Fairford Water Ski Club Ltd v Cohoon & Ors

The court decided a first instance claim by a members' club (the Claimant) seeking to recover money and property it said had been misappropriated or improperly applied by two director-partners who ran a separate watersports business (the Defendants). The judgment applied the Companies Act 2006 duties (notably sections 171, 172, 174, 175 and related provisions) and established that the management arrangement between the club and the partnership was effected without the disclosure and formalities required by the club's articles and was therefore voidable. The court held that the first defendant (Craig) had put himself in a position of conflict and was accountable in respect of management fee receipts after the relevant limitation period cut-off; other findings of liability were made against the individual directors and the partnership for specified items (notably mark-ups on third party supplies, certain payments plainly for the partners' benefit, advertising and selected property transactions).

The judgment refused to allow the Claimant to amend some pleaded heads mid-trial (notably a fuller pleading as to certain plot dealings) but allowed a constrained amendment on Plot 11. The court dismissed the partnership's contractual counterclaim for a year's management fee. It declined to make broad presumptions of liability on unexplored items in the parties' spreadsheet, except where the evidence at trial established a mark-up practice or other clear misapplication.

The claimant, Fairford Water Ski Club Limited (the Club), alleged that directors of the Club (Craig and Scott Cohoon, and briefly Jane Cohoon) and the defendants' unincorporated business Craig Cohoon Watersports (Watersports) misapplied Club funds, received unauthorised management charges and otherwise acted in breach of duties owed to the Club. Watersports counterclaimed for a management fee said to be due following termination of an alleged management arrangement.

Background and factual matrix

• The Club operates a lakeside members' water-skiing business with static caravans and lodges on the Site. The Cohoons ran Watersports on the Site and (until January 2017) Craig and Scott were directors of the Club.
• Disputes concerned: (a) an annual management charge paid to Watersports (claimed by the Club to be unauthorised); (b) numerous payments recorded in the Club's bookkeeping which the Club alleged were not for the Club's benefit; (c) particular payments alleged to have benefited the defendants; (d) monies not collected or not paid over to the Club; and (e) various property transactions on the Site (notably Plot 3 and Plot 11, and sales of lodges/statics).

Procedural posture

• The claim was tried after a multi-day commercial court hearing. The Claimant sought monetary restitution and equitable compensation; Watersports counterclaimed for a management fee. A large set of disputed transactions was marshalled in a Scott Schedule and an accompanying Spreadsheet; the trial could not explore every item in detail.

Issues framed

• Whether directors breached the duties in the Companies Act 2006 (sections 171, 172, 174, 175 etc.) and were accountable for sums paid or assets transferred.
• Whether the Management Agreement (said to date from May 2007) complied with the Club's articles and the disclosure obligations in the antecedent statute (section 317 of the Companies Act 1985) so as to relieve the directors/Watersports from liability.
• Whether shareholders' approval or other equitable defences (including section 1157 relief and limitation arguments) prevented recovery.
• Whether the court should presume against the defendants on the many unexplained payments in the Spreadsheet, or limit findings to items properly explored at trial.

Court's reasoning and disposition of the main issues

• The court analysed the statutory duties and the interplay between article-based disclosure (clause 84(1) of Table A), section 317 of the 1985 Act (as it then applied), and the Companies Act 2006 relieving provisions (section 180). The court emphasised the need for full disclosure of the nature and extent of a director's interest and rejected any broad residual discretion to treat non-compliance as harmless; compliance must be judged strictly and the consequences of non-compliance assessed by established equitable principles and statutory reliefs available to directors.
• On the Management Agreement the court found that clause 84(1) (and therefore the section 317 regime adopted by the articles) had not been complied with before the Club entered the arrangement. The agreement was therefore voidable for non-disclosure. The court rejected the submission that shareholders had given valid prior ratification. The court held Craig accountable for management fee receipts subject to limitation: the appropriate measure was treated as a net £15,000 pa (being the gross fee offset by rent) and liability was limited to periods after 30 October 2011 by limitation rules.
• The partnership's counterclaim for one year's fee was dismissed because the agreement was voidable and not enforceable against the Club.
• On the Spreadsheet and unexplained payments the judge declined to falsify or make wide presumptions in respect of hundreds of unexamined transactions. He determined liability only for those items adequately explored at trial or where the evidence established a systematic practice (for example Watersports charging ad-hoc mark-ups) that breached fiduciary duties. The defendants were held accountable for mark-ups and specific items shown at trial.
• In relation to property dealings the court found that Plot 11 was a substantial transaction caught by section 190 (using the Company’s 2012 accounts to calculate the asset-value threshold). The Club could not be given Plot 11 back in specie given subsequent improvements; the court ordered monetary relief under the statutory regime and held the relevant defendants jointly and severally liable for the assessed loss. Other property dealings (including a lodge bought and sold (Meyer Lodge) and various static/home transactions) gave rise to liability or allowances on account of conflict/profit rules, subject to permitted allowances for work and renovations.
• The court applied limitation principles (Limitation Act 1980, section 21 and section 32) and the statutory power to relieve directors (section 1157 of the 2006 Act) where appropriate, and rejected attempts to rely on a latent judicial discretion to disregard strict disclosure requirements.

Result

• The court made multiple specific findings of liability in favour of the Club against the defendants for a series of sums and items identified in the judgment. It refused to grant the Club wide falsification relief in respect of unexplored spreadsheet items but ordered recovery in respect of specific proven items and categories. Watersports' counterclaim was dismissed.

First instance: The claim was successful in part. The court found that the alleged Management Agreement and payments under it were entered into without the disclosure and formalities required by the Club's articles and relevant statutory regime and were therefore voidable. The first defendant (Craig) was held accountable (subject to limitation) for management fee receipts after 30 October 2011 (the court measured entitlement as a net £15,000 per annum) and the court made a series of findings of liability against the individual defendants and against Watersports for specified items (notably mark-ups, certain payments and selected property-related transactions). The court dismissed Watersports' counterclaim for a year’s management fee. The judge refused to make broad presumptions as to hundreds of unexplored spreadsheet items and limited recovery to items properly proved or where systemic misconduct was established.