In Power Adhesives Limited v Stephen James Sweeney & Others [2017] EWHC 676 the High Court set aside the decision by a company’s directors to convert a loan into shares: this accidently created a transfer of value and it amounted to breach of the directors’ fiduciary or common law duties.

  • Prior to the transaction the company had 10,000 £1 shares in issue.
  • One of the directors had a large balance on their loan account, with the company owing him £490,000.
  • The director in question was terminally ill, and there were concerns the amount owed would be repayable immediately on his death.
  • To avoid this, after consulting with their advisors, the directors decided to convert the debt to equity by issuing 490,000 £1 shares.
  • Following the director’s death, the remaining directors became aware that the conversion had diluted the original shareholdings and caused an unintended Transfer of Value with adverse IHT and CGT consequences.

The High Court agreed that the decision to issue the shares should be voided, as it had been a breach of the directors’ fiduciary or common law duties under the Hastings Bass principle:

  • It was obvious that the directors did not understand the effect the share issue would have, and if they had they would not have approved it.
  • The board failed to take into account relevant considerations such as the massive dilution of the shares and the tax consequences.
  • The company was a substantial trading operation with an experienced board of directors: they could reasonably have been expected to spot the obvious mismatch in the value of the existing and new shares.
  • Involving the company’s advisers did not mean the directors had fulfilled their fiduciary duties.


As the court pointed out, 'It is not entirely obvious where the boundary will lie where professional advisers are involved but (arguably) fail to spot a point arising from the structure of the transaction.' Clearly, the adviser's PI insurers will be happy with this result although it is unclear what advice they gave.

There is no IHT Business Property Relief given in respect of a loans made to a company; this includes a credit balance on a directors' loan account. The amount owed to the director would most likely have been treated as a Loan relationship if waived, resulting in a large taxable credit for the company. A debt for equity swap is one way of getting round this, and should result in no tax for the company. 

As this case shows, you have to be aware of the wider impact issuing shares can have and the tax consequences for the shareholders. 


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Case reference: Power Adhesives Limited v Stephen James Sweeney & Others [2017] EWHC 676

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