Director acting in good faith – legal implications

Reported case decisions can be interesting for any number of reasons – interesting facts, interesting legal points, high profile characters and so on. Football related cases are always intriguing as many football clubs are not always run like other businesses. This recent case, on what appear to be straightforward facts, is worth looking at, and

Home » commercial law » Director acting in good faith – legal implications

Reported case decisions can be interesting for any number of reasons – interesting facts, interesting legal points, high profile characters and so on. Football related cases are always intriguing as many football clubs are not always run like other businesses.

This recent case, on what appear to be straightforward facts, is worth looking at, and also because it’s local, involving Watford Football Club.

In simple terms, you may ask, why did this case ever reach court ? This is because, on the face of it, a commercial lender decided to lend several million pounds to a limited company which happened to be a football club. The company has only repaid part of the loan, with a  balance of some £900,000.00 still due. Seems simple and clear – if the limited company is not insolvent, it should repay the loan.

Cases are sometimes disputed just because of value

First and perhaps fundamentally, with a  debt of this amount, if there are any legal arguments available, and let’s face it, even if the arguments are weak, there are usually some that can be put forward, a debtor may decide it’s worth disputing, not least perhaps to try and get the creditor to negotiate to accept a lower amount. My point is that the value of a dispute is always a very significant factor, from start to finish.

The defence – alleged lack of authority, actual or apparent

In this case, the limited company owning Watford Football Club put forward a defence based largely on the basis of alleging that the former owner of the club, Laurence Bassini, was an all round “bad egg” (more on Mr Bassini and Watford Football Club here). They argued that the claimant lender either knew or ought to have known that Mr Bassini was not acting in the best interests of the club and that he could not consequently have actual authority and that Mr Bassini was acting against Football League rules. On the face of it a tall order, but an arguable defence perhaps, subject to compelling evidence. In the event, even though the lender paid the loan money to an entity other than the football club the evidence was not enough to succeed as a defence.

Section 172 of the Companies Act 2006 – acting in the best interests of the Company

The defendants relied on section  172  of the Companies Act on the basis that the loan transactions were manifestly not in the best interests of watford Football club, bearing in mind this section requires directors to act in good faith

Putting it bluntly, these sorts of arguments were always going to face an uphill struggle – in simple terms, they were dealing with the de facto Managing director of a limited company and as such, it is generally difficult to argue that a Managing director does not have actual authority to bind a company.

The facts of the case are of interest in that the evidence showed that even though Mr Bassini apparently did not seek authority for his dealings over the loan from other directors, neither did he seek to deliberately conceal things. The case suggest that to make out the argument that the dealings were in breach of the duty of good faith, in turn giving rise to a successful argument that the Managing Director could not have had actual authority, deliberate concealment may be necessary.

In failing with the above arguments, the Court decided that Mr Bassini did have actual authority to enter into the loan arrangements. The upshot of this is that, when dealing with a Managing Director, whilst remaining cognisant of any factors that put you on alert, such as perhaps a highly unusual transaction, value or actual facts that make you worry,  you may generally take the view that such a person does have actual authority to deal with you.

Practical tips on director duty of good faith

The upshot of a case like this is that, if your company has a Managing Director and you want to limit his or her authority, you should think about how to do this and how to communicate this to 3 rd parties. Failing to do so may result in decisions being made  which may be legally binding but which the rest of the Board of directors might not necessarily sanction. Company law, of itself, offers little clear protection, and whether a director is acting in the best interests of a company may often be a moot point, so it’s important to have your own internal and external rules.

The other takeaway point is that, if you have a dispute over a significant amount of money or strategically important, there may be any number of technical legal points or issues which may assist your case. In these situations, it is often worth, at the very least, getting some good legal advice at the outset. It may also help your negotiating position.

bjone-sbGet in touch if you need further advice on how to deal with any of the issues raised here, whether as a preventative measure (always recommended) or if a  dispute has already arisen.

 

 

 

commercial law

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