PNC Telecom Plc v Thomas & Ors

A director may be relieved from liability under section 727(1) of the Companies Act 1985 only if he acted honestly and reasonably and ought fairly to be excused in all the circumstances. A director may have acted honestly yet fail the separate requirement of reasonableness. In assessing reasonableness, the court asks whether he acted as a man of affairs with reasonable care and circumspection could reasonably be expected to act. A director who approves conflicted payments or arrangements which may deter shareholders from changing the board, without securing the expected corporate benefit or investigating their consequences, may be denied relief. Equitable compensation may be awarded for loss directly caused by the breach of fiduciary duty.

The claimant company brought five claims against its former chairman and director, Mr Thomas, concerning payments and arrangements made after the company emerged from administration. The claims concerned legal costs, lease-related fees, payments to companies connected with directors, and arrangements providing substantial payments upon a change of control of the board.

The court rejected the allegations of fraud and found that the first four claims failed. It found, however, that Mr Thomas had acted in a position of conflict when approving the change-of-control and compensation provisions connected with the purchase of his shares by another director. The central issues were breach of fiduciary duty, causation, equitable compensation and relief under section 727(1) of the Companies Act 1985.

1. The first four claims failed. Mr Thomas had acted honestly and in good faith in relation to the legal costs, lease fees, TNTI payments and Toocan payments. Any technical breaches concerning the TNTI arrangement would in any event have attracted full relief under section 727(1) of the Companies Act 1985.

2. The fraud allegation concerning the two versions of the board minutes was rejected. The court accepted Mr Thomas’s evidence that the change-of-control provisions had been discussed and agreed at the meeting on 24 June 2004.

3. Mr Thomas nevertheless breached his fiduciary duty. The change-of-control provisions formed part of an arrangement under which Mr Etherington agreed to purchase Mr Thomas’s shares. Mr Thomas therefore had a clear conflict between his personal interest in completing the sale and his duty to consider the company’s interests.

4. The breach caused the company’s loss. The payments to Mr Etherington and Mr Pack were made pursuant to provisions which came into existence because Mr Thomas voted for them. The company was entitled to equitable compensation equal to those payments. The suggestion that Mr Etherington might have extracted the money by another means was conjectural.

5. Relief under section 727(1) was unavailable. Although Mr Thomas acted honestly, he had not acted reasonably. The provisions could deter shareholders from changing the board, exposed the company to substantial immediate payments without securing the proposed corporate benefit, and were approved without proper investigation of the compensation claim or the increased remuneration for Mr Pack.

6. Accordingly, the claim succeeded in relation to the change-of-control and compensation payments, subject to the formal order.