Directors' company obligations trump family interests

Directors must be loyal to and to act in the best interests of the company of which they are directors. Whilst directors in a majority family owned business may "owe" moral duties to their family members which may conflict with their duties owed to the company, they must prioritise the interests of the company. The recent judgment, Northampton Borough Council v Cardoza and others [2019] EWHC 26 (Ch) [2019] All ER (D) 130 (Jan), is a timely reminder of these rules.

Background

The case concerned Northampton Town Football Club (NTFC) and the use made of part of sums totalling £10.25 million drawn down by NTFC under three loan agreements with Northampton Borough Council (NBC). The loan was to fund the development of NTFC's stadium, facilities and an adjacent 30 acre brownfield site.

In late 2002, Anthony Cardoza (D1) and his son David Cardoza (D2) (collectively Ds) acquired control over NTFC. They were directors of NTFC from 2003 until mid-2015. Ds sold their controlling shareholding in November 2015. For all but three of the thirteen years that NTFC was under Ds' control, NTFC was loss-making. Its net liabilities increased from £2.5 million in 2002 to £8.8 million in 2015.

In November 2015, NBC received information that money drawn down under the loan had been used for purposes other than development, which were unauthorised. This included interest payments and instalments of principal to NBC and paying NTFC's solicitors. Given NTFC's new management and financial state, NBC decided to pursue recovery of the loan monies including an assignment by NTFC to NBC of all its rights, title, interests and benefit in and to specified debts and claims. Therefore, NBC acquired the right to bring claims against Ds and others. NBC set about investigating the way in which the draw-downs were applied and the conduct of Ds as directors of NTFC. These investigations resulted in a claim against Ds for breach of fiduciary duties as directors.

The claims were that:

1. D1 and D2 received or benefitted from payments in breach of their statutory duties as directors of NTFC, and
2. D2's transfer by way of gift of his interest in his family home to his wife, Christina Cardoza (D3) was a transaction at an undervalue for the purpose of putting an asset of his beyond the reach of present or future creditors.

Decision

Each of the sums received by D1 from the loan draw downs, totalling £2.05 million, had been received in breach of his duty as a director. D1's argument that the payments were regarded by him as part repayments of his director's loan account and he asked D2 to record them in NTFC's accounts was rejected. The Court rejected this claim based on its assessment that D1's evidence was unreliable and lacked corroborative contemporaneous evidence. Instead, the court held that Ds in fact diverted and misappropriated the £2.05 million and deliberately routed it through corporate vehicles "so as to avoid having to record them as reductions in" the loan account.

D2 was found to be in breach of fiduciary duty as the managing director of NTFC on the basis that the diversion and misappropriation by D1 could not have happened without D2's knowledge. Furthermore, over a two-year period D2 made net withdrawals from his director's loan account exceeding £650K when NTFC was insolvent. The court held that D2 had been treating his loan account "as a current account available for day to day drawing". By so doing D2 put himself and his interests before NTFC's interests including pressing creditors, thus disregarding the NTFC's creditors as a class.

The Court also held that the transfer by D2 to D3 of his marital home was a transfer at an undervalue for the purpose of putting assets beyond the reach of any person who might make a claim against D2.

The Judge commented that on the evidence, neither D1 or D2 had ever considered whether or how their interests might not coincide with or be different from the interests of NTFC, nor did they consider what the interests of NTFC might be.

Having decided the above, the court held that NBC was entitled to equitable compensation under the principle of restoring to the trust estate monies misapplied by the trustee (in this case a director).

Comment

The key takeaway of the Cardoza case is that whenever a family business concerns a corporation, it is subject to the regime of corporate law and directors are bound by stringent directors' duties, including fiduciary duties and statutory duties under the Companies Act 2006. It is crucial for directors in a family business to make clear segregation between his or her personal accounts and company accounts and to make sure that he or she knows the scope and content of his or her duties as a director.