Interactive Technology Corporation Ltd v Ferster & Ors

A managing director’s ordinary authority to manage a company does not ordinarily include authority to dispose of its business or fundamentally change its business model. Informal acquiescence does not establish delegation of all directors’ or shareholders’ powers, nor authority to fix the director’s own remuneration.

A director is entitled to reimbursement only for expenses satisfying the objective criteria in the company’s articles. The burden lies on the director to establish that entitlement. Unauthorised remuneration and expenses must be repaid.

Unfairly prejudicial conduct under Companies Act 2006, section 994 may arise from company litigation. Relief under section 996 may nevertheless be refused where the petitioner’s own wrongdoing is substantially graver and caused the breakdown in relations.

The judgment determined three related proceedings concerning Interactive Technology Corporation Ltd (“ITC”), its three shareholder-directors, and companies associated with Jonathan Ferster.

ITC claimed that Jonathan had diverted its online gaming business and assets, received unauthorised remuneration and claimed improper expenses. Jonathan presented a petition under section 994 of the Companies Act 2006, alleging unfair prejudice arising from his brothers’ conduct of ITC’s affairs and litigation. Warren and Stuart also brought a trust claim based on Jonathan’s former registered holding of ITC’s share.

The central issues were the ownership of the gaming business, the authority to enter into an asset purchase agreement and services agreement, the validity of remuneration and expense payments, and whether the petition justified relief.

1. Ownership and agreements. The online gaming business and its assets were owned by ITC throughout. The asset purchase agreement (“APA”) and supply of services agreement (“SSA”), although signed and backdated by Jonathan, were unauthorised and did not bind ITC. They purported to transfer ITC’s business to WOS and materially alter ITC’s business.
2. Authority. Jonathan became ITC’s de facto managing director in 2007 and had ordinary authority to manage its business. That authority did not extend to disposing of the business or determining that ITC should cease operating it. The informal course of dealing did not delegate all directors’ powers, all shareholders’ powers, or the power to fix Jonathan’s own remuneration. The Duomatic principle did not validate the APA or SSA.
3. Motive and fiduciary duty. Jonathan’s principal motive in entering the APA was to transfer the business to a company owned solely by him. The SSA did not require WOS to pay all net income to ITC. Even if Jonathan had possessed authority to transfer the business, the agreements were unauthorised because they were not for ITC’s benefit and he did not reasonably believe that those with authority wished ITC to enter them.
4. Remuneration and expenses. The brothers initially agreed that Jonathan’s remuneration would exceed that of each brother by £120,000 annually, subject to later review. Jonathan had no authority to increase his own remuneration. Under regulation 83 of ITC’s articles, reimbursement depended on objective compliance with the stated criteria, and Jonathan bore the burden of proving that his expenses qualified. Unauthorised remuneration and expenses had to be repaid.
5. Petition and relief. The refusal of an offered audit and a threatening settlement email related to the conduct of ITC’s affairs and were unfairly prejudicial. No relief was granted under section 996. Jonathan’s wrongdoing was substantially graver, caused the breakdown in trust and confidence, and was not materially caused by the conduct found against ITC, Warren and Stuart. The trust claim was not determined because the issue was unnecessary.

The judgment was a first-instance determination of the ITC claim, the section 994 petition and the trust claim. It records interlocutory decisions in the same litigation, including the Court of Appeal decisions at [2016] EWCA Civ 614 and [2016] EWCA Civ 717.