Directors acted unfairly by paying themselves too much

Three directors had damaged their family business by paying themselves too much and benefiting from company loans.

That was the decision of the High Court in a case involving AMT Coffee Ltd.

The company had been incorporated in 1993 as a retail coffee-selling business.

Upon incorporation, four ordinary shares were issued, one each to three brothers and one to their father. In 2003, three further ordinary shares were allotted to the three brothers. Those seven shares remained the only shares in issue.

The father died in 2001 and his share vested in his widow. One of the brothers died in 2006. His shares were transmitted to the executors of his will.

The executors took legal action against the remaining directors based on three complaints:

1. first, that they had paid themselves excessive remuneration
2. second, that they had failed to give consideration in good faith to the payment of dividends (no dividends having been paid to shareholders since 2007)
3. third, that two of the directors, the remaining two brothers, had benefited from loans from the company at favourable rates.

The executors complained that the loans did not bear interest and were not subject to any agreed repayment plan or terms; the brothers had used them to pay personal expenses and over £1m was owed.

The court found in favour of the executors. It held that the remuneration paid to the three directors had not been authorised by shareholders or the constitution of the company. The payment of excessive remuneration, the use of the loan accounts and the failure to make a decision in good faith on the issue of dividends amounted to unfairly prejudicial conduct.

The proper remedy was for the directors to buy the executors’ shares at a fair value. Given the nature and extent of the unfairly prejudicial conduct, there should be no discount in the share valuation.

Please contact Sing Li if you would like more information about the issues raised in this article or any aspect of company law.