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Ratification of a director’s breach of duty

The High Court has held that a director of a company who had breached his fiduciary duties as a director could not then, in his capacity as the company’s sole shareholder, ratify the breach where the company was insolvent.

A director’s breach of duty can be ratified by resolution of the shareholders. Some acts are incapable of ratification, such as where the act is a fraud on the minority shareholders; where the act was dishonest or where the act was inherently unlawful, such as the payment of an unlawful dividend.

In Goldtrail Travel Ltd (in liquidation) v Aydin [1], Goldtrail, a holiday tour operator now in liquidation, had entered into transactions with other companies that were designed to divert assets away from Goldtrail. Essentially, the director, Mr Aydin, had entered into deals with third parties to purchase seats on airlines for the company’s customers. Large sums of money were paid to Aydin, enabling him to make a personal profit.

Goldtrail’s liquidators claimed against the third parties for dishonest assistance, both in relation to the misapplication of the company’s money and the breach of the statutory duty in section 175 of the Companies Act 2006 for directors to avoid a conflict of interest.

The High Court found that Aydin had breached his fiduciary and statutory duties. The issue was whether such acts were capable of prior authorisation by him as a sole director or subsequent ratification by him as the company’s sole shareholder.

The High Court answered that question by holding that once the company had gone into liquidation, the director could not then, in his capacity as sole shareholder, approve the transactions as he owed duties not just to the company but also to the company’s creditors.

The Court also considered that ratification by shareholder resolution and prior authorisation by the board were precluded by respectively section 239 of the Companies Act 2006, which prohibits shareholders from voting on resolutions to ratify breaches concerning themselves as directors and section 175(6) of the Act, which prohibits a director from authorising a conflict of interest involving him- or herself as a director. The Court also explained that the inability of a sole director/shareholder to ratify his or her own wrongdoing is not alleviated by the so-called Duomatic principle, namely the principle that where it can be shown that all shareholders entitled to vote on a resolution informally assent to some matter, that assent is as binding as a resolution in general meeting would be.

This case is helpful in highlighting the limits upon the ability to ratify directors’ breaches.

[1] [2014] EWHC 1587 (Ch)