The High Court has recently ordered a $12.1m buyout from the Drylandcarbon partnership in the plaintiff’s favour following a lengthy decision canvassing a breach of company directors’ duties.

Background

Mr B, a well-known company director, created a business concept in the form of a forestry and carbon credit venture.  

The forestry division would assist firms in generating carbon credits through establishing forests.  Mr B approached two investment bankers, Mr. L. and Mr M.  Subsequently, the parties entered into a joint venture by way of limited partnership, with a holding company owning the general partner and associated management company.  The shares in the holding company were held equally.

Following immediate success the parties faced several management challenges.  Within a period of 4 years Mr. B. had been ousted from his management role.  

Following Mr. B.’s removal, the partners initiated a new fund, replicating the concept of the joint venture, using the same personnel and many of the same investors.

Mr. B. and his wife brought proceedings by:

• A derivative action (on behalf of the Drylandcarbon general partnership company, holding company and management company), claiming that the joint venture partners had misused company information; and
• A breach of directors’ duties based on a corporate oppression claim under section 174 of the Companies Act 1993, claiming that Mr. and Mrs. B. had been unfairly treated as shareholders of the holding company.

High Court’s Findings

Justice Radich found a series of “clear fiduciary breaches”, which supported the conclusion that the profits from the new fund opportunity by Mr. L. and Mr. M. were made from, or out of, the joint venture partners’ positions as directors of the holding company.

Diversion of corporate opportunity is a central principle of company law which imposes a fiduciary obligation on directors owed to the company. This obligation prohibits directors from diverting a business opportunity that they should only have pursued through, and for, the company.

The Court held that the joint venture partners, Mr. L. and Mr. M., had breached this duty by replicating the corporate structure using the same staff, marketing efforts, information and approaching existing investors.

Justice Radich held that there was no requirement that the opportunity had belonged to the holding company, or for the holding company to have been “actively pursuing” the opportunity. It was sufficient for the opportunity to be “sufficiently connected” to the relevant directors’ roles, which is often the case when the opportunity arises for a director by virtue of their directorship.

The Court also held that the series of breaches and the removal of Mr. B. as a director were carried out in a way which was “oppressive, unfairly discriminatory, and unfairly prejudicial” under section 174 of the Companies Act 1993.

While the Court accepted that a director has a defence if it is proven that a company was agreed to be formed as a “Single Purpose Vehicle (SPV)” for a single purpose and not for any future opportunities, Justice Radich found that was not the case for Drylandcarbon.

Summary

Justice Radich ordered that the joint venture partners, Mr. L. and Mr. M., were required to account to the holding company for the profits made from the new fund, less an allowance of costs for the establishment of the new fund, to the final sum of $12.135 million.

Justice Radich commented that the duty for directors not to divert company opportunities to themselves is “intentionally draconian” to better deter individuals from being tempted. The Drylandcarbon decision is a landmark reminder of the duties that are owed to companies by their directors.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Guy Goodwin and Raiyan Azmi