The worm turns: Maidment v Attwood

The shareholders in a company trust its directors to run the company properly and in their interests as a whole.  It is an established principle that the directors of a company should act in its interests.  Should the directors’ duties be breached, a shareholder whose interests have been prejudiced can seek to hold the directors accountable for their actions.  Section 994 of the Companies Act 2006 provides a rule that the majority shareholders must not permit prejudice to the minority shareholders’ interests.  This is a regular area of conflict, often resulting in matters needing to be resolved in court.

A recent court case involved such an accusation from a minority shareholder that his interests had been prejudiced by those controlling the company.  In this case the minority shareholder in question was Mr Maidment and he brought a petition for relief from the unfairly prejudicial conduct of Mr Attwood who was the sole director of the company Tobian Properties Ltd from 2001 onwards. Unusually in this case Tobian had gone bust and had entered a Creditors’ Voluntary Liquidation (‘CVL’) in October 2008, on the basis that there was estimated shortfall to its creditors of between £199,000 and £259,000 (and consequent loss of value to its shareholders as well, as their shares were now worthless).  In the initial court hearing, Mr Maidment was unsuccessful in bringing his claim, so he appealed to the Court of Appeal.

The issues to be decided were:

1. Excessive director’s remuneration.  Over the six years prior to the claim being made Mr Attwood received a total of £779,100 in pay, even though profit was made in only three of the six years and profits were in decline under Mr Attwood’s control;
2. Use of Tobian’s trading name by Epyc Ltd from 2005 to 2008.  Mr Attwood had permitted Epyc to use Tobian’s trading name free of charge since 2005.  Ms Heard (Tobian’s company secretary) and Mr Attwood were the directors of Epyc Ltd from 2004 and Ms Heard and Mr Attwood were the only shareholders of Epyc; and
3. Sale of Tobian’s trading name cheaply on the eve of its liquidation. Mr Maidment alleged that Ms Heard and Mr Attwood had conspired to sell Tobian’s name and other assets for £5,000 plus VAT to Epyc, which in Mr Maidment’s view was lower than their real value.

With regard to the question of Mr Attwood’s excessive remuneration, Mr Maidment had not been sent the company’s full accounts on an annual basis by Mr Attwood, as he should have been. However, as summaries of the accounts had been available at Companies House, the judge in the initial court hearing had ruled that Mr Maidment should have looked at them much sooner than he had and, that if he had done so, he would have seen the excessive amount Mr Attwood was being paid at an earlier stage.  The Court of Appeal disagreed with this and ruled that this wrongly imposed an additional requirement not required by section 994 - this did not excuse Mr Attwood from fixing his pay by reference to his own interests, rather than Tobian’s.

In the initial court hearing the judge ruled that, as Epyc had not been profitable, there was no loss to Tobian in Epyc’s using its name for free and consequently that there was no prejudice to Mr Maidment’s interests.  The Court of Appeal disagreed and ruled that this was illogical – it was Mr Attwood’s duty as director to avoid others misusing its assets (by using them free of charge) and he had failed in his duty.

With regard to the sale of Tobian’s trading name and other assets at a low price, the Court of Appeal ruled that the price was too low.  Even though the liquidator of Tobian had agreed that no more needed to be paid than £5,000 by Epyc, the Court of Appeal ruled that the valuation was not wrong, as it had been calculated on the basis that Tobian’s goodwill was worthless because it had been used by Epyc since 2005, when in fact Epyc should have either paid for its use since 2005 or paid to buy the rights at a proper value in 2008.

Mr Attwood was therefore personally liable to account to Tobian for the losses that had been caused to it by the various breaches of his duties as a director.

Unfair prejudice claims like that of Mr Maidment are not always easy to bring, but the Commercial and Corporate Finance Team at Birkett Long LLP can provide advice to shareholders on what action they can take to protect their interests if they disagree with the actions of a fellow shareholder or director of their company.