The recently heard case in the Chancery Division of Haysport Properties Ltd and another v Ackerman  EWHC 393 (CH) provides a stark warning regarding the importance of directors adhering to their fiduciary duties, particularly in respect of transactions involving other companies or entities that they have an association or connection with. In addition, the case also dealt with the issue of whether the claim should be statute barred under the Limitation Act 1980.
Mr Ackerman, a well-known property magnate, was approached in 2005 in connection with the purchase of some commercial and residential properties that formed part of the “Liberty One” development. The properties were to be purchased via an offshore company named New Liberty Property Holdings Limited (“NLPH”), which was wholly owned by a discretionary trust of which Mr Ackerman was a beneficiary. Mr Ackerman was not a director of NLPH but was the driving force behind the deal.
Mr Ackerman was also at this time the sole active director of both Haysport Properties Ltd and (“Haysport”) and Twinsectra Limited (“Twinsectra”), both of which were subsidiaries of Delapage Limited (“Delapage”), a charitable company that was incorporated to gift excess profits generated by its subsidiaries to charitable causes. The other director of both Haysport and Twinsectra was Mr Ackerman’s sister-in-law but she was submissive to all that Mr Ackerman did.
In connection with NPHL’s financing of the aforementioned acquisition, Mr Ackerman caused both Haysport and Twinsectra to secure certain assets they held in respect of a £10m million bank liability owed by NLPH (as NPLH had no assets of significance). The (meagre) consideration given to Haysport and Twinsectra in return for the provision of this security was £25,000, which was found never to have been paid. As well as that, Mr Ackerman caused Twinsectra to loan £4 million to NLPH against unsecured loan notes carrying an interest rate of 8% and which, again, were never repaid.
NLPH eventually entered into insolvent liquidation in December 2009 and, in order to prevent the enforcement of the bank’s security, Twinsectra had been paying interest to the bank in respect of the debt owed by NLPH. Mr Ackerman eventually resigned as a director of Haysport and Twinsectra in 2011 following an intervention by the Charity Commission in respect of irregularities concerning Delapage.
Haysport and Twinsectra subsequently brought proceedings against Mr Ackerman alleging that he had breached the fiduciary duties he owed to Haysport and Twinsectra and that he should (i) repay the £4 million loan made by Twinsectra (together with the interest accrued thereon) and (ii) indemnify Haysport and Twinsectra for all other losses that they suffered as a result of Mr Ackerman’s breach of his fiduciary duties in respect of the security that Haysport and Twinsectra each provided and the loan provided by Twinsectra.
In ruling in favour of Haysport and Twinsectra, the judgment found that Mr Ackerman was “hopelessly conflicted” and that he had clearly breached the fiduciary duties he owed to both Haysport and Twinsectra. Despite Mr Ackerman’s assertion that he had considered the commercial benefits that Twinsectra and Haysport would derive from entering into this transaction, the judgment found that there was “no real incentive” for either of them in doing so. Contrarily, Twinsectra would be an unsecured creditor behind a large queue of secured lenders in respect of the £4 million loan that it made. Whilst this was clearly an attractive venture for NLPH, the same could not be said for Twinsectra and Haysport and Mr Ackerman had not fully evaluated the evident risks that they would each be subjected to.
In respect of whether the claim was deemed time barred under the Limitation Act 1980, as the loans and security were granted to a party controlled by Mr Ackerman, they fell within section 21(1)(b) (recovery of trust property) of the Limitation Act 1980, and as such the limitation period would be disapplied. In addition, as Mr Ackerman had a duty to disclose his breaches of duty, and he had failed to do so, sections 32(1)(b) and 32(2) of the Limitation Act (deliberate concealment and deliberate breach of duty) applied and consequently the limitation period was disregarded.
The case is a salient reminder for directors of their need to fully evaluate the benefits and risks of any transaction and to avoid having their judgement clouded by the interests of any other company that they are involved with. Company directors should always be advised to record in detail the factors they have considered when reaching their decision, so that they can be seen to be acting so as to promote the success of the company, particularly in cases involving connected parties. The judgment illustrates that courts will look to assess whether directors have exercised independent judgement (and, where appropriate, sought independent advice) in respect of each company that they are representing. The judgement also highlights that in claims involving breach of duty, it is not always clear cut as to whether such claims will be statute barred under the Limitation Act 1980.
This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Elizabeth Shaw on 020 7955 1456.