O'Connell & Ors (As Joint Administrators of London Oil & Gas Ltd) v London Group LLP & Ors

A director cannot bind a company to a transaction outside his actual or apparent authority where the counterparty knows, or ought to know, of the lack of authority or breach of duty. Ratification requires the principal to adopt the transaction with knowledge of its material circumstances. A purported ratification based on material misinformation is ineffective. Where a company is insolvent or likely to become insolvent, directors must consider creditors’ interests. A transaction releasing a substantial debtor in return for payment covenants from companies unable to pay is capable of being a transaction at an undervalue under the Insolvency Act 1986.

The applicants were the joint administrators of London Oil & Gas Limited. They challenged two novation agreements dated 15 February 2019, by which debts recorded as owing by London Group LLP were purportedly transferred to LPE Enterprises Limited and London Power & Technology Limited.

The applicants sought declarations that the agreements were unauthorised and void, alternatively transactions at an undervalue under section 238 of the Insolvency Act 1986, and further or alternatively shams. The respondents did not appear at trial, although their witness evidence was admitted and considered. The central issues were authority, ratification, directors’ duties, undervalue and sham.

1. Authority. The novation agreements and the underlying loan arrangements were entered into without actual or ostensible authority. The company’s articles required board decision-making, and the evidence showed that the relevant arrangements differed materially from proposals considered by the boards. The respondents’ knowledge of the lack of authority was attributable through Mr Hume-Kendall.
2. Directors’ duties. Executing the novations to insulate London Group LLP from recovery was not a proper exercise of the director’s powers. It was inconsistent with the duty under sections 171 and 172 of the Companies Act 2006, including the obligation to consider creditors’ interests when insolvency was probable.
3. Ratification. The board’s purported ratification of the loan arrangements was ineffective. The board lacked material information about the backdating of the agreements, the benefit to connected persons, the circular transactions and the source and destination of the funds. In the circumstances, ratification would itself have breached the directors’ duties.
4. Undervalue. Under section 238 of the Insolvency Act 1986, the release of London Group LLP was unsupported by valuable consideration. LPE and LP&T lacked assets or cash sufficient to make the payment covenants valuable. The statutory defence was unavailable, and the transactions fell within the relevant period under section 240.
5. The novation agreements were therefore declared void for want of authority. Alternatively, they would have been set aside as transactions at an undervalue. The sham issue did not require determination.