Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 119
CA87/08	OPINION OF LORD HODGE in the cause EASTFORD LIMITED Pursuer; against (FIRST) THOMAS GRAHAM GILLESPIE and (SECOND) AIRDRIE NORTH LIMITED Defenders: _____________

Act: Sellar QC; Semple Fraser LLP

Alt: Dewar QC, McIlvride: Anderson Fyfe LLP

20 August 2009

[1] For many years the Gillespie family has operated a successful family business. That business has included open cast coal mining and property development. Unfortunately, in recent years certain relationships within the family have broken down. That breakdown has resulted in numerous court actions between family members. This action against Mr Thomas Graham Gillespie ("Mr Graham Gillespie") and Airdrie North Limited is at the instance of a family company, Eastford Limited ("Eastford"). In this action Eastford alleges that Mr Graham Gillespie has acted in breach of his fiduciary duty to the company by acquiring for his own benefit a commercial opportunity which belonged to the company.

[2] Mr Gary Gillespie, Mr James Stevenson Gillespie ("Mr Steven Gillespie"), Mr Graham Gillespie and Mr Alan Gillespie are brothers and are directors of Eastford. Each holds twenty five per cent of the share capital of the company. In the summer of 2008 Mr Gary Gillespie and Mr Steven Gillespie instructed Semple Fraser LLP to raise the action in name of Eastford. At a hearing before calling on 19 August 2008 the company obtained an interim interdict which among other things prohibited the defenders from transferring out of the ownership of GM Drumshangie Limited or burdening specified landholdings. The defenders challenged the authority of Mr Gary Gillespie and Mr Steven Gillespie to raise the action in the name of the company.

[3] Faced with this challenge, Mr Gary Gillespie and Mr Steven Gillespie sought to have Eastford ratify their actings. They convened a meeting of the board of directors of the company on 9 October 2008. At that meeting the directors disagreed on who was entitled to vote and referred to legal advice which they had received. Mr Gary Gillespie and Mr Steven Gillespie argued that Mr Graham Gillespie was not entitled to vote because of his interest in the impugned transactions. Mr Graham Gillespie and Mr Alan Gillespie, while accepting that the former could not vote, argued that only Mr Alan Gillespie was entitled to vote as all the others had conflicting interests. Thereafter, Mr Gary Gillespie and Mr Steven Gillespie purported to vote in favour of resolutions ratifying the raising of this action and another action while Mr Graham Gillespie and Mr Alan Gillespie purported to vote against those resolutions.

[4] The minutes of the board meeting recorded that the resolution in relation to this action was carried by two votes to one but that Mr Graham Gillespie and Mr Alan Gillespie disagreed with that result. The minutes also stated:

"Thomas Graham Gillespie wanted it noted that Eastford had no funds to pursue these actions. Alan Gillespie requested that Minutes of Meeting be approved by Semple Fraser and forwarded to Anderson Fyfe. Thomas Graham Gillespie requested that it be noted that in his view the meeting was illegal."

[5] In their defences to the action the defenders argued that the action should be dismissed as it had been brought without proper corporate authority. In an opposed hearing on 24 October 2008 they successfully sought recall of the interim interdict on various grounds. Further, as Eastford had no funds, the defenders successfully sought caution for expenses under section 726 of the Companies Act 1985 on 9 January and again on 26 May 2009. In an unopposed motion on 2 July 2009 the defenders obtained the release of consigned funds to meet the taxed expenses of the hearing for the recall of the interim interdict.

[6] In the debate, which I have heard, the defenders challenged the relevancy of the action and sought its dismissal on the basis that the purported ratification at the board meeting was ineffective because of conflict of interest. The defenders did not contend that the company could not ratify the directors' actions. They advanced a narrower argument, namely that the ratification was ineffective because Mr Gary Gillespie and Mr Steven Gillespie should not have voted as they had placed themselves in a position where their personal interests were in conflict with their duty to Eastford.

Legal background

[7] It is well established at common law that, unless a company's constitution otherwise provides, a board of directors can, within a reasonable time, ratify the acts of a director or directors who, when they acted, had no authority to bind the company: Re Portuguese Consolidated Copper Mines Ltd [1890] LR 45 Ch D 16, Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100 and Municipal Mutual Insurance Ltd v Harrop [1998] 2 BCLC 540. See also Danish Mercantile Co Ltd v Beaumont
[1951] Ch 680.

