Clark v Cutland

A director who transfers company assets without the authority required by the company’s constitution acts in breach of fiduciary duty. The transaction is without legal effect, rather than merely voidable. Inadequate disclosure within aggregated accounts does not supply the positive shareholder approval required for unauthorised remuneration.

The company may trace the transferred assets into the hands of innocent volunteer recipients. Their lack of knowledge may preclude personal liability, but it does not defeat the company’s proprietary claim. Once the recipients have notice, the court may secure the traceable amount by a charge over the recipient fund’s assets. The charge may be enforced through set-off against a debt owed by the company, with any balance charged on the fund’s cash reserves.

Two equal shareholders were also the company’s only directors. One director caused £145,000 of company money to be contributed to his pension fund without the approval required by the company’s constitution. The trial judge found unfairly prejudicial conduct under section 459 of the Companies Act 1985 and entered judgment for the company, but refused the requested proprietary remedy against the pension fund.

The company owed the pension fund £100,000. The appellant sought a charge over the fund’s assets, with the traceable contributions set against that debt and the balance charged on the fund’s cash reserves. The appeal raised whether that remedy could be pursued despite the alleged pleading deficiency, and whether unauthorised contributions could be traced into assets held by pension trustees who had received them as innocent volunteers.

Appeal allowed unanimously. Lady Justice Arden delivered the judgment. Lord Justice Potter agreed, while Lord Justice Schiemann agreed with the proposed orders and expressly endorsed the principal grounds.

1. The proprietary remedy could properly be pursued on appeal. The written closing submissions and post-judgment discussion showed that tracing and set-off had been before the judge. The relevant facts had been found, the respondent was represented on appeal, and separate proceedings would duplicate cost and delay while risking an abuse-of-process objection.

2. A director must comply with the procedures prescribed by the company’s constitution and must use corporate property only for proper purposes. Disclosure also serves to inform shareholders and directors and to deter self-dealing. An aggregated remuneration figure was inadequate where the director had stated that he was taking no remuneration. There was no challenge to the rejection of unanimous shareholder consent.

3. Regulation 76 of Table A in Schedule 1 to the Companies Act 1948 required directors’ remuneration to be authorised in general meeting. No authorisation had been given. The pension contributions were therefore without legal effect, not merely voidable. An agent’s unauthorised transaction attracts the more serious consequence, which supersedes the voidability that would otherwise arise from breach of fiduciary duty.

4. The company could trace the contributions into the pension fund’s assets. The trustees’ receipt as innocent volunteers meant that they incurred no personal liability upon receipt. It did not defeat the company’s equitable proprietary right. The director had acted in breach of fiduciary duty, the trustees continued to hold assets representing the contributions, and they had received notice of the company’s claim.

5. Relief under section 461 of the Companies Act 1985 could be granted for the company’s benefit. A charge was an appropriate proprietary remedy. The £145,000 and interest were charged over the fund’s assets and set against the company’s £100,000 loan debt and contractual interest. The remaining balance was charged on the fund’s cash reserves and ordered to be paid within 28 days after service. Upon payment, the director was to receive corresponding credit against his judgment debt.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The court granted the company a proprietary charge securing £145,000 and interest, ordered set-off against the company’s £100,000 debt to the pension trustees, and charged the balance on the fund’s cash reserves.
2. High Court, Chancery Division, Birmingham District Registry: His Honour Judge Norris QC found unfair prejudice under section 459 of the Companies Act 1985, ordered acquisition of the respondent’s shares and entered judgment for the company. He declined the proprietary relief later granted on appeal. No neutral or report citation is stated.