Regentcrest v Cohen [2001] 2 BCLC 80; [2001] 2 BCLC 319

KEY POINTS

• Directors have a fiduciary duty to act in the best interests of the company and its shareholders, which includes the duty of loyalty, care, and avoiding conflicts of interest. A breach occurs when a director acts in a way that harms the company, such as self-dealing or ignoring conflicts of interest.

• If a director votes in favor of waiving a company's claim against share vendors under a share sale agreement, and the company soon goes into liquidation, this might suggest a breach of fiduciary duty. The director's decision could indicate a conflict of interest or a failure to consider the company's welfare.

• To assess whether a director breached their fiduciary duty, courts look at the following:

  1. Duty of Care: Did the director gather sufficient information and act with due diligence?

  2. Duty of Loyalty: Was there a conflict of interest, and was it disclosed and managed properly?

  3. Duty of Good Faith: Did the director act with honesty and genuine belief in the company's best interests?

• If the director failed to meet these standards, they might be held accountable for damages or face other legal consequences.

FACTS

• Regentcrest plc, (“The Claimant Compan”), a property developer, went into liquidation in November 1990.

  • Before that, in 1985, Mr Don Richardson and his brother Mr Roy Richardson (“Second Defendant and his brother”) acquired a 29.9% stake in the company and became directors.

  • In 1988, the Claimant bought all shares in Greenground Ltd, a company owning a £4.2 million piece of development land.

  • The share sale agreement contained a "clawback provision," which required the vendors to pay back any decrease in Greeground Ltd's net asset value at the completion of a proposed development.

  • Due to market conditions, the development never occurred, but practical completion was deemed to have happened on August 15, 1990.

  • Had the clawback provision been enforced, it would have resulted in a £1.5 million claim against the vendors.

  • By early 1990, the Claimant faced financial troubles from the commercial property market collapse.

  • The second Defendant and his brother acquired the remaining shares in the claimant for £5.7 million and invested another £5 million to support cash flow.

  • On September 5, 1990, the Second Defendant and his brother voted to waive the £1.5 million clawback claim in exchange for free services from the vendors.

  • On September 17, 1990, a winding-up petition was filed, leading to a compulsory liquidation order on November 21, 1990.

• The Claimant company's liquidators then sued the second Defendant for breach of fiduciary duty, claiming that waiving the clawback claim was against the company's interests and amounted to disposing of a valuable asset for negligible consideration.

  • They alleged that the Second Defendant and his brother's decision to waive the claim was to protect the vendors and not the company.

JUDGEMENT

• The court held that the duty imposed on directors to act bona fide in the interests of the company was subjective in nature.

  • This means that the question is whether the director genuinely believed that their action or omission was in the company's best interests.

  • While it may be more challenging for a director to convince the court of this belief when the action or omission causes substantial harm to the company, the subjective nature of the test remains unchanged.

• In this case, it was evident from the second Defendant's testimony that there were valid commercial reasons behind his decision to agree to the waiver of the clawback claim.

  • Furthermore, he genuinely believed that by voting in favor of the resolution for waiver, he was acting in the best interests of the Claimant company.

• Therefore, the claim of breach of fiduciary duty against him failed.

COMMENTARY

• Directors have a fiduciary duty to act in the best interests of their company, which includes being loyal, and careful, and avoiding conflicts of interest.

• A breach happens when a director's actions harm the company, such as through self-dealing or failing to disclose a conflict.

  • Courts evaluate breach claims by looking at whether the director acted in good faith and genuinely believed their decision was best for the company.

ORIGINAL ANALYSIS

• Test for good faith (under pre-2006 law) is entirely subjective

  • However the greater the detriment caused to company, harder it will be for Defendant to show he acted in good faith

RELATED CASES

• Additional analysis - Regentcrest plc v Cohen