an objective test for the normal subjective one.

74 The tests referred to above apply when the company is solvent and a going concern. Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion. This principle has been recognised by the Court of Appeal in Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 at p.33 per Dillon LJ, applying the reasoning of Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at p.730 (CA, NSW). It was also applied in the Court of Appeal in Brady v Brady (1987) 3 BCC 535 at p.552 per Nourse LJ where he stated that the interests of the company in this context are in reality the interests of the existing creditors alone.

75 As Lord Greene MR stated in Re Smith & Fawcett directors must exercise their powers for proper purposes and not for any collateral purpose. This is another aspect of their fiduciary duties. If the directors can be shown to have exercised a power conferred by the articles for a purpose other than that for which it was given their conduct is open to challenge. It is no defence for them simply to respond by asserting that they believed in good faith that their conduct was in the interests of the company. While the court will not substitute its own view for that of the board, where on an objective review of the situation it finds that an alleged requirement was, for example, not urgent or critical it may have reason to doubt or discount the directors' assertions that they acted solely for that purpose. This principle was laid down by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.

76 The mere fact that a decision taken by directors in good faith in the interests of the company also promotes their own interests does not invalidate the exercise of their discretion. However, any court in which the decision is challenged should examine the directors' conduct with particular care: see Gore-Browne on Companies (44th ed., Jordans), para.27.3. Mr Fisher has reminded me of the statement by Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd at p.832 where he said:

‘Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management's decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.’

However, it is important to note that immediately after this passage Lord Wilberforce points out:

‘But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships' opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme.’

The court is therefore required to examine in detail the allegations made against Mr Howells and Mr Palmer that they did not act in the best interests of the company and that they acted for improper purposes.

77 I will consider first the position of Mr Howells. He attended the directors' meeting with only the background knowledge provided to him by Mr Gwyer in the briefing note. Despite the length of this document (25 pages) it cannot be described as an objective or impartial account of the long-running disputes between CGA and the company. Inevitably, the author, Mr Gwyer, gives his account of the matter. However, unfortunately that is all that Mr Howells had studied before the crucial board meeting, having made no attempt to examine any documents or advice obtained by the company. He stated in cross-examination that he had been asked by Mr Gwyer to become a director because the latter told him that there were problems ‘on the site’ and he (Mr Gwyer) wanted him to take the appointment in order to deal with them. By dealing with the problems Mr Gwyer must have had in mind the settlement of the forfeiture proceedings on favourable terms, to the advantage of CGA. It is noteworthy that, in ignorance of the company's legal advice, of counsel's opinion or even sight of the company's claim form, Mr Howells felt no hesitation in accepting CGA's terms. The only amendment was to agree with Mr Palmer that CGA would not counterclaim for the costs of the alleged rectification work. It is to be noted that this alleged claim had never been formulated and was not part of the Pt 20 claim in the possession proceedings.

78 In all the circumstances it is difficult to see how Mr Howells could possibly have exercised an informed, let alone independent, judgement when voting on the resolution to accept the settlement terms in the offer letter. There is no allegation of dishonesty in the strict sense against him, simply an allegation that he cannot have acted in good faith in the interests of the company if he was completely ignorant of what those interests were. He had not even attempted to discuss the matter at any time with Mr Ramsden (although the latter's absence from the board meeting was hardly his fault), had not seen any up-to-date financial figures, and had not even thought of referring the offer letter to the company's solicitors, Rosenblatt, for their advice.

79 The position of Mr Palmer was somewhat different in that he was aware of the advice given to the company, but placed little reliance on the opinions of Rosenblatt and of counsel. He knew that counsel had stated in his opinion that there was about a 70 per cent chance of the company recovering its costs in the possession proceedings but he questioned whether this was really the case. Mr Palmer said time and again when questioned that, in accepting the terms in the offer letter, he was motivated by what he considered to be the best interests of the company. He wanted to achieve peace and harmony among the tenants and to avoid the further escalation in legal costs and waste of expenditure on legal proceedings which he thought would get nowhere. I have no doubt that this was his genuine opinion at the time, but he was unquestionably influenced in reaching that view by the aggressive letter from TWM dated July 31, 2001, demanding the repayment to Eaton Bray of his share of the moneys advanced to or for the company, and his personal dislike of the behaviour of Mrs Hoffenberg towards Mrs Palmer. However, I reject the contention that he acted out of a desire to damage Eaton Bray or to avoid paying his share of the costs.

