Chohan v Ved and others [2024] EWHC 739 (Ch)
There were two claims before the Court:
- Mrs Chohan's derivative claim under the Companies Act 2006 (‘CA 2006') on behalf of Nexbell Limited (‘the Company'), alleging breaches by Mr Ved of the duties he owed to the Company as its (at the material time) sole director. This claim was premised on Mr Ved procuring that the Company grant him a lease with security of tenure under the Landlord and Tenant Act 1954 (‘LTA 1954') at the Company's principal asset: the office premises at 5 Theobald Court, Elstree (‘5TC'). Mrs Chohan claimed that the lease was void ab initio or had since been avoided;
- Mr Ved's Part 20 claim for declaratory and other relief in relation to a joint venture agreement which he entered into on behalf of himself and his family with Mrs Chohan's husband on behalf of Mrs Chohan and their family, relating to the terms upon which Mr Chohan and Mr Ved agreed that 5TC would be occupied.
Factual Background
Mr Chohan and Mr Ved knew each other from childhood. From 2008 Mr Ved ran his accountancy business, Sterling Associates, from part of the premises comprising 5TC pursuant to a series of licence agreements with the then tenant of 5TC, Eutopia Ltd (‘Eutopia').
Mr Ved allowed Mr Chohan to operate from a room on the first floor of 5TC, initially for no charge.
In 2014, the owner of the freehold of 5TC decided to sell its interest. Mr Ved and Mr Chohan agreed that their families should buy it using a joint venture company. The joint venture vehicle was to be the Company, which had been previously incorporated for a different purpose.
Following the purchase, Mr Ved was registered as the Company's sole director and shareholder, having been allotted 1 subscriber share and 99 further shares. He transferred 50 shares to his wife, on the basis of the understanding or agreement that 50% of the shareholding would be beneficially held for Mrs Chohan.
5TC was to be purchased with a loