Corporate update: the latest corporate law developments April 2023

Directors’ duties post-liquidation

It is well understood that directors owe fiduciary duties to the companies to which they are appointed. But to what extent do those duties continue after the company has entered liquidation? This was the question which the High Court had to consider in Mitchell v Al Jaber [2023] EWHC 364 (Ch) which arose out of an application by the liquidators of a company incorporated in the British Virgin Islands (BVI).

The facts

Sheikh Mohamed Bin Issa Al Jaber and his daughter were the only directors of the BVI company which operated in the commercial property, finance, hospitality and food industries. According to evidence given in proceedings against the Sheikh by Standard Bank plc in 2011, the company’s total assets were US$4bn and it had an annual net income of US$301m. But the company was wound up on 10 October 2011 pursuant to an application made by Unicredit Bank Austria AG to whom the company owed around €4,340,000. However, the two directors continued in office after the liquidators had been appointed.

Among other things, the liquidator challenged a transfer of shares in the company’s subsidiary for no consideration made by the directors in 2016, long after the company’s liquidation.

The liquidators argued that the Sheikh had continued to act “as if he were the controlling mind of the company” and that he continued to deal with the company’s assets “as if they were his own” despite the fact that, since they were appointed, the liquidators were the only persons with a right to custody or control of the company’s assets.

The decision

The court accepted that where a director has obtained custody and control of a company’s assets, and that custody and control continues after liquidation, the director’s obligations of fiduciary stewardship in relation to those assets were capable of continuing post-liquidation. However, the judge recognised that the obligations continued “in a much reduced form and […] only in circumstances where unauthorised dealing with company assets occurs”. The existence of this post-liquidation obligation was rooted in the director’s original assumption of responsibility, as fiduciary steward, for company property.

The judge noted that a director should not retain a company’s property post-liquidation. But, if they did, then they would continue to hold it in a fiduciary capacity. If the director then dealt with that property adversely to the liquidation, the director will have breached that fiduciary duty and must account to the company for the property as if the director were a constructive trustee. In reaching her conclusion, the judge was particularly persuaded by authorities which, in relation to shadow directors and retired directors, emphasised the existence of fiduciary duties by reason of the assumption of responsibility.

The judge made an award of more than €67m against the Sheikh for the misappropriation of the company’s property as a result of the share transfer.

Comment

As the judge noted, it would be surprising if the liability of a director for misappropriation of, or unauthorised dealing with, company assets ceased simply because the relevant act took place after the liquidation of the company (despite the director’s continuing status as a director). However, the judge was also clear that whether or not the liability existed in each case would depend on the specific facts and the relationship between the relevant parties.

Although the decision concerned a BVI company and BVI laws, the experts involved did not suggest there was any difference between BVI and English law on this particular point and, indeed, it was decided based on English authorities.

Execution of deeds: requirements for valid attestation

In Euro Securities & Finance Ltd v Barrett [2023] EWHC 51 (Ch), the High Court held that a deed of guarantee had been validly executed where the three defendants’ signatures had been witnessed by the same person who signed once, under the words “witnessed by”. The case provides useful guidance on the requirements for the valid witnessing and attestation of deeds.

Background

For a document to be valid as a deed, it must comply with four key requirements, one of those requirements being that the document must be validly executed as a deed.

For a deed to be validly executed by an individual, the individual must sign in the presence of a witness who attests that signature (section 1(3)(a)(i) Law of Property (Miscellaneous Provisions) Act 1989 (the Act)). The Act does not specify what is involved in attesting a signature, but it is generally accepted that attestation requires:

• the witness to observe the document being signed by the signatory; and
• the witness to add their signature to a statement (commonly referred to as an attestation clause) that the document was signed by the signatory in the presence of the witness.

If the requirements relating to witnessing or attestation are not met, then the document will not have been validly executed as a deed and, therefore, cannot take effect as a deed (though it may be effective as a simple contract).

High Court decision

In this case, the Court was required to determine whether a deed of guarantee that had been signed by the three defendant guarantors was validly executed as a deed. The defendants claimed that a failure to comply with the witness and attestation requirements of the Act had resulted in the guarantee being invalidly executed. This meant that the guarantee could only take effect as a simple contract, with any claims under it being subject to a six-year limitation period (rather than 12 years for a deed).

The Court found that the guarantee had been validly executed as a deed in circumstances where a single witness had observed the defendants signing and had then signed herself under the words “witnessed by,” to confirm that she had witnessed the signatures. When making that decision, the Court held that:

• In relation to the validity of the attestation, it did not matter that there were no words confirming that the witness had observed the act of signing, witnessed all three signatures or signed in the defendants’ presence. As there was no legal requirement for the attestation clause to include specific words, it was enough that the witness had signed under the words “witnessed by.”
• A witness signing under the words “witnessed by” and below three signatures clearly attests them all. Although the Act envisaged several parties making a deed, it did not prescribe a particular form of attestation in those circumstances. As such, a person who witnessed several signatures on a deed could properly attest them collectively, by a single signature.
• The Act did not require the witness to attest in the signatory’s presence nor to do so at the same time as the signatory signed the deed. Even if there was such a requirement, it would be satisfied by the witness attesting on the same day and irrespective of whether the signatory was present when the witness signed.

Comment

Failing to comply with the execution requirements for a deed may have dire consequences for a party wanting to enforce any of its terms. Although this case helpfully confirms that valid attestation does not require the use of specific words or for each party’s signature to be individually attested, best practice is to make it as evident as possible that all signatures have been validly witnessed and attested. It would, therefore, be advisable for a witness to separately attest each party’s signature and for the attestation wording to indicate that the signatory “signed in the presence” of the witness. Individual attestation may be particularly important where there are multiple signatories to the deed and each party’s signature, and that of the witness, do not appear on the same page.

Statutory execution formalities apply whether a deed is signed in wet ink or by one of the many methods of e-signing. In an attempt to facilitate electronic execution, the Industry Working Group (a multi-disciplinary group of business, legal and technical experts) was established in 2021 with a remit to produce e-signing guidance and make proposals for reform. Following the publication of its Interim Report in February 2022 (which included best-practice guidelines for executing documents) the Industry Working Group has now published its Final Report. The Final Report addresses the challenges arising from the use of electronic signatures in cross-border transactions and considers potential solutions to protect signatories to deeds from the risk of fraud.

Did the exercise of enhanced voting rights on an insolvency event amount to unfairly prejudicial conduct?

Bringing a successful unfair prejudice claim can be notoriously difficult, particularly in light of the fact-specific and complex nature of this area of law. As illustrated by the recent case of Durose & Ors v Tagco BV & others [2022] EWHC 3000 (Ch), the Court will first and foremost have regard to the constitutional arrangements of the business and will be slow to interfere with commercial decisions and judgments that are made within the bounds of those constitutional arrangements.

Facts

The Court in this case was asked to decide whether the actions of a private equity investor amounted to “unfair prejudice.”

The petitioners were certain of the original shareholders in a company that was looking to exploit the potential of a novel gas safety product. The private equity investor had made a significant investment into the company, with the investment terms being set out in a suite of documents that included new articles of association. These new articles provided that in certain defined circumstances, including on the occurrence of an “Insolvency Event,” the investor could exercise its “swamping rights” – i.e. it could serve a notice entitling it to be treated as having 95% of members’ voting rights.

After the investor’s initial investment in 2017, it was clear that the company would need additional finance. A share issue eventually took place in May 2019, but it failed to raise sufficient funds. Despite assurances from the original shareholders that it would be “sorted,” the shortfall in funding could not be met and in August 2019 the investor exercised its swamping rights on the basis that an Insolvency Event had occurred.

The original shareholders brought an unfair prejudice petition arguing, among other things, that the investor had deliberately engineered the insolvency event to exercise its swamping rights and gain control of the company.

Court decision

The Judge dismissed the petition, finding that the investor had always acted in accordance with the agreed and professionally drawn up investment arrangements. The relationship between the parties was not based on personal trust, but was purely commercial and, as is usual in commercial relationships, the parties proceeded on the basis that “fairness” would be measured by reference to the documentation drawn up by their lawyers.

The Judge was satisfied that all signatories to the investment agreements had been given the opportunity to consider the documents and to take legal advice on their contents. The original shareholders were also aware that while underperformance on its own was not enough to trigger the investor’s enhanced voting rights, an insolvency event was. The Judge found that the insolvency was caused by a combination of factors, including a failure to control the company’s finances and a failure by the original shareholders to pay to the company funds that they were legally obliged to pay.

In these circumstances, the investor was permitted to hold the original shareholders to the terms of the agreed legal documents and the shareholders should not complain that their treatment was unfair.

Comment

As illustrated by this case, the starting point for a Court when faced with an unfair prejudice petition will be to ask whether the conduct complained of is in accordance with the constitutional and contractual arrangements governing the company. Where the arrangements between the parties are purely commercial, which will generally be the case unless the founding members establish the business based on mutual trust and confidence (i.e. it is a “quasi-partnership,”) the Court will be reluctant to take account of any shareholder expectations beyond the scope of their strict legal rights.

The parties to any contractual arrangements should ensure that the legal documentation reflects the agreement that they believe to have been reached. This is particularly important when there are complex arrangements in place. The agreed contractual and constitutional documents will establish the rules for the conduct of the company and if those rules are followed, a shareholder is unlikely to be successful in any unfair prejudice claim even if the company ultimately fails as a result of that conduct.

First published in Accountancy Daily.