Case Law Update - International Law Office

Partial Transfer of Business from Partnership to Company

In Re MDA Investment Management Ltd the High Court considered the transfer of a financial services business from a partnership to a limited company.

Facts
Respondent D was the principal shareholder and a director of the company. The company entered into an agreement for the sale of its business to a third party. The agreement provided for part of the consideration to be paid to the company and the rest to be paid to MDAP, a partnership in which D was the main participant. The company went into liquidation. The liquidator claimed that the whole of the consideration for the sale of the business should have been paid to the Company. D claimed that MDAP was the previous owner of the business before the company; it had built up the company's client base and continued to have ownership of it, and was therefore entitled to part of the consideration. The liquidator commenced proceedings against D alleging that in splitting the proceeds of sale, D had acted in breach of his duties as a director within the meaning of Section 212 of the Insolvency Act 1986.

Judgment
An individual or a partnership may carry on a trade for a time and then set up a company, and then carry on the same trade through the company without having formally transferred the trade to the company; in such a case it is unrealistic to say that the company has not become the owner of the trade. It follows that in the current case, the business which was the subject of the agreement was entirely owned by the company prior to completion of the sale; it was not accepted that MDAP still owned the goodwill in the business. The agreement was also structured on the basis that the company was the sole owner of the business. It was not justifiable for MDAP to receive more than half of the consideration. D was in breach of his fiduciary duties to the company by causing or allowing the transaction to take the form that it did, to the detriment of the company and its creditors. D was liable in damages to the liquidator and to make reparation to the company.

Liability of Non-executive Directors

In Equitable Life Assurance Society v Bowley the Commercial Court considered an interlocutory application to grant relief to non-executive directors under Section 727 of the Companies Act 1985, on the grounds that they were entitled to rely on the judgment of executive directors and professionals.

Facts
Equitable Life pursued a certain policy in relation to payment of bonuses to its members between 1993 and 1999. In subsequent litigation (known as the Hyman Litigation), the House of Lords ruled that the policy was unlawful. The instant proceedings involved a claim by Equitable Life against its former directors and non-executive directors in relation to bonus payments made from 1996 onwards. The claim was for negligence and breach of fiduciary duty for failing to take legal advice regarding the validity of the bonus policy after the problem first came to light, and later, for failure to reduce the bonuses and raise awareness about potential costs should the Hyman Litigation be lost. Certain defendants, who had all been non-executive directors during the relevant period, sought an order for summary judgment that they should be excused from all liability under Section 727 of the Companies Act 1985, on the grounds that they had been entitled to rely on the executive directors and other professional advisers. They claimed that they had acted honestly and reasonably, and ought fairly to be excused for any negligence or breach of duty.

Judgment
The extent to which a non-executive director can rely on the executive directors and other professionals is a developing area of law and is dependent on the facts of each case. Arguably, the company should be able to look to non-executive directors for independence of judgment and supervision of executive management. It would require an exceptional case for a court to conclude that it was appropriate to grant Section 727 relief on an interlocutory application. In all the circumstances, the claims against the non-executive directors could not be said to have no real prospect of succeeding.

For further information on this topic please contact Andrew Hoad or Jonathan Ling at Nabarro Nathanson by telephone (+44 20 7524 6000) or by fax (+44 20 7524 6524) or by email (a.hoad@nabarro.com or j.ling@nabarro.com).