Director must pay over £600k after breaching legal duties

A director who breached his legal duties while running a company has been ordered to pay more than £600,000 compensation.

The claimant in the case had set up a company called GBR in late 2010 to take over a recycling business. He had been disqualified from acting as a director and entrusted GBR’s growth and development to another director.

However, that director incorporated another company, GBRK, in January 2011 and diverted the recycling business to it. GBRK grew into a successful business after obtaining investment in mid-October 2011. GBR was struck off the register of companies around the same time but was later restored.

At the liability hearing, the judge found that the director had breached his fiduciary duties under the Companies Act 2006 to promote GBR’s success and to avoid conflicts of interest.

The director submitted that the assessment of compensation should take into account his argument that even if he had not breached his fiduciary duties, GBR would have lacked the necessary finance to operate a successful business and would have been dissolved.

The court held that compensation should be determined on a reparative basis, which assessed what would have happened but for the breach of duty.

From that point of view, GBR would have been in the same position logistically and financially as GBRK in January 2011 when the latter was formed.

The director was a resourceful and skilful businessman with a proven track record in the waste management business. He clearly saw an opportunity to run a successful company from the site and had effectively stolen that opportunity from GBR.

If he had acted honestly and in accordance with his duties as a director of GBR, he would have diligently pursued the necessary funding for the company to enable it to succeed.

The appropriate measure of compensation was the value that GBR would have had when it was struck off the register in mid-October 2011, which was equivalent to the value of GBRK at that time.

The court assessed that value at £800,000.

The compensation of £800,000 was subject to two deductions. First, £170,685 had already been repaid to GBR from GBRK. Second, the director was entitled to an allowance of £30,000 to recognise the skill and effort he had displayed in building up the business of GBR from January to October 2011.

Accordingly, the claimant was entitled to £599,315 compensation plus simple interest at the rate of 2% above the Bank of England base rate from 1 November 2011. He was also entitled to compound interest on the sum of £170,685 from 1 November 2011 to 24 March 2020, when the sum was repaid.

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Davies v Ford
Chancery Division
22 September 2021
[2021] EWHC 2550 (Ch)
David Holland QC