MacPherson & Anor v European Strategic Bureau Ltd

Directors must exercise the company’s powers for the company’s benefit. An arrangement made by an insolvent company which appropriates the proceeds of existing contracts to directors, shareholders or former shareholders, while excluding other creditors and making inadequate provision for liabilities, is not a proper transaction for the company. It is a breach of the directors’ duties and may be ultra vires.

Describing payments as remuneration does not cure an arrangement whose substance is an informal winding up and distribution of assets. A company may contract to remunerate services, including past services where supported by fresh consideration, but the transaction must still promote the company’s prosperity and protect its creditors.

Mr MacPherson and Miss Torevell claimed sums from European Strategic Bureau Ltd under a revised shareholders’ agreement dated 28 February 1991. The agreement provided for monies received under existing contracts to discharge certain liabilities and loans, followed by payments to the three participants in shareholding proportions as payment for consultancy services.

Mr Justice Ferris rejected challenges based on directors’ duties, the distribution provisions of the Companies Act 1985, financial assistance and consideration, and gave judgment for the claimants: [1999] 2 BCLC 203. The company appealed. The central issue was whether the directors could properly cause an insolvent company to enter into an arrangement which distributed the proceeds of existing business to the participants without proper provision for creditors.

The Court of Appeal unanimously allowed the appeal and set aside the order below. Chadwick LJ delivered the principal judgment; Buxton LJ agreed with the result and added separate observations; Peter Gibson LJ agreed entirely with Chadwick LJ.

1. Nature of the payments. Chadwick LJ held that clause 8.4 was intended to create a contractual obligation to pay for past and future services. The agreement contained sufficient consideration, including waived rights, promised future services, non-competition obligations, confidentiality obligations and other undertakings. The adequacy of consideration was immaterial provided it was real and not illusory.
2. Directors’ duties and corporate benefit. Directors’ powers must be exercised for the company’s benefit, not for their own benefit without regard to the company’s interests. Applying the questions stated in In re Lee, Behrens and Co Ltd, the arrangement was not for the benefit or prosperity of ESB. It was an informal winding up: the proceeds of existing contracts were appropriated to selected creditors and the participants, while other creditors and the costs of completing or enforcing the contracts were left without proper provision.
3. Entering into an arrangement which seeks to distribute company assets as if on a winding up, without proper provision for all creditors, is itself a breach of directors’ duties or, alternatively, ultra vires the company. The participants could have used a sale, reconstruction or formal winding-up procedure, but each lawful route required proper provision for creditors.
4. Statutory issues. Chadwick LJ considered that the vice was not necessarily a direct contravention of section 263(1), but an attempt to achieve outside a formal winding up the distribution permitted by section 263(2)(d), while circumventing creditor protection. Buxton LJ expressed the view that clause 8.4 did provide for a distribution contrary to section 263(1), but treated the point as unnecessary to the result. Chadwick LJ also considered that the arrangement would, if otherwise enforceable, constitute financial assistance contrary to section 151(1), but reached no concluded decision because the agreement was unenforceable on the primary ground.

The appellant was awarded its costs of the appeal and below.

1. Court of Appeal (Civil Division): Appeal allowed; order of Mr Justice Ferris set aside.
2. High Court: Mr Justice Ferris gave judgment for the claimants under the 1991 agreement: [1999] 2 BCLC 203.