The High Court decision in Fairford Water Ski Club v Cohoon [2020] EWHC 290 serves as a good illustration of the approach that a court will take in interpreting the duties which directors owe to their company. The key points are that:
- the court will be strict in its interpretation and application of the duties
- directors must take great care if they engage in separate businesses which might give rise to conflicts of interest with their company.
The three defendants were all found liable for various breaches of duty under the Companies Act 2006 (CA 2006). They were Craig Cohoon and Scott Cohoon (his son) and Jane Cohoon (Craig's partner). The claim was brought by Fairford Water Ski Club Ltd (the Club) which ran a members' water skiing club on a lake and surrounding land near Fairford. The three individuals were directors of the Club.
The conflicts of interest which were at the centre of the claim arose out of Craig and Scott's operation of a separate unincorporated business (Watersports) which ran a water ski school and shop at the lake.
The Club claimed that the following duties under CA 2006 had been breached by the defendants:
- s 171: duty to act in accordance with the Club's constitution and to exercise the powers given to him as a director only for the purposes for which they are conferred.
- s172: duty to act in a way the director considers in good faith would be most likely to promote the success of the Club for the benefit of its members as a whole;
- s175: duty to avoid any situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company; and
- s177: duty to declare any interest in a proposed transaction or arrangement with the company.
The Club made numerous allegations against the directors. One of the main allegations was in relation to the payment of an annual management charge to Craig under a 2007 management agreement between the Club and Watersports, which the Club said it had never agreed to, and said that the directors had no authority to pay. The Club argued that this was a breach of the duties in s171 and s175. The Club pointed to the then-applicable law in s317 of the Companies Act 1985 and the related provision in the Club's articles, which required a director with a direct or indirect interest in a proposed contract or arrangement with the company to declare the nature of it to the board of directors. The Club alleged that Craig had not complied with this article and that this was therefore a breach of s317. Looking at the relevant provisions (regulation 84(1) Table A CA 1948, s317 CA 1985 and s 180(4)(b) CA 2006) the judge said that in order to comply with all of them, Craig would have needed to disclose both the nature and extent of his interest under the proposed transaction - in these circumstances, that meant that the amount of the payment should have been disclosed. He did not accept that there was any judicial discretion to overlook a failure to comply on the basis that it was of a technical nature: "...it must be obvious that a director wishing to escape liability for self-dealing has either complied with the provisions of the articles ... or he has not". There was "no scope for a defence of 'substantial compliance' with the articles", nor for a 'mere technical' statutory breach.
Another claim by the Club related to the transfer of a plot by the lake from the Club to Craig. The Club said this was a 'substantial property transaction' for Companies Act purposes and thus was invalid because it did not have members' approval. The judge upheld the Club's claim and also considered that the transfer was a breach of s172, as it was made at a significant undervalue.
What points should directors take away from this?
- Directors should ensure that they are fully aware of and understand the duties that they owe to their company, and should be in no doubt that should they ever find themselves facing a claim for breach of those duties, the court will likely interpret and apply those duties strictly. There is no such thing as a 'technical breach' of duty which can be overlooked.
- Although the courts will not second-guess business decisions which the directors take in good faith, they can and will question whether a director's alleged belief that he was acting to promote the success of the company was honestly held at the time.
- Directors must take great care if they engage in separate businesses, must be fully aware of all the relevant provisions in the legislation and the articles of the company which relate to conflicts of interest, and make sure they comply with them.
- It will be extremely important to make sure that all decisions and approvals are clearly evidenced and documented, in case of future challenge.
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