Power Adhesives Ltd v Sweeney & Ors

The Hastings-Bass principle applies to company directors. A decision may be set aside where directors fail to consider relevant matters or take irrelevant matters into account, subject to the decision being voidable rather than void. Obtaining professional advice does not by itself discharge fiduciary duties. Directors must use proper care and diligence in obtaining advice about the consequences of the transaction. The required degree of care depends on the circumstances, including the company’s size and the directors’ experience. Where directors approve a share issue without appreciating that it will massively dilute existing shareholders and transfer substantial value, they may have breached their fiduciary duties.

The claimant sought a declaration that its directors had acted in breach of fiduciary duty by issuing 490,000 B shares of £1 each to Peter Sweeney in exchange for the cancellation of his loan account. The transaction materially altered the balance of interests in the company and diluted the value of the existing ordinary shares.

The defendants, including the shareholders and HMRC, did not defend the claim. The central issue was whether the directors’ failure to appreciate the economic and tax consequences of the transaction engaged the rule in In Re Hastings-Bass, deceased [1975] Ch 25, notwithstanding their reliance on professional advisers.

1. Declaration granted. The resolution approving the issue and allotment of the B shares was set aside.
2. The rule in In Re Hastings-Bass, deceased [1975] Ch 25 applies to company directors. A fiduciary decision may be impugned where the fiduciary fails to take into account matters which ought to have been considered, or takes irrelevant matters into account. The principle is analogous to the Wednesbury principle in Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223.
3. The summary of the law adopted in Futter and another v HMRC and Pitt and another v HMRC [2013] UKSC 26, drawing on Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409 and Mettoy Pension Trustees Limited v Evans [1990] 1 WLR 1587, confirms that proper care and diligence in obtaining relevant information and advice may prevent a breach. Professional advice is not, however, automatically sufficient.
4. The directors’ decision in principle to exchange the loan for equity was not itself flawed. Their breach lay in approving shares with a nominal value vastly exceeding the existing share capital without considering the resulting dilution, transfer of value and potentially serious tax consequences. Given the company’s size and the board’s experience, more was required than the limited advice obtained.
5. Because the decision was within the directors’ power but involved a breach of fiduciary duty, it was voidable and could be set aside at the claimant’s instance.