Pomeroy Developments (Castleford) Ltd (‘Castleford’) was one of a large group of companies headed by Pomeroy Developments Ltd (‘Pomeroy’). None of the companies ere subsidiaries of Pomeroy, but they had common shareholdings, directors, and officers. Pomeroy supervised the activities of the companies, provided office support, and carried out the acquisition and development of various sites. For each site acquired, a separate company was incorporated.
In 1956, Castleford entered a lease guaranteed by Pomeroy; the latter also, from time to time, paid the rent due by Castleford under the lease. In 1960, Pomeroy and two other companies within the group had overdrawn their bank accounts with Lloyds Bank Ltd (‘the bank’) by pounds 22,091. Castleford guaranteed the payment of all moneys and liabilities owing or incurred by Pomeroy and deposited the title deeds of the leasehold property to the bank as security.
A year or so later, Castleford borrowed money from Askinex on security of a first mortgage over the leased property; Castleford used the proceeds of that mortgage towards repayment of Pomeroy’s overdraft. When Pomeroy’s overdraft increased again three months later, Castleford charged the leasehold property to the bank subject to the prior security in favour of Askinex. At that time, the officers of the group of companies and the bank did not consider the interest of Castleford separately from that of the group.
Castleford later agreed to sell the property to the Charterbridge Corporation Ltd (‘Charterbridge’) for over pounds 30,000. Charterbridge paid pounds 20,000 on account. Almost the full amount was used towards discharging Askinex’s mortgage, leaving the bank as first mortgagee. Subsequently, Charterbridge sought a declaration that the charge created by Castleford in favour of the bank was outside the scope of Castleford’s business and purposes and was therefore ultra vires and invalid.
Pennycuick J held that the directors who had procured Castleford to enter into the guarantee and charge looked to the interests of the group as a whole. The directors considered that it was in the interests of the group as a whole that Castleford should enter into the transactions, but the directors did not take into consideration the interests of Castleford separately from that of the group.
Pennycuick J rejected the argument that the transactions by Castleford were ultra vires. In obiter, however, his Honour considered the separate argument that the directors were not acting with a view to benefit Castleford (separately and in contradistinction to the group). His Honour described this as a question of fact with Charterbridge bearing the burden of proof.
Charterbridge argued that absent separate consideration being given to Castleford’s interests, the directors, ipso facto, must be treated as not having acted with a view to the benefit of Castleford. Pennycuick J considered this was an ‘unduly stringent test and would lead to absurd results’; that is, ‘unless the directors of a company address their mind specifically to the interests of the company in connection with each particular transaction, that transaction would be void notwithstanding that the transaction might in fact be beneficial to the company’. Pennycuick J also rejected the competing argument advanced by the bank that it was a sufficient answer to the claim that the directors of Castleford looked to the benefit of the group as a whole.
In the context of the rejection of that contention, his Honour stated: ‘Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interests of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.’
His Honour concluded that in the circumstances the answer to that question was ‘yes’; accordingly, there was no breach of duty by the director.
Special considerations arise as to his duties if a director acts in the interests not of the company of which he is a director but of the group of companies of which that company forms part.
Pennycuick J said: ‘ . . I must proceed to express a conclusion upon the contention that in creating the guarantee and legal charge, the directors were not acting with a view to the benefit of Castleford. That is a question of fact, and the burden of proof lies on the plaintiff company. As I have already found, the directors of Castleford looked to the benefit of the group as a whole and did not give separate consideration to the benefit of Castleford. Mr Goulding contended that in the absence of separate consideration, they must, ipso facto, be treated as not having acted with a view to the benefit of Castleford. That is, I think, an unduly stringent test and would lead to really absurd results, i.e. unless the directors of a company addressed their minds specifically to the interest of the company in connection with each particular transaction, that transaction would be ultra vires and void, notwithstanding that the transaction might be beneficial to the company. Mr Bagnall for the bank contended that it is sufficient that the directors of Castleford looked to the benefit of the group as a whole. Equally I reject that contention. Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interest of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. If that is the proper test, I am satisfied that the answer here is in the affirmative.’
Pennycuick J
[1970] 1 Ch 62, [1969] 2 WLR 791, [1969] 2 All ER 1185
England and Wales
Citing:
Distingished – In Re Lee, Behrens and Co Ltd ChD 1932
The Court was asked whether an agreement by the company to pay an annuity to the widow (a shareholder) of a former managing director of the company was ultra vires.
Held: Eve J set out three applicable tests: ‘But whether they be made under an . .
Cited by:
Cited – Official Receiver v Stern and Another CA 20-Nov-2001
The director appealed against a 12 year disqualification. The basis of the disqualification was unlawful trading to the detriment of creditors, and taking excess drawings. . .
Lists of cited by and citing cases may be incomplete.
Company
Leading Case
Updated: 14 November 2021; Ref: scu.181878