Is “this transaction may have been unlawful, but we could have done it this way” a defence to a breach of duty claim?

Possibly, it turns out.

A company director successfully appealed a summary judgment that he pay equitable compensation of £13,149,479 on the basis he had procured that the company paid that sum against sham invoices. These invoices were apparently for Research & Development, but in fact were to procure payments from the Company to the shareholders to evade corporation and income tax. The company received no benefit from these payments.

Mr Patel accepted procuring these payments amounting to a breach, but argued that the shareholders would (and could) have procured these sums were paid out in a perfectly lawful way meaning his breach in fact caused no loss. A critical point underpinning this was whether it was possible to deduct a hypothetical payment, given that no dividends had actually been paid. In AIB Group (UK) Plc v Mark Redler, the Supreme Court held that the amount of equitable compensation payable where funds had been misappropriated might not necessarily be equal to the amount of the payment.

Although clearly sceptical of the defence, the Court of Appeal was simply concerned with an appeal of summary judgment. Summary judgment was only available if the respondent had no reasonable prospect of defending the claim at trial, and here the Court of Appeal was not prepared to go so far as to say the defence was unsustainable.

20 years ago a similar defence run by a director in Bairstow v Queens Moat Houses Plc, failed. Leave to appeal to the House of Lords had been given before the claims were then settled. Equitable compensation is a key remedy sought against directors and the principles behind it have been developing since then. Even if this defence may look improbable, or even unrealistic, this certainly looks to be an area to keep an eye on.

Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291

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