80 Most importantly, neither Mr Palmer nor Mr Howells properly considered the interests of the company's creditors when passing the resolution, contrary to the principle recognised in Liquidators of West Mercia Safetywear Ltd v Dodd. They both knew that the company was insolvent and claim to have had express regard to that fact when they were deciding on the offer of settlement. Indeed, one of the most important items on the agenda was the service by Eaton Bray of the statutory demand on August 17, 2001, in the sum of £57,341.89. They knew that the company would be unable to pay the statutory demand. It was this which led the two directors to discuss the possibility of the company's going into voluntary liquidation. Once this fact is recognised it is clear that the directors should not have released the company's claim to recover from CGA the costs incurred in the possession proceedings, without considering the impact of that decision on the company's creditors. Those creditors comprised not only Eaton Bray but also Miletrian (who claimed approximately £100,000) and Rosenblatt (who were owed about £9,000 for unpaid costs). It is common ground that the company had assets of only about £1,000 in cash and the head lease, which generated ground rents of £450 per year, plus the right to recover sums from the tenants under the leases by way of service charges. There was no way in which the company or its creditors would benefit from the immediate release of all legal claims against CGA on the basis that the company would bear its own costs. The result was that the company gave up its right to obtain reimbursement from CGA of all the costs of the possession proceedings. Moreover, in view of the possibility of a voluntary liquidation this was just the type of decision that the directors should have left to the proposed liquidator to take a view on. It was wrong in law for the directors to have rushed ahead with such a far-reaching decision so close to the likely winding up of the company.

81 Mr Fisher contended that the interests of the company were no different from that of its creditors at this time. I do not agree. The creditors had little interest in, and would probably have derived little benefit at all from, an outbreak of harmony between the tenants, whereas that could quite reasonably have been a relevant consideration for the directors in reaching their decision had the company been solvent and able to pay its debts. In my view neither director properly had regard to the interests of the company's creditors and of the impact of their decision on the ability of those creditors to recover the sums due to them from the company.

82 Mr Fisher also argued that the errors made by Mr Howell and Mr Palmer fell into the category of acting in breach of their duty of care rather than actions in breach of fiduciary duty. In particular, their failure to seek proper professional advice or, in the case of Mr Howells, the failure to inform himself about the company's case should not result in the resolution being set aside but in the company having a claim against them for negligence. They were not in breach of their fiduciary duties simply because they perhaps acted incompetently, (though this was not admitted). Mr Fisher referred me to passages from the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] 1 Ch 1 at p.18A–D and E–F where the learned judge drew the distinction between breaches of fiduciary duty, in the sense of a duty which is properly confined to those duties which are peculiar to fiduciaries, and breaches by a person in a fiduciary position of his duty to use proper and reasonable skill and care in the discharge of his duties. Mr Fisher emphasised that, in the words of Millett LJ, the distinguishing obligation of a fiduciary is the obligation of loyalty:

‘The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations.’

That case concerned a claim for damages against a solicitor for negligent advice and the remarks of Millett LJ (as he then was) were made in that context.

83 Again, I would reject Mr Fisher's arguments. Of course, if directors act in good faith in the interests of the company and for proper purposes they will not be liable for breach of fiduciary duty if they make a mistake and act unreasonably, but may be liable for breach of their duty of care. But that is not this case. It is correct that Mr Howells did not act as a prudent man of business in assessing the company's rights, but he also showed what amounts in effect to wilful blindness in considering the company's interests. He did exactly what Mr Gwyer had directed him to do, namely pass a resolution with the assistance of Mr Palmer to settle the proceedings on the terms of the offer letter. The extent of Mr Gwyer's dictation of events is, in my view, illustrated by his drafting of the minutes of the meeting even though he was not present. To secure the right outcome he ensured that formal wording was inserted which expressly referred to the grant of relief from forfeiture, whereas it was clear that this language was not used by either Mr Howells or Mr Palmer at the meeting. Indeed, Mr Howells had some difficulty understanding what the words meant.

84 The test of what is a fiduciary duty applied by Millett LJ in Bristol and West Building Society v Mothew can be seen to apply without difficulty to the present case, at least in so far as Mr Howells is concerned. However well-meaning, he did not show single-minded loyalty to the company, nor did he have regard to the interests of the creditors. Mr Palmer, on the other hand, although motivated by what he considered to be the interests of the company in the sense of the shareholders also failed the latter test in that he had no regard to the interests of the creditors. He was unable to explain in the witness box how the company would pay the creditors, except that he assumed that the shareholders would eventually have to raise the necessary funds.

