Ceredigion Recycling & Furniture Team v Pope

The Court of Appeal dismissed the first defendant's application to reopen a refusal of permission to appeal under CPR 52.30. The judge at first instance had found that the transfer of the company's principal asset into self-invested pension plans and the leaseback arrangements were outside the company's powers in light of the company's memorandum and articles and the Companies Act 2006, and that the directors had breached duties under sections 171, 172, 174 and 175 and their fiduciary duties. The judge found breaches of duty but not dishonesty under the Ivey test. The Court of Appeal held that (i) section 39 of the Companies Act 2006 protects third parties dealing with a company but does not immunise directors from liability to the company for acting contrary to the constitution; (ii) section 40(5) preserves director liability for exceeding powers; (iii) Bilta (UK) Ltd v Nazir (No 2) establishes that wrong-doing by directors is not to be attributed to the company as a defence; and (iv) the criteria for reopening an appeal under CPR 52.30 were not satisfied because there was no egregious error vitiating the permission process and no powerful probability that Popplewell LJ's refusal would have been different.

The claimant, a company limited by guarantee operating a furniture recycling project, sued its two former directors seeking return of the company's property or consequential relief after the directors arranged transfer of the company's freehold into their SIPPs and a leaseback, funded in part by the company's funds. At first instance HHJ Jarman QC found that the arrangements were not within the company's powers as contained in its memorandum and that the directors had acted in breach of statutory duties (ss.171, 172, 174, 175 Companies Act 2006) and fiduciary duties; he held the breaches established but that the directors' conduct fell short of dishonesty on the Ivey test. Relief was adjourned for quantification and submissions by third parties.

The first defendant sought permission to appeal. Popplewell LJ refused permission on paper. The first defendant then applied to reopen that refusal and sought to argue, centrally, that section 39 of the Companies Act 2006 had abolished the ultra vires doctrine so that unanimous member action could validate the transfers and insulate the directors from complaint. The applicant also relied on the Duomatic principle and broader historic common-law authorities. Andrews LJ ordered the matter to be heard by the full Court and granted a stay of the first instance proceedings pending determination.

At the full Court the principal issues were:

• whether the refusal of permission to appeal should be reopened under CPR 52.30;
• whether section 39 CA 2006 and related provisions operated to prevent the company from complaining about the transfers made by its directors acting as members;
• whether the Duomatic principle or informal unanimous agreement could be treated as effecting an amendment or validation contrary to the memorandum and statutory restrictions (ss.62–63 CA 2006); and
• the scope of the Court of Appeal's inherent jurisdiction to review an interlocutory refusal of permission to appeal.

The Court held that the first defendant's central legal thesis was misconceived: section 39 protects third parties dealing with companies but does not prevent the company from suing directors for breach of duty; section 40(5) preserves director liability for exceeding powers and Bilta establishes that directors' wrongdoing is not to be attributed to the company as a defence. Popplewell LJ had correctly concluded that the Duomatic principle could not be used to accomplish informally what could not be done formally (Imperial Hydropathic Hotel v Hampson). The Court further held that there was no basis for invoking an inherent jurisdiction to reopen the refusal and that the tightly constrained statutory test in CPR 52.30 was not satisfied because the permission process had not been corrupted nor was there a powerful probability of a different outcome. The application to reopen was therefore dismissed and the stay lifted.

The Court dismissed the application to reopen the refusal of permission to appeal. The rationale was that the first defendant's central legal argument — that section 39 CA 2006 and a unanimous agreement of the only members restored a common-law position permitting the transfers and insulating the directors from liability — was wrong: section 39 protects third parties but does not displace director liability to the company, which is preserved by section 40(5) and by the attribution principles in Bilta. The Duomatic principle could not be used to do informally what could not be done formally and the statutory criteria for reopening under CPR 52.30 were not met because there was no egregious error vitiating the permission process and no powerful probability that the refusal would have been different.

Appeal from HHJ Jarman QC (sitting as a High Court judge) Business and Property Courts (ChD), Royal Courts of Justice, judgment [2021] EWHC 1783 (Ch). Permission to appeal was refused on paper by Popplewell LJ (2 August 2021). Andrews LJ ordered the application to reopen to be dealt with by the full Court and granted a stay. The full Court (Flaux C., Newey LJ, Edis LJ) heard the matter on 30 November 2021 and delivered judgment dismissing the application on 14 January 2022 [2022] EWCA Civ 22.