Sujata Chohan v Jayendra Ved & Ors

The claimant pursued a derivative claim under Chapter 1 of Part 11 of the Companies Act 2006 alleging that the defendant director procured the company to grant him a lease (the "New Lease") which conferred on him security of tenure under Part II of the Landlord and Tenant Act 1954. The court held that the director had exercised the company's power to grant leases for an improper purpose, in breach of section 171(b) CA 2006, by procuring a contracted-in lease that materially advantaged him beyond the joint venture agreement (JVA). The court also applied the objective limb of section 172(1) CA 2006 and found that an honest and intelligent director could not have believed the New Lease promoted the company's success. As a consequence the New Lease was declared void. The judgment considered the parties' credibility, the significance of a statutory declaration given by the defendant when entering the original lease (contracted-out), and rejected that the Duomatic principle relieved the defendant because there was no unanimous assent of beneficial shareholders.

Background and parties: The Company (Nexbell Limited) was used as a joint venture vehicle by two families represented by Messrs Chohan and Ved to purchase 5 Theobald Court (5TC). Mr Ved became sole director and initially took an original lease that excluded security of tenure under the Landlord and Tenant Act 1954. After the company completed the purchase, the defendant procured that the Company grant him a New Lease which included protection under the 1954 Act and a tenant-only rolling break clause.

Nature of the proceedings: (i) a derivative claim by Mrs Chohan under Chapter 1 of Part 11 CA 2006 seeking a declaration that the New Lease was void or had been avoided; (ii) a Part 20 claim by Mr Ved seeking declaratory relief about the joint venture agreement. Permission to continue the derivative claim had been granted under section 261 CA 2006 prior to trial.

Issues framed:

• What were the terms of the oral joint venture agreement (JVA) between the parties regarding occupation of 5TC?
• Did Mr Ved, as director, breach his duties under section 171(b) and/or section 172(1) CA 2006 by procuring the New Lease?
• If there was a breach, could it be validated by ratification or the Duomatic principle?

Findings of fact and reasoning: The court found the JVA intentionally flexible and concluded there existed (i) a "Ved Occupation Right" allowing Mr Ved (or his firms) to occupy 5TC so long as fair market rent was paid, and (ii) a corresponding "Chohan Occupation Right". However, the court found that the Ved Occupation Right did not include a right to procure that the Company grant him the security of tenure protections of the 1954 Act. The judge rejected assertions that Mr Ved was unaware of the original lease being contracted out, noting documentary evidence and that Mr Ved had signed a statutory declaration acknowledging the consequences of a contracted-out lease.

The court applied the Extrasure/Howard Smith four-stage test to the exercise of the Company's power to grant leases and concluded that the substantial purpose of procuring the contracted-in New Lease was to secure a material personal advantage and to safeguard the defendant's position in light of deteriorating relations with Mr Chohan, not a proper company purpose. That amounted to a breach of section 171(b) CA 2006. On section 172(1) CA 2006 the court applied the objective test (there being no evidence the director actually considered the company's interests) and held that an intelligent and honest director could not reasonably have believed the New Lease promoted the company's success.

The court considered but rejected ratification under the Duomatic principle because the legal shareholder(s) held beneficial shares on trust and there was no evidence of the beneficial shareholder's assent; unanimity required the assent of beneficial owners in the circumstances of this case.

Remedy and disposition: The court granted the declaration sought: the grant of the New Lease by the Company to Mr Ved was declared void. The court invited parties to agree an appropriate form of consequential order and to return for a consequentials hearing if necessary.

This is a first instance judgment. The claimant's derivative claim succeeds: the court declared that the New Lease granted by Nexbell Limited to Mr Ved was void. Rationale: the director procured the New Lease for an improper purpose in breach of section 171(b) Companies Act 2006 (the lease conferred a material advantage beyond the terms of the JVA) and also failed the objective test under section 172(1) CA 2006. The court rejected ratification by the sole legal shareholder under the Duomatic principle because assent of the beneficial shareholders was not established.