Fletcher v Davis & Anor

Informal arrangements made during the establishment of a business venture do not necessarily create a contract. A binding funding obligation requires sufficiently certain terms, including the amount or limits of funding and the mechanism for payment. An agreement that one participant will manage the company’s day-to-day affairs does not, without clear contractual language, make that person irremovable or guarantee continuing remuneration.

Where a suspended director is subsequently left by agreement in practical charge of the company, authority may be impliedly restored to enable the company’s business to continue. Payments made personally to discharge the company’s liabilities may then constitute a director’s loan. Equitable relief is not barred by general misconduct unless the misconduct has an immediate and necessary relation to the equity claimed.

The claimant and the first defendant established a company to develop and market internet advertising software. The claimant supplied the idea and managed the project; the first defendant arranged funding. The claimant alleged a shareholders’ agreement under which he would manage the company, receive substantial remuneration and consultancy fees, and be supported by continuing funding.

After the relationship deteriorated, the claimant was purportedly suspended and removed as a director. He claimed remuneration, damages for breach of the alleged agreement, reimbursement of payments made to company creditors, and relief concerning patent rights. The company’s counterclaim concerning software copyright was settled during the trial. The central issues were whether a binding agreement existed, whether the first defendant was obliged to fund the venture, and whether the claimant was entitled to recover payments made for the company.

1. The claims for remuneration and damages for removal as a director failed. The alleged shareholders’ agreement was not proved. The parties had a loose working arrangement concerning the proposed venture, shareholdings and the claimant’s day-to-day role, but the arrangement did not amount to a binding contract. There was no agreement entitling the claimant to remuneration on launch, a consultancy fee, or continued office as director (paras 54–63).

2. The alleged funding obligation also failed. Although it was expected that the first defendant or the Kilmeaden interest would provide funds, no binding obligation was undertaken. The amount required was uncertain, there was no agreed maximum, and no mechanism or terms for drawdown or payment. The informality of the arrangement was inconsistent with a contractual promise to fund the venture, whether through the first or second phase (paras 66–68).

3. The absence of a contractual shareholders’ agreement meant that the claimant could not recover damages based on exclusion from management or loss of an expectation of future remuneration. The statutory unfair-prejudice framework under section 459 of the Companies Act 1985 was identified as part of the legal context governing informal shareholder arrangements, but it did not create the contractual rights claimed (paras 54, 63–65).

4. The reimbursement claim succeeded. The payments were made by or through the claimant, rather than directly by the Swiss trust, and were used to discharge liabilities which remained liabilities of PFI. The claimant had not successfully transferred the business or those liabilities to Shopping Pages (paras 69–77).

5. Any earlier suspension was overtaken by the parties’ subsequent modus vivendi. The claimant was left in day-to-day charge while the first defendant was absent and the business was to continue. His authority was therefore impliedly restored, including authority to pay PFI’s debts and borrow funds for that purpose (para 79).

6. The payments were properly analysed as creating a director’s loan to PFI. The company’s accounting evidence supported that analysis, including the proposed entry to a director’s loan account. The claimant was entitled to recover the sums, including the payment to Endacotts, which was made bona fide and was not sufficiently challenged (paras 81–82).

7. The claimant’s misconduct did not bar recovery in equity. General dishonesty or misconduct is insufficient unless it has an immediate and necessary relation to the equity sought. The reimbursement claim therefore succeeded even if equitable relief had been necessary (para 80).

8. The reimbursement claim was allowed. The other claims against the first defendant were dismissed. No order was made concerning the abandoned patent claim or the settled counterclaim (para 84).