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Sole shareholder knowledge of breach was not corporate knowledge

Out-Law Analysis | 15 Mar 2018 | 4:17 pm | 3 min. read

ANALYSIS: A recent decision by the Judicial Committee of the Privy Council underlines the importance of statutory limitation periods and understanding restrictions on them, while also highlighting the differences between directors, shareholders and the company.

The case was a complex one looking at the question of when knowledge or discoverability by a shareholder of a breach of a company director's duty can be attributed to the company, particularly in the context of limitation.

The court held that there is no general rule that a shareholder's knowledge is automatically attributed to the company in relation to a breach of duty to the company by the directors even where, as in this case, there is only one shareholder. Instead, it found that there was "much to be said for adhering to the simple rule, based upon the separate personality of the company from even a sole shareholder, that shareholder knowledge of a breach of duty owed to the company by its directors, or the ability to discover the facts, is simply not to be attributed to the company at all, at least for as long as the allegedly delinquent directors retain control of it".

The Privy Council acts as the highest court of appeal for several Commonwealth countries, and is made up of some of the most senior UK judges. Although the case was heard by the courts of Trinidad and Tobago, and relates to that country's Limitation of Certain Actions Act 1997 (as amended), the relevant provisions are materially identical to those of the English Limitation Act 1980.

The dispute arose in connection with the $5 million investment by state-owned development company, Evolving Tecknologies and Enterprise Development Co. Ltd (Eteck), into IT services business Bamboo Networks Ltd (Bamboo). The decision to make the investment was made by Eteck's then directors, who remained its directors until October 2010. Eteck has a single shareholder, the Trinidadian minister of finance, in a corporate capacity rather than based on the individual holding the office. The investment failed, and the full $5m was lost.

On a change of government, a legal audit into Eteck's affairs was authorised which led to the directors being replaced and an action raised, in Eteck's name, against them in negligence, on the basis that there had been no sufficient prior due diligence to justify them taking the risk of committing to and in fact making the investment. The former directors said there had been no negligence and pleaded limitation.

Section 14 of the amended Limitation of Certain Actions Act provides that, where there is fraud, concealment or mistake, a period of limitation will not begin to run until the fraud, concealment or mistake are or could with reasonable diligence be discovered. Deliberate commission of a breach of duty when it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty. The company's case was that the former directors' breach was deliberate, although not dishonest.

The former directors' argument focused on the contention that a sole shareholder should have its knowledge attributed to the company because of the "fundamental principle of company law, and a primary rule of attribution, that the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company". In this case, the sole shareholder had sufficient evidence to make the alleged breach not only discoverable, but actually known.

The former directors also argued that the purpose of the Limitation Act was to prevent stale claims where those with both the ability and interest to cause the company to bring a claim had the necessary knowledge, or it was discoverable with reasonable diligence.

Although the Privy Council saw some attraction in what it described as a "finely balanced" argument, it preferred an approach based on the separate personality of a company from even a sole shareholder. Put another way, shareholder knowledge of a breach cannot be attributed to the company for at least as long as the directors allegedly in breach remain in that role. The panel of judges had "not been shown (and has not discovered) any case in which it has been applied, for limitation purposes, so as to attribute to the company a sole shareholder's knowledge of, or the ability to discover, a breach of duty owed to the company by its directors".

Although there is a general principle that unanimous shareholder decisions are treated as decisions or acts of the company, that does not follow where there is a sole shareholder or where the matter in issue is not a positive endorsement of an action but instead an attribution of knowledge in relation to a breach of directors' duties.

Moreover, directors' knowledge is attributed to a company because the director has a duty to report relevant matters to the company. Shareholders owe no such duty and there is no general rule of attribution of shareholder knowledge. In this case, even if the knowledge was attributable, the breach was nevertheless deemed not discoverable.

Craig Connal QC is a corporate litigation expert at Pinsent Masons, the law firm behind Out-Law.com.