12 Feb 2020

Can a director defend a misappropriation of monies claim by a company if, had the misappropriation had not occurred, the funds would have been lawfully transferred to the same person? Auden McKenzie (Pharma Division) Limited v Amit Patel [2019] EWCA Civ 2291

Background

A company director applied to the Court of Appeal to set aside an order for summary judgement on a claim for equitable compensation brought against him by the company.

The appellant director was the director and majority shareholder of a pharmaceutical company. The director had accepted that between 2009 and 2014 he caused the company to pay a total of £13,763,452 against false invoices produced in order to extract funds from the company to evade the payment of tax. In 2017 the company claimed damages against the director for breach of fiduciary duty in relation to these payments and sought summary judgement.

The director's defences were two-fold:

  • Actions which would otherwise amount to breaches of duty could be ratified by the unanimous consent of the shareholders; and
  • If the unlawful payments had not been made the shareholders would have caused the company to make equivalent payments to the shareholders as dividends or in another lawful manner, resulting in the same outcome.

These defences were rejected and summary judgement was awarded in the sum of £13,149,479 on the basis the director had no real prospect of successfully defending the claim on the basis of his second defence.

What happened on appeal?

Ordinarily, equitable compensation is the personal remedy used in respect of those in a fiduciary position (such as company directors) whose acts or omissions amount to a breach of trust or fiduciary duty – in this case the unauthorised payments of the false invoices. The loss to the company was the amount of the payments and therefore the director would be ordered to pay a sum equal to the payments plus interest.

The case of Target and AIB Group (UK) Plc v Mark Redler & Co Solicitors established that equitable compensation in respect of unauthorised payments was not necessarily for a sum equal to the payments. If, at the date of trial, it would cost more or less to replace the misappropriated asset, it was that amount that would be awarded as compensation. The Court of Appeal accepted that this case introduced a qualification to the hitherto strict obligation on a trustee to restore to the trust the value of any assets transferred or amount of any payments made.

The issue for the Court of Appeal was therefore whether the loss to the company could be reduced or even eliminated on account of the hypothetical payment of lawful dividends.

The Court was not prepared to say that the director was entitled to rely on the assumed fact that dividends equal to the payments would have been paid to reduce or even eliminate the claim for equitable compensation. However, as the order had been for summary judgement the Court was prepared to allow the appeal on the basis the Court was not satisfied that the director's defence was unsustainable in law.

Comment

It is important to note that the Court of Appeal was dealing with an order for summary judgment, not a judgment on a preliminary issue. The Court of Appeal was clear that it was 'far from saying' the director had a defence that would succeed even if he established all the facts he relies on. The issues raised required much fuller submissions at trial, when they could be decided on their facts.