Sujata Chohan v Jayendra Ved & Ors

A director must exercise company powers for the purposes for which they were conferred. The court identifies the power, its proper purpose, the substantial purpose for which it was exercised, and whether that purpose was proper. A director cannot use a company transaction to secure personal advantages exceeding rights agreed under a joint venture. Where a director causes the company to grant him a lease in breach of that duty, the transaction may be void. The statutory duty to promote the company’s success is subjective only where the director actually considered the company’s interests; otherwise an objective test applies. Unanimous shareholder assent under the Duomatic principle requires informed assent by the relevant beneficial shareholders and cannot be established by an uncommunicated internal decision alone.

The claimant brought a derivative claim on behalf of Nexbell Limited against its sole director, Jayendra Ved. The claim challenged a lease which Mr Ved procured the Company to grant him over its principal property. The new lease extended an earlier contracted-out lease, added security of tenure under Landlord and Tenant Act 1954, and included a tenant-only break clause.

The parties had operated the property through a family joint venture. Mr Ved contended that the new lease reflected the joint venture agreement and was authorised or ratified by shareholder consent. The issues were whether the lease breached Mr Ved’s duties under sections 171(b) and 172 of the Companies Act 2006, whether it was void, and whether the Duomatic principle applied.

1. Proper purpose. The court applied the four-stage approach in Extrasure Travel Insurances Ltd v Scattergood and the guidance in Howard Smith Ltd v Ampol Petroleum Ltd: identify the power, its proper purpose, the substantial purpose for which it was exercised, and whether that purpose was proper. The relevant power was the Company’s power to grant leases. Its proper purpose was broadly to promote the Company’s business and obtain rental income without unnecessarily burdening its ability to recover possession or increase rent.

2. The joint venture agreement was intentionally flexible. It gave Mr Ved an occupation right for as long as he or his businesses paid fair market rent, but did not entitle him to obtain the additional security of tenure conferred by the new lease. By procuring that lease after the relationship had broken down, Mr Ved secured a material personal advantage and placed himself in a stronger position against the Company. His substantial purpose was therefore improper, and he breached section 171(b) of the Companies Act 2006.

3. The court also found a breach of section 172(1). The subjective test described in Re Regentcrest plc v Cohen applies where the director actually considered the Company’s interests. In the absence of evidence of such consideration, HLC Environmental Projects Ltd required an objective inquiry. An intelligent and honest director in Mr Ved’s position could not reasonably have regarded converting the lease into one with security of tenure as promoting the Company’s success.

4. The lease was void, subject to any effective ratification. The Duomatic principle requires informed assent by all shareholders entitled to vote. Applying Re Tulsense Ltd and Ciban Management Corpn v Citco (BVI) Ltd, assent by a legal shareholder who holds shares on trust is insufficient where the beneficial shareholder has not assented, and a merely internal decision is not enough. Mr Ved had not shown the necessary informed and objectively manifested unanimity.

5. The court did not decide whether Duomatic could cure a proper-purpose breach resulting in a void transaction. That issue had not been fully argued. The claimant was entitled to a declaration that the grant of the new lease was void. Consequential orders were left for agreement or a further hearing.

This was a first-instance decision. The judgment records that the Court of Appeal refused Mr Ved permission to appeal the earlier order permitting continuation of the derivative claim.