The recent case of GQA Qualifications Ltd v Clayton has important lessons for directors and shareholders involved in disputes, says Alec Fair, an Associate in the Commercial Disputes team at UK law firm Shepherd and Wedderburn.
Disputes between directors and shareholders are at best an unwanted distraction, and at worst a threat to the company’s existence. They can arise for many reasons, but one of the more common is when one or more people feel that others are not acting in the company’s best interests. That was the situation in GQA Qualifications Ltd v Clayton, an English case with UK-wide implications.
GQA Qualifications awards formal qualifications across a number of industries. Its memorandum of association required all of its profits to be put back into the business, rather than being distributed to its members. Over the years, the business expanded: its turnover in 2003 was approximately £310,000, and by 2023 this had grown to over £4 million. All of its directors were also shareholders.
Every director with the exception of the CEO, Michael Clayton, proposed a scheme to distribute these surplus profits to themselves, by awarding retrospective performance bonuses and transferring assets to a new for-profit parent company.
Mr Clayton considered that this was not in the company’s best interests. He consulted a former solicitor, who advised that the other directors may be acting fraudulently and in breach of their director’s duties. On that advice, Mr Clayton advised a number of parties (including GQA’s regulators and some clients) that his fellow directors were being investigated for fraud, and that he intended to suspend them and ultimately remove them from office. Before he could do so, GQA removed him from office and raised proceedings in the High Court of England & Wales.
Specifically, GQA brought various claims, including for breach of his employment contract, breach of confidence, and breach of his fiduciary duties. It is the last of these that is most instructive in terms of the lessons that can be drawn.
One of two claims in this respect was that Mr Clayton had acted contrary to Section 172 of the Companies Act 2006. This required him to act in the way that he considered, in good faith, would be most likely to promote the success of the company for the benefit of its members.
The court found that Mr Clayton’s belief about the intent of the proposed scheme was genuine and strongly held, and that he was motivated by a desire to stop the other directors from doing something which he considered was for their personal benefit. In acting on the legal advice he received, he had turned his mind to what he considered would be most likely to promote the success of the company. He was also acting in line with the terms of GQA’s memorandum. The court therefore found that he had not acted in breach of his duty under s 172.
The fact that Mr Clayton took legal advice before acting, and the other directors did not, was influential in the court’s decision. And so the main lesson from this case is one that is valid in many different situations: company directors in disputes should take professional advice at an early stage.
Of course, directors cannot act blindly on legal advice, and must still apply their minds to what is in the company’s best interests. But taking advice, and relying on it where it was reasonable to do so, would have been a good way to demonstrate they were acting honestly and in good faith, as Mr Clayton was able to do here.
shepwedd.com.
