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| 3 minutes read

A lesson for directors on the dangers of standing by in a power struggle

A recent High Court case, Mahoney v Renwick [2021] EWHC 3441, is an example of business owners falling out and an attempt to seize control which failed to survive the scrutiny of the court. It is also a good illustration of why directors should not blindly follow the instructions of a persuasive investor – particularly if that investor is subject to a director disqualification order…!

The case concerned a taxi business in Cardiff, formerly operated through a limited company that ran into financial difficulties. Two new companies, known as the “Blue Companies”, were formed to take over the taxi business and its assets. A dispute arose over ownership of the Blue Companies, and a battle for control erupted between Mrs Mahoney and Mr Moxham. Mrs Mahoney alleged that she was the sole member, both legally and beneficially, of both Blue Companies and that R and M, two directors who followed the instructions of Mr Moxham, had wrongfully excluded her from management of the Blue Companies and filed documents at Companies House evidencing her supposed resignation. The defendants alleged that an oral agreement had been made in 2019 under which it was agreed that the shares in the Blue Companies would be held as to 45% by Mrs Mahoney, 10% equally between R and M (who would be the directors), and the remaining 45% of shares to be held by Mr Moxham (in return for investment of his own money). Under the defendants’ version of events, it had been agreed that Mrs Mahoney would have no involvement in the management of the Blue Companies, but would receive regular updates from the directors via Mr Moxham.

The problem with oral agreements is that it is very difficult to prove them. Despite the involvement of lawyers in setting out a detailed "road map" on the way forward, the court was not convinced that a legally enforceable agreement existed. The “road map” was never sent to R and M, as planned, despite the lawyers chasing Mr Moxham a number of times. In order for a binding agreement to exist, there would have to be agreement on the key terms and the court was clear that this was not a case where “there was agreement between the parties but that it was “subject to contract””. There was no agreement on key terms, and the “road map” merely set out a provisional understanding for a structure. Sometimes, the court will recognise that the parties have conducted themselves on the assumption that there was a contract, but here there was insufficient evidence for this.

The court preferred the evidence of Mrs Mahoney. It granted her and the Blue Companies declarations that Mrs Mahoney was a director and sole member of the Blue Companies, that the Blue Companies owned the assets of the business (in contrast to Mr Moxham’s assertion, supported by R and M, that they were owned personally by him), and that resolutions passed by Mrs Mahoney appointing new directors were valid. R and M found themselves subject to an injunction restraining them from acting in respect of the Blue Companies on the instructions of Mr Moxham, or at all, without the authority of the board of directors.

The directors, R and M, found themselves in hot water for having blindly followed the instructions of Mr Moxham, and it is a sobering reminder of the statutory duties that directors owe and that the courts will scrutinise should their behaviour come before the courts. Here, the purported removal of Mrs Mahoney as a director was a breach by R and M of their duties to act in accordance with each company’s constitution (section 171 Companies Act 2006), a breach of their duty to act in good faith to promote the success of each company for the benefit of its member (section 172 CA 2006) and a breach of their duty to exercise independent judgment (section 173). They were further in breach of sections 172 and 173 in agreeing with Mr Moxham’s assertion that he personally owned the assets of the business, and they had neglected their duties under sections 171, 172 and 173 by not insisting on sight of each company’s accounting records.

" my judgment the Blue Companies are entitled in the circumstances to an account from the directors who have breached their duties, treated the assets belonging to the companies as the assets of other persons, and failed to give any proper account of their management of the companies"