Burnell v Trans-Tag Ltd & Anor

A contractual investment may be binding on a company where its controlling shareholder negotiated the transaction under authority conferred by a shareholders’ agreement, even if the company is not expressly named in the agreement. Where the principal bargain was an equity investment linked to the issue of shares, failure to issue the shares may constitute a total failure of basis entitling the investor to restitution.

A person may be a de facto director without valid appointment where, objectively, he or she assumes the status and functions of a director within the company’s governance structure. The statutory extension of the duty to avoid conflicts of interest to former directors may apply to post-resignation conduct, even without proof that resignation was prompted by a wish to exploit the relevant opportunity.

Alan Burnell advanced £250,000 to Trans-Tag Limited, a technology company controlled by Robert Aird through Monogram Capital Limited. The parties agreed that Mr Burnell would receive shares making him an equal equity partner with Mr Aird. The shares were never issued.

Mr Burnell claimed repayment of the loan from TTL and damages from Mr Aird for failing to procure the issue of shares. TTL counterclaimed, alleging that Mr Burnell had breached directors’ duties and confidence by acquiring the shares in Trans-Tag Systems Oü, the holder of the relevant intellectual property, and causing the termination of TTL’s licence.

The issues included whether the February 2017 agreement bound TTL, whether Mr Burnell was a director or de facto director, the scope of the continuing duty under the Companies Act 2006, and the resulting relief.

1. Loan agreement and repayment. The February 2017 negotiations produced a completed agreement binding on TTL. Clause 4 of the Joint Venture Agreement authorised Monogram to determine the terms on which an investor acquired shares. Mr Burnell’s investment was economically an equity transaction, notwithstanding that it was structured largely as a loan. The material terms, including the ranking and repayment of the Series I and Series II Loans, had been agreed.
2. It was an express term that TTL would issue 90 shares to Mr Burnell when he advanced the further £150,000. The proposed discussion with Mr Clark and Mr Kriisk was not a precondition. TTL’s failure to issue the shares was a breach. The principal benefit for which Mr Burnell had bargained was the equal equity participation. There was therefore a total failure of basis, entitling him to restitution of the £250,000 loan: the approach in Stocznia Gdanska SA v Latvian S.S. Co [1998] 1 WLR 574 was applied.
3. Mr Aird’s liability. Mr Aird had negotiated in his personal capacity and for Monogram and TTL. Given his control of TTL and the contractual arrangements, it was an implied term that he would procure the issue of the shares. He failed to do so. Damages were limited to the lower of the value of the shares and the amount of the loan unrecovered from TTL. They were assessed at a maximum of £67,500.
4. Directorship. Mr Burnell was not validly appointed as a statutory director. Article 8 required a positive communication by each director indicating assent to a common view; mere acquiescence in his attendance at meetings was insufficient. The Duomatic principle also failed because Mr Clark and Mr Kriisk had not assented with full knowledge that their consent was being sought.
5. Mr Burnell nevertheless became a de facto director no later than 28 February 2017. The inquiry was whether he formed part of the corporate governance system and assumed the status and function of a director. His conduct was assessed objectively and cumulatively, consistently with Smithton Limited v Naggar [2014] EWCA Civ 939. He remained a de facto director until at least the meeting on 29 March 2017.
6. Continuing conflict duty. The general duties in Chapter 2 Part 10 of the Companies Act 2006 codified, but did not eliminate the relevance of, the earlier common law and equitable principles. Section 170(2)(a) imposed a continuing duty under section 175 in relation to property, information or opportunities of which Mr Burnell became aware while a director. Its wording meant that post-resignation conduct could itself found a breach; proof that resignation had been prompted by a desire to exploit the opportunity was not an absolute requirement.
7. Mr Burnell breached that continuing duty by acquiring TTS, using information concerning TTL’s licence and its enforceability, and taking immediate steps to terminate the Licence Agreement so that TTS could exploit the intellectual property free of TTL’s rights. He also breached the equitable duty of confidence. The counterclaim succeeded to the extent of £200,000, together with an account of profits from exploitation of the rights obtained through termination of the Licence Agreement. That sum was set off against Mr Burnell’s recovery.