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Firm awarded compensation after director breached his duties

Posted: 12th December 2012   In: Corporate Commercial

A director has been ordered to pay compensation to his former company after breaching his legal duties.

The director, who had been chairman of a credit union business, breached his fiduciary duty when using a loan from the company to purchase a property.

The problem arose because he had a separate business interest with a property developer. He proposed a deal where he and the property developer would take out a loan of £100,000 from the credit union to purchase a number of flats.

The credit union would be entitled to use one flat as an office while the others would be leased by the director and the property developer. The credit union had an option to buy one of the flats or have the money paid back with interest. The company didn’t receive any legal advice and was never presented with a formal agreement for the option to buy.

It then transpired that the flats weren’t suitable for office use so the company asked for the loan to be returned.

By this time, the director’s relationship with the property developer had broken down.

The developer offered to pay back the credit union as long as the director signed over all his interests in the flats. The director refused to do this.

The court found that the director had breached his fiduciary and non-fiduciary duties. He had prioritised his own interests above those of his company. In doing so, he had exposed the company to unnecessary risk.

It was clear that no one with the director’s experience would have risked his company paying out £100,000 without first seeking legal advice, or enter into an agreement where the terms were not clearly set out.

He was liable for the loss of the £100,000 and would also have to pay interest on that sum at 3%.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any aspect of company law.