Director must repay unauthorised gifts and loans with interest

A director who channelled substantial payments from his family’s businesses to a new company he had set up on his own has been ordered by the High Court to repay the money with interest.

The case involved two brothers and their extended family. One of the brothers started making unauthorised gifts and loans to his new company after his father died. The payments had not been approved by the other family directors.

The family claimed he had acted in breach of fiduciary duty in procuring the payments and had not declared his interest in the transactions. The brother maintained that the payments were part of a loan agreement and that the other directors knew they were being made.

The court found in favour of the family. It held that the brother had failed to show that the payments to his new business were part of a loan agreement. The other family directors were never informed about the payments or asked to agree to them.

The brother had acted in breach of fiduciary duty in making what were substantial unauthorised loans without express provision for repayment or for interest.

Where a director used company money to confer a benefit on another company controlled by him, it amounted to a conversion of trust property and could justify a claim against him for compensation for breach of fiduciary duty.

However, the family had failed to show that the breach of duty was dishonest. The appropriate remedy, therefore, was to order repayment of the outstanding money with interest. There was no justification for any further compensation or an account of profits.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any aspect of company law and directors’ duties.