Micheal & Ors v Phillips & Ors

A person who assumes practical control of a company’s affairs may be a de facto director, regardless of formal appointment or job title. The question is one of fact and degree, assessed by examining the person’s role in the company’s corporate governance and the functions actually performed. A manager and his company must not divert or merge the business and assets of the managed company to its detriment where fiduciary, statutory or contractual duties require them to promote that company’s interests. An implied periodic tenancy may arise from exclusive possession and payment and acceptance of rent. Such a tenancy may bind a purchaser as an overriding interest under Land Registration Act 2002, section 29. A Pallant v Morgan equity requires more than an informal understanding concerning a proposed acquisition: the arrangement must have the necessary joint-venture, advantage or detriment, and unconscionability elements.

The claimants were the shareholders of Havering Radio Cars UK Ltd and its business was managed by Gary Phillips and A1 Group (UK) Ltd under agreements intended to facilitate an eventual share acquisition. The proposed acquisition did not complete. The claimants alleged that, while managing the company, the defendants diverted its business, merged its operations with other minicab businesses and breached fiduciary, statutory and contractual duties.

The claimants also claimed that HRC occupied the ground floor of 142 South Street under a protected business tenancy and that Mr and Mrs Phillips held the freehold on constructive trust for Mr Micheal. The first and second defendants were debarred from defending the claims, and Mrs Phillips did not attend trial. The issues were whether Mr Phillips was a de facto director, whether the financial breaches caused recoverable loss, the extent of HRC’s tenancy, and whether the circumstances created a Pallant v Morgan equity.

1. Financial claims. Mr Phillips was a de facto director of HRC. The statutory test was one of fact and degree. The court examined what he actually did, whether he formed part of the company’s corporate governance system, whether he assumed the status and function of a director, and whether he was held out as such. His control of staff, finances, systems, branding, drivers and business operations demonstrated that he had assumed full authority over HRC.
2. Mr Phillips and A1 Group owed duties to promote HRC’s success and avoid conflicts of interest under Companies Act 2006, sections 172 and 175, and under the Management Agreement. They were not entitled to merge HRC’s operations with their own businesses, divert its drivers, telephone traffic, customers and goodwill, or operate without accounting controls so as to prejudice HRC and its shareholders. Those matters constituted breaches of fiduciary, statutory and contractual duties.
3. The court accepted the expert methodology for assessing loss, making appropriate allowances for uncertainty, future overheads and contingencies. Judgment was entered on the financial claims for £1,210,676, together with interest of £48,448. The award included losses from diverted turnover, future loss, replacement licences and equipment, a telephone system and advertising costs, less sums paid into HRC.
4. Tenancy. HRC had exclusive possession of the whole ground floor and had paid rent, which was accepted by the former freeholder. That conduct created an implied quarterly tenancy. The tenancy was an overriding interest under section 29 of the Land Registration Act 2002 and bound Mr and Mrs Phillips on their purchase of the freehold, because Mr Phillips knew of HRC’s occupation and payment of rent and no sufficient inquiry was made on behalf of Mrs Phillips. HRC was therefore entitled to a declaration that it held a quarterly periodic tenancy of the whole ground floor and to recover £13,416 relating to the subletting of part of the premises.
5. Freehold. The informal understanding that Mr Phillips would acquire the property and later give Mr Micheal an opportunity to purchase it did not create a Pallant v Morgan equity. The arrangement was not a joint venture, contemplated no concurrent enjoyment or joint exploitation of the property, and involved no relevant advantage or detriment sufficient to make retention of the property inequitable. The claim against Mrs Phillips also failed because she was unaware of the undocumented arrangement and had acquired the property jointly with her husband. The freehold claims were dismissed.

• High Court (Queen’s Bench Division): after earlier orders striking out the first and second defendants’ defence and debarring them from participation at trial, the court determined the financial and property claims. Judgment was entered for the claimants on the financial claims, a tenancy declaration was granted, and the constructive-trust claims concerning the freehold were dismissed.