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Directors decision to swap debt for shares is declared breach of fiduciary duty

11 April 2017

A decision made by a group of directors has been set aside as the court held that they had acted in breach of their fiduciary duties by swapping the debt owed to a terminally ill director in return for shares in the company.

In the case of Power Adhesives Ltd v Stephen James Sweeney & Others [2017] EWHC 676 (Ch), the court granted a declaration to the claimant company that a decision made by a group of directors could be set aside due to breaches of their fiduciary duties.

The claimant was concerned because it had been indebted to a terminally ill director in the sum of £490,000 so the directors passed resolutions which effectively swapped the debt for 490,000 £1 B shares. The directors at the time had taken family tax planning advice from accountants but did not appreciate the effect of the decision on the remaining shareholders or the tax implications of the decision.

The judge considered that the principle from the case of Re Hastings-Bass that failing to take account of a relevant or irrelevant factor, merely makes a decision voidable, providing it also amounts to a breach of a fiduciary duty” applied to the present case and declared the decision set aside. 

Directors should be cautious when seeking to rely fully on professional advice as simply seeking advice will not necessarily mean that they have discharged their fiduciary duties and should consider all factors when making decisions. 

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