Whether Jakob may be made personally liable for receipt of the £750,000 which was paid to Offshoot Communication Limited.
- Lifting of the Corporate Veil:
- Issue is whether the doctrine can be used with respect to Offshoot Communication Limited that has been incorporated by Jakob.
- Director - Fiduciary duties:
Issue is whether as a director, Jacob is a fiduciary of the company and whether he has breached this fiduciary duty.
IA 1986, s.212 : Where a person having been an officer of the company is found to have misapplied or retained, or become accountable for, any money or other property of the company, or being guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company, the Court may order such person to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just. Issue is whether Jakob can be made to repay or restore the £750,000 that he has misappropriated from the company.
There is a fiduciary duty to act in good faith. Duty not to make personal profit is one of the common law fiduciary duties of the director. CA 2006 requires that the general duties of directors should be interpreted in line with common law rules.
In Bristol & West Building Society v Mothew, 25 Millett LJ observed that fiduciary duties are duties particular to fiduciaries, breach of which attracts legal consequences different from those consequent upon breach of other duties. Equitable remedies, in particular restitution or restorative remedies rather than compensatory remedies are given in cases involving breach of fiduciary duties. 26 Directors are indisputably fiduciaries in a company owing to their powers of management of the company’s property and assets. 27 Fiduciary can also be any other person who is entrusted with any job involving trust and confidence. From that perspective, the Head of Accounts in a company is also a fiduciary. Under the common law therefore, a director or any other person in a position of trust and confidence is a fiduciary and such a person is liable to make good equitable remedies such as restoration, where there is a breach of fiduciary duties.
A director of a company is guilty of misfeasance if he has misapplied or retained, or become accountable for, any money or other property of the company. 28 This section does not create any new offences or impose any novel duties, but provides a summary means of pursuing directors. The courts have confirmed that the misfeasance procedure is appropriate for cases of negligence as well as alleged breaches of fiduciary duty, for instance this rule was also laid down in Re D’Jan of London Limited. 29 Any director found guilty of misfeasance may be held liable to repay or account for money or property to the company (together with any interest which the court may impose thereon) or contribute such sum to the company’s assets by way of compensation as the court thinks just as per section 212(3) of the IA 1986. Moreover, directors may also be held accountable for prejudicial conduct for misapplication of company funds. In Lloyd v Casey, 30 the director of the company used a company controlled by him to make a number of transactions from the company and this was held to be a prejudicial conduct.
One way of enforcing the director’s duties is if the liquidator or administrator following the commencement of a formal insolvency procedure decides to commence proceedings against the director for breach of duty. One of the consequence of such breach is restoration of the company’s property. Another would be to file a derivative claim on behalf of the company for the purpose of restoring the company property.
In this case, the doctrine of lifting or piercing the corporate veil is also pertinent. As per this, the incorporation of a company will be a sham if the purpose of its incorporation is to commit fraud, breach of contract or do some improper act or conduct. Accordingly, where a director of a company or a person in charge of companies assets or accounts, incorporates another company for the purpose of siphoning funds from one company to the other, the doctrine will be used to hold the natural person liable for the misappropriation of the money. 31 In such cases, personal liability against the natural person can be enforced instead of applying the rule of corporate personality which only applies such actions against the company.
Jacob as a director in the company and also as an Head of the Accounts of Pulse was in a fiduciary position with respect to the company. By misappropriating the money of the company through transactions in favour of a third company opened by him, he has breached
the trust as per his fiduciary position. An equitable remedy of restoration is available to the company. The £750,000 paid to Offshoot Communications is to be restored to Pulse by Jacob. In this his personal liability can be enforced after applying the doctrine of lifting of the corporate veil. Here, as Jacob has incorporated Offshoot Communications and has used this company to siphon off money from Pulse, it can be said that Offshoot Communications was a sham company, which was incorporated with the sole objective of misappropriating Pulse assets. Offshoot Communications has become insolvent. However, Jacob can be made to restore the money to Pulse under his personal liability as this equitable remedy is available to the company. For this purpose, the other shareholders can file a derivative claim as against Jacob for restoring the company property.
Jacob’s personal liability for restoring £750,000 paid to Offshoot Communications can be enforced as against him.
- Hannigan B, Company Law (4th ED), Oxford University Press, 2012.
- Keay A, Walton P, Insolvency Law : Corporate and Personal ( 3rd ed) Mayson S et al, French and Ryan on Company Law
- Milman D, ‘Reforming Corporate Rescue Mechanisms’, in John De Lacy (ed), Reform of UK Company Law (Routledge 2013)
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