Pennyfeathers Ltd and others v Pennyfeathers Property Company Ltd and others

Company – Director – Fiduciary duty – Parties entering into shareholders agreement – Directors entering into buy-out agreement – Claimants alleging breach of fiduciary duty by defendant directors – Whether proposed buy-out amounting to binding contract between parties – Whether shareholders agreement continuing – Whether defendants acting in breach of fiduciary duty – Claim allowed in part The first claimant was set up by the second and third claimants to exploit the opportunity to develop a farm on the Isle of Wight, to the south-east of Ryde comprising 76 acres. The second and third claimants had been granted an option over the farm. They approached the second defendant for finance who approached the third defendant who had experience in the construction industry. A business colleague of the third defendant (D), who was a former banker and operated through a company MDS, was also brought in. The five men concluded a shareholders’ agreement relating to the first claimant. It was subsequently decided that the second and third defendants would take over the shares of the second and third claimants and MDS in the project and take it forward by themselves. On 27 December 2007 the parties met to see if they could arrive at an agreement as to what the buy-out would involve. All three were to transfer or cancel their shares in the first claimant and the second and third claimants would resign as directors. In anticipation of acquiring complete control of the first claimant, the second and third claimants set up the first defendant company which entered into a contract with the owner for the conditional purchase of the farm. The third defendant also started to approach people who owned smaller parcels of surrounding land which would be incorporated into the development. The claimants alleged that the second and third defendants, at a time when they were directors of the first claimant, had acted in breach of their fiduciary duties towards the first claimant by causing the first defendant to contract with the owner of the farm on terms which were in their own interests and contrary to the best interests of the first claimant; and to enter into options over land surrounding the farm when those options should have been acquired by them on behalf of the first claimant. Held: The claim was allowed in part.On the evidence, the parties had not entered into legal relations or created a binding agreement at the meeting in 27 December 2007: The Hannah Blumenthal [1983] 1 AC 854 and RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] 1 WLR 753 considered. However, the strict fiduciary duties owed by the second and third defendants to the first claimant as directors continued until they resigned. They were still bound by their fiduciary duties unless and until they bought out all the other shares and were in a position to cause the company to release them from those duties. The conduct of the second and third defendants after 27 December 2007 had been in conflict with the interests of the first claimant and a clear breach of their fiduciary duties. The development of the farm was the very opportunity which the first claimant had been incorporated to pursue and was the stated purpose of the company according to the shareholders agreement. Their conduct in causing the first defendant to enter into a purchase agreement and surrounding land options was a serious breach of their fiduciary duty to the first claimant since they had not acquired the informed consent of the other shareholders to that conduct. Moreover, they had acted in bad faith towards the claimants by pushing ahead with plans for the development of the farm without concluding a buy-out agreement and presenting a misleading picture of their connection with the first defendant: Phipps v Boardman [1967] 2 AC 46, Re Bhullar Bros Ltd [2003] EWCA Civ 424 and Sharma v Sharma [2013] EWCA Civ 1287 considered. On the facts of the present case, no fiduciary duty arose out of a joint venture between the parties. The agreement had been described as a shareholders agreement and not a joint venture and the circumstances militated strongly against the existence of additional equitable duties: Ross River Ltd v Cambridge City Football Club [2007] EWHC 2155(Ch); [2007] PLSCS 187; [2007] 41 EG 201 (CS) and Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910; [2013] PLSCS 187 applied. Where an agent acquired for himself property which he was instructed by the principal to acquire or which the principal would have been interested in acquiring, it was clear both that the agent held the acquired property on constructive trust for the principal, and also that the principal could acquire a proprietary interest in an asset acquired by his agent, even though the principal had no pre-existing proprietary interest in the asset, and the asset was, in the first instance, acquired by the agent with his own money: FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17; [2013] PLSCS 214 applied. In the present case, the facts fitted squarely within the kind of situation where the Court of Appeal in Mankarious regarded the availability of a proprietary remedy as settled. However, the issues as to the appropriate relief had not been canvassed in any detail at the hearing and the court would not make any declarations as to trust at this stage. Patrick Lawrence QC and Michael Ryan (instructed by Field Fisher Waterhouse LLP) appeared for the claimants; Robert Levy QC and Neil McLarnon (instructed by Grosvenor Law) appeared for the defendants. Eileen O’Grady, barrister