[8] The statutory statement of the general duties of directors in Chapter 2 of Part 10 of the Companies Act 2006 has not superseded that line of authority. Section 171 provides that a director of a company must act in accordance with the company's constitution. That might, taken by itself, suggest that an unauthorised act could not be ratified. But it is clear on examining the statutory statement of the general duties of directors that that statement does not prevent a company by a resolution of its board from ratifying the acts of a director which were unauthorised but were within the power of the board.

[9] One must look to the purpose of the statutory statement which is revealed in the 2006 Act. Subsections (3) and (4) of section 170 set out the relationship between the general duties which are stated in the Act and the pre-existing common law rules and equitable principles on which they are based. Subsection (3) provides:

"The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director."

Thus the statutory statements replace such of the common law rules as have been subjected to statutory formulation. But sub-section (4) provides:

"The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties".

This subsection seeks to address the challenge which the Law Commissions and the Company Law Review had identified, namely of avoiding the danger that a statutory statement of general duties would make the law inflexible and incapable of development by judges to deal with changing commercial circumstances. Parliament has directed the courts not only to treat the general duties in the same way as the pre-existing rules and principles but also to have regard to the continued development of the non-statutory law in relation to the duties of other fiduciaries when interpreting and applying the statutory statements. The interpretation of the statements will therefore be able to evolve. The statutory statement of the general duties of directors is intended to make those duties more accessible to commercial people. I see nothing in the statutory provisions, including section 180(5) (which provides that, subject to specified exceptions, the general duties have effect notwithstanding any rule of law), which suggests that Parliament intended to alter the pre-existing rules on ratification by a board of a director's unauthorised acts.

[10] I am supported in my opinion by Lord Glennie in West Coast Capital (Lios) Ltd Petr [2008] CSOH 72, (at para 21) in which he expressed the view that section 171 of the 2006 Act did little more than set out the pre-existing law on the subject. I also derive some support from leading company law textbooks such as Gore-Browne on Companies (at para 15[8A]) and Palmer's Company Law, which (at para 8.2309) suggests that older cases remain relevant to the interpretation of the statutory duties "since the codified duties are generally formulated in a way that quite faithfully reflects the older case law". The statutory formulations do not, by a side wind, alter the law of agency or prevent ratification of the unauthorised acts of a director. As I have said, the defenders did not seek to argue otherwise.

Conflict of interest

[11] The only issue therefore is whether Mr Gary Gillespie and Mr Steven Gillespie were excluded from voting at the board meeting on 9 October 2008 because of a conflict of interest.

[12] Regulation 94 of Table A, which applies to Eastford, provides so far as material:

"Save as otherwise provided by the articles, a director shall not vote at a meeting of directors ...on any resolution concerning a matter in which he has, directly or indirectly, an interest or duty which is material and which conflicts or may conflict with the interests of the company ...".

Mr Gary Gillespie and Mr Steven Gillespie did not dispute that a conflict of interest would have precluded them from voting. The question is whether there was such a conflict.

[13] Section 175(1) of the 2006 Act codifies the conflict of interest rule as follows:

"A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company."

Subsection (4) of section 175 provides:

"This duty is not infringed-

(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or

(b) if the matter has been authorised by the directors."

[14] Parties agreed that the relevant test was whether there was a real sensible possibility of conflict. The basic principle, as is well-known, is that which Lord Cranworth LC stated in Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461, when discussing the fiduciary duties of directors to their company, at p.471:

"And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

In Boardman v Phipps [1967] 2 AC 46, Lord Upjohn in a celebrated speech qualified that statement and said (at p.124B-C),

"The phrase 'possibly may conflict' requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict."

The Court of Appeal has applied that test more recently in Bhullar v Bhullar [2003] 2 BCLC 241. See, in particular, Jonathan Parker LJ at paras [27] to [31] in which he emphasised the strictness of the obligation not to allow a conflict to arise between duty and interest. These authorities appear to me to be relevant to the interpretation of not only section 175(1) of the 2006 Act but also Regulation 94 of Table A.