85 Mr Fisher argues that, in the event of a finding by the court that the directors have failed to have proper regard to the interests of the company's creditors, the ‘fall-back’ test applied by Pennycuick J in Charterbridge Corporation should not then be applied. Mr Fisher denies that Charterbridge Corporation is authority for the proposition that, in assessing whether directors have acted in breach of their fiduciary duties in circumstances where the directors of an insolvent company have not separately considered the interests of the creditors or have not addressed a relevant factor, the court should or is entitled to assess the question whether the directors acted in the best interests of the company by asking ‘could an honest and intelligent man, in the position of the directors, in all the circumstances, reasonably have believed that the decision was for the benefit of the company’. Mr Fisher insists that Pennycuick J's test was confined to the question of whether the particular transaction in that case, the creation of a guarantee and legal charge in favour of a bank in support of the liabilities of another company in the same group, was ultra vires the company.

86 I cannot accept Mr Fisher's argument. In Charterbridge Corporation Pennycuick J declined to follow the judgment of Eve J in Re Lee, Behrens & Co Ltd [1932] 2 Ch 46, in particular the suggestion made in that case that a question that should be asked, when considering the scope of an express power in a company's memorandum of association, is whether what was done was for the benefit and to promote the prosperity of the company. Pennycuick J's remarks at p.74C–F were made in the context that if he was wrong on his view of the law on ultra vires he had to proceed to express a conclusion upon the contention that, in creating the guarantee and legal charge, the directors were not acting with a view to the benefit of their company. The test that he formulated applies whenever directors fail to give separate and proper consideration to the interests of their company. He was of course dealing with a solvent company.

87 In relation to an insolvent company, the directors when considering the company's interests must have regard to the interests of the creditors. If they fail to do so, and therefore ignore the relevant question, the Charterbridge Corporation test can be applied with the modification that in considering the interests of the company the honest and intelligent director must have been capable of believing that the decision was for the benefit of the creditors. In my view the Charterbridge Corporation test is of general application.

88 In the alternative, Mr Fisher argued that if the Charterbridge Corporation test did apply the answer was that an honest and intelligent man could reasonably have believed that the decision of Mr Howells and Mr Palmer was for the benefit of the company. I do not accept that submission. In my view, the decision of the two directors fell outside the range of what an honest and intelligent board of directors would have considered appropriate in the interests of the company. For the reasons set out in this judgment I believe that no reasonable board of directors, having regard to the interests of the creditors, would have accepted the offer from CGA without seeking to modify or improve its terms.

89 It is to be noted that the resolution to accept the terms of the offer letter gave up the company's contractual right to recover its costs from CGA under the lease and amounted to a wholesale surrender to CGA on all the issues and demands for information and protection raised over a long period and embodied in the possession proceedings. It even purported to grant to CGA the right to construct the staircase to the ground floor notwithstanding the previous opposition of both Mr Palmer and Eaton Bray and the absence of detailed and approved plans. Moreover, there was no reason to take such an important decision in relation to the possession proceedings in haste at that time, least of all in the absence of professional advice. No immediate court hearing was pending in the proceedings for which further funding was required. Furthermore, although Mr Palmer referred in his evidence to the urgency created by the service of the statutory demand from Eaton Bray, nothing in the resolution assisted the company in dealing with the demand. In fact, the resolution made the company's financial position worse as it lost any possibility of recovering from CGA the costs that had been incurred. The directors were in effect surrendering an asset for no consideration except the exclusion of the unlikely possibility (in the view of the company's counsel) that CGA would recover costs from the company in the possession proceedings.

90 Accordingly, for the reasons given above I conclude that Mr Howells and Mr Palmer acted in breach of their fiduciary duties in passing the resolution to settle the possession proceedings on the terms of the offer letter. However, I reject the proposition that the resolution was passed to promote the interests of Mr Palmer at the expense of the company or Eaton Bray. On the other hand, there is no doubt that it promoted the interests of CGA and was supported by Mr Howells on behalf of CGA for that very purpose.}}

See also

• West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30; [1988] BCLC 250
• Re Smith & Fawcett [1942] Ch 304
• Charterbridge Corp Ltd v Lloyd’s Bank Ltd [1970] Ch 62, ‘could an honest and intelligent man, in the position of the directors, in all the circumstances, reasonably have believed that the decision was for the benefit of the company’.

US law

• Geyer v. Ingersoll Publication Co., 621 A.2d 784 (Del. Ch. 1992);
• Credit Lyonnais Bank Netherland, N.V. v. Pathe Communication Corp., Civ. A. No. 12150, 1991 WL 277613, at 34 n.55 (Del. Ch. Dec. 30, 1991)
• North American Catholic Education Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) denying direct fiduciary claims against directors by creditors and limiting these duties to situations where the firm is already insolvent

References

• J Lowry, 'The Recognition of Directors Owing Fiduciary Duties to Creditors' (2004) International Corporate Rescue

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