The Newgate Stud Co & Newgate Stud Farm LLC v (1) Anthony Penfold (2) Penfold Bloodstock Ltd (2004)
A director and agent of companies was in breach of the self-dealing rule because he failed to obtain informed consent to sales when partnerships in which he was interested acquired race horses from those companies.
The claimant companies (C) claimed against the first defendant director (D1) for breach of the self-dealing rule. C were companies which were beneficially owned by F, which held and ran F's horse racing and bloodstock interests. D1 had been the racing and bloodstock manager for C and a director of C. D1 was an independent contractor under a 1991 agreement and also traded on his own account buying and selling interests in mares. That business had been merged with his wife's bloodstock business and incorporated as the second defendant (D2). After the death of F, D1 had been removed as a director of C. C then alleged that two broodmares had been sold to partnerships in which D1 had a financial interest either directly or through the interest of his wife and that those interests were neither disclosed to nor approved by F. In relation to a third horse, given by F to D1's wife's father, C alleged that D1 had misrepresented the true position to F and concealed material points in breach of duty. C submitted that D1 was in breach of the self-dealing rule, which prevented a director of a company from dealing with the company without the informed consent of the shareholders; that D1's interests had been deliberately concealed from F; and that D1 had placed himself in a position of conflict between his duty as a director and manager and his personal interests and had used information acquired as a director for his own personal gain. D1 submitted that the sales of the two horses were made with the approval of F who knew of all the relevant circumstances and denied any misrepresentation or concealment in relation to the third horse, and argued that the claims were time-barred.
(1) D1 was subject to the self-dealing rule as a director and as an agent under the 1991 agreement owing fiduciary duties to C, with the result that any transaction between C and D1 would be set aside unless D1 could show that he obtained the informed consent of F. The rule was strictly applied, so that a transaction was liable to be set aside even if it was beneficial to the company, Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 applied. (2) D1 did not disclose to F his interest in the proposed purchase of the first horse and therefore did not obtain his consent to that transaction. D1 did obtain F's consent to bid for the second horse, but that consent was not given after full disclosure of all material facts. There was inadequate disclosure by D1 and the consent was not informed. C succeeded in their claims based on self-dealing in respect of the sales of the first two horses subject to the issue of limitation. (3) If the sales had been made directly to D1's wife as principal and not as nominee for D1, they would not have been automatically voidable by reason of the self-dealing rule, but the onus would have been on D1 to demonstrate that they represented fair dealing. The relationship between D1 and his wife's father, when the latter acquired an interest in the first horse, was not one which gave rise to such a conflict as to impose on D1 the legal onus of demonstrating that it was a fair dealing. (4) As the self-dealing rule applied to the acquisition by D1 of interests in the first two horses, the Limitation Act 1980 s.21(1)(b) would apply to some of the relief sought against him, JJ Harrison (Properties) Ltd v Harrison (2001) EWCA Civ 1467 , (2002) 1 BCLC 162 applied. In not disclosing to F prior to the purchase of the first horse that he was to be a member of the purchasing partnership, D1 was not acting in a way which he knew to be contrary to C's interests or a deliberate concealment of information which he knew should be disclosed. Likewise, in relation to the second horse, D1 did not deliberately conceal from F the existence of the partnership or the maximum price to which they might be prepared to bid, knowing that he should disclose those facts. Therefore D1 was not guilty of fraud or a fraudulent breach of trust within the meaning of s.21(1)(a). However D1 deliberately concealed from F the facts that D1 had entered into the contract as a purchaser of the first horse and had not disclosed it to F prior to the making of the contract within the meaning of s.32(1)(b) of the 1980 Act, Williams v Fanshaw Porter & Hazelhurst (2004) EWCA Civ 157 , (2004) 1 WLR 3185 considered. Accordingly the claim in respect of the first sale was not time-barred, but the claim in respect of the second horse was time-barred except to the extent that it came within s.21(1)(b). (6) The claim in respect of the sale of the third horse failed on the facts.
Judgment for claimants in part.