[15] Mr Dewar QC for the defenders submitted that there was such a conflict or possible conflict. Having instructed the raising of the action without the company's authority, Mr Gary Gillespie and Mr Steven Gillespie risked being found liable to pay the defenders' expenses were the action to fail. If the action were not ratified, such liability might arise by the court making an award of expenses against them personally or against the solicitors who would seek relief from them. Mr Dewar initially submitted that they had used the company to pursue a personal dispute at the company's expense rather than their own expense; but in the end he did not assert, at least for the purposes of this debate, that the court should hold that they had used their powers for an improper purpose, contrary to section 171(b) of the 2006 Act. He took the position that if Mr Gary Gillespie and Mr Steven Gillespie had granted an indemnity to the company or otherwise protected it from incurring expense in this action, there would not have been a conflict of interest. His complaint was that they had not done so at the time of the directors' meeting on 9 October 2008. Accordingly he submitted that Mr Gary Gillespie and Mr Steven Gillespie had a material interest in having Eastford ratify the action which they had instructed without its authority in order to avoid personal liability in expenses. That interest compromised their ability to give disinterested consideration to the question whether it was in the best interests of Eastford that their actions should be ratified.

[16] Mr Sellar QC submitted that there was no real and sensible possibility of conflict. It was not disputed that Eastford had no funds and was not trading. He argued that Mr Gary Gillespie and Mr Steven Gillespie had known when they instructed the solicitors to raise the action in Eastford's name and when the board ratified their actions that the company had no material assets to pay its legal advisers and also that if the action failed they would be personally liable for the expenses of the defenders. Such liability to the defenders could arise either from their status as domini litis, by their solicitors seeking relief from a finding of expenses or, as a matter of practicality, in order to avoid the company being wound up. Eastford, he submitted, had no conflicting interest as there was no real possibility of it ever being able to pay the expenses of the action or of it protecting the instructing directors from such liability. Thus the release of the two directors from liability to Eastford for the consequences of instructing the action, should it thereafter fail, was worthless in monetary terms.

[17] At this stage in the proceedings the court cannot take any view as to whether Mr Gary Gillespie and Mr Steven Gillespie in raising the action were acting in good faith for the benefit of the company or were, as Mr Dewar suggested, using their powers for an improper purpose. I must therefore assume that they acted in bona fide. If they had called a board meeting before raising the action in such circumstances I see no reason why they should not have voted on a resolution to raise proceedings against a fellow director if they believed that he had been guilty of significant breaches of his fiduciary duties to the company. Directors can disagree on matters of company business in good faith and the board as a result may decide to commence litigation in the name of the company against a director if it is satisfied that the company has a valid claim against him. In this case I was informed that Mr Gary Gillespie and Mr Steven Gillespie had thought that they needed to instruct the raising of the action urgently to obtain an interim interdict and that urgency had militated against first holding a board meeting. Does the fact that they had exposed themselves to potential financial liabilities by so acting give rise to a conflict in interest which otherwise would not have arisen?

[18] I have come to the conclusion that it does not. While the case law to which I have referred emphasises the strictness of the duty to avoid a situation where interests or duties are in conflict, that duty comes into play only where there is a real possibility of such conflict. In determining whether there is such a possibility the court must look at the facts of the particular case. On this occasion I am satisfied that Eastford's lack of any funds meant that Mr Gary Gillespie and Mr Steven Gillespie had no real prospect of avoiding personal liability for funding the action from the outset and Mr Sellar informed me that they were well aware of that. The solicitors whom they instructed on Eastford's behalf would look to them for funding and the defenders would be able to obtain awards of expenses for which they would be personally liable as Mr Dewar and Mr Sellar submitted. Whether or not the action was ratified, the defenders could also protect themselves by seeking caution for expenses under section 726 of the Companies Act 1985 as they have done.

[19] I recognise that if Eastford had had funds to finance the action the directors who initiated the action would have had a personal interest in the ratification of their acts which might conflict with the interests of the company; but those are not the circumstances of this case.

Conclusion

[20] The defenders' motion for dismissal of the action therefore fails. I will have the case put out by order to determine further procedure.