In the recent decision in the case of Fry -v- Sherry [2012] (in the matter of Ruscoe Limited (in liquidation)) a company director was held to be personally liable for the sum of £259,200 for taking action in breach of his director’s duty even though he was acting honestly when doing so.
The facts
The company had entered into an arrangement with one of its shareholders for the repurchase of one of its own shares pursuant to an agreement which was in breach of the Companies Act 1985 (which was then the relevant statutory provision).
The agreement involved weekly payments being made by the company in respect of the payment of the shares. Each of the payments was authorised by the director. The company did not have sufficient distributable profits to enable it to enter into the repurchase agreement. This meant that by the time the company went into liquidation, it had paid £259,200 to the shareholder which it should not have done. The situation was made worse by virtue of the fact that by the time of the liquidation the transfer of the shares by the purchasing shareholder back to the company had also not been completed.
The decision
The court found that the director had acted honestly when entering into the repurchase agreement but that he had acted unreasonably by failing to obtain professional advice so as to ensure that the agreement was lawful. It found that the consequence of him doing so was that he had made weekly payments under an agreement that was void and that he was therefore in breach of his fiduciary duties to the company.
Summary
Many shareholder/ directors of companies believe that by operating their business through a limited company they will not incur personal liability. This case illustrates that this is a dangerous state of mind. If the company undertakes unlawful activity as a result of the conduct of a director (and this is particularly relevant to those who are sole directors of their company) then he may be held personally liable for the consequences.