Auden McKenzie v Patel

Until the Court of Appeal recently decided Auden McKenzie (Pharma Division) Ltd v Patel,1 the equitable liability of a company director to compensate the company for misapplying company assets was considered stable and certain. Directors were liable to restore assets they misapplied or their value in money, assessed as of the date of judgment. Authorities specifically on unlawfully paid dividends had decided that those liabilities are not subject to reduction or elimination by factual findings that the company suffered no “loss” because, had the directors stuck to their duties, the company would no longer have held those assets in any event. However, the equitable liability of directors for misapplying company assets is now unstable and uncertain, since Auden McKenzie decides that such a reduction or elimination of directors’ liability may be maintainable in law.

Mr and Ms Patel were brother and sister. They were the sole directors and the sole shareholders of the claimant company at all relevant times. Those relevant times spanned five years of frauds practised by Mr Patel on the company, evidently without his sister’s knowledge. Between 2009 and 2014, Mr Patel procured three Dubai companies to raise fake invoices for payment of “research and development” work supposedly done. In all, Auden McKenzie paid £13,763,452 against these invoices. The events came to light through investigations by Her Majesty’s Revenue and Customs in 2015, by which time the company had been sold to a new owner (Chilcott UK Ltd) unaware of the frauds or the investigations.

The company sued Mr and Ms Patel, pleading claims for “damages and/or equitable compensation for breach of fiduciary duties” and proprietary relief in respect of the “extracted sums and/or their traceable proceeds”. It afterwards claimed summary judgment on the former claim in the sum of £13,149,479 plus interest against Mr Patel only. He opposed summary judgment, first, on the basis of the Re Duomatic Ltd 2 principle (allowing the approval of all members of a company in a general meeting to ratify a breach of fiduciary duty)—an argument that was bound to fail, since these were fraudulent transactions, not honest lawful transactions. He also opposed the claim with an argument turning on the word “compensation” in the label “equitable compensation”. Mr Patel asserted that, if the payments had not been made unlawfully, he and his sister as shareholders would have caused the company to make equivalent payments to themselves as dividends or in some other lawful manner, such that the company “could show no loss flowing from” the payments. The first instance judge rejected that argument as well and entered summary judgment.3 On appeal, David Richards LJ (with whom Lewison and Newey LJJ concurred) agreed that that objection was unsustainable in point of fact.