A case summary that illustrates the potential outcome of ignoring the formalities of the Companies Act when a company gets into financial difficulties.

It might be tempting to try and do things 'on the cheap' rather than spending money on vital things such as professional fees in order to save costs. Sometimes this strategy may pay off. On the other hand, if later there is a shareholder dispute or when the company falls into financial difficulty and it comes to light that directors have cut corners and not observed all the transactional formalities, the strategy may backfire. Directors may find themselves held personally accountable for their past actions. 

In Stuart & Kinlan v Crimmin [2006] EWHC 779 (Ch), a retiring director was pursued by a liquidator who claimed that he had not acted in the company’s best interests when negotiating for it to repurchase his shares and that the repurchase procured had not been carried out properly. 

  • Mr Crimmin and Mr Smith were directors and shareholders of Styleprint Limited (the company). Mr Crimmin wanted to retire and Mr Smith did not have enough cash to buy him out, it was agreed that the company would execute a Purchase of own shares and buy out Mr Crimmin.
  • An agreement was drafted and Mr Crimmin agreed to sell his entire shareholding to the company for a consideration of £130,000, payable in two instalments. The company also agreed to repay the balance of the director's loan account due and engage the vendor on a self-employed basis for eight years.
  • A sale agreement was drawn up by their accountant, who was wise enough to include a clause in the agreement which said that the firm: “Did not hold themselves out as experts in the area of share sale agreements and had warned the company and the vendor that they should seek independent legal advice”. 
  • The sale agreement went through and Mr Crimmin resigned from the company as planned. 
  • The company subsequently went into Liquidation.

The liquidators sued Mr Crimmin and his wife claiming misfeasance and a breach of trust in relation to the share sale agreement. Companies Act procedures had not been followed and the directors had not acted in the best interests of the company. This had the effect of voiding the share sale agreement and the liquidator wanted the £130,000 returned.

The matter went to court, which considered:

1. Were the correct procedures under the Companies Act all followed? Key to this was the question, was the special resolution and share purchase agreement been correctly circulated and made?

The court thought so. Although formal notices were not given for the resolutions, this was a small company and those who required sight of resolutions saw them during the meetings and the right director voted.  

2. Were the shares fully paid on redemption as required by the Companies Act? 

The court found not. The purchase agreement was by instalment, so the shares were not fully paid. The result was that the agreement was void.

3. Did the directors disclose their interests and act in the best interests of the company, as required by the Companies Act?

The court thought so, even though one of the directors was retiring and this created a conflict of interest of sorts. The director had disclosed his interests. 

4. Could the court exercise its powers to grant relief? 

The court found that Mr Crimmin had acted honestly and reasonably in all the circumstances and ought fairly to be excused from liability in respect of the whole sum actually received by him. 

Comment

A very lucky escape for the Crimmins, but not without cost and the emotional trauma of being pursued through the court by a liquidator.

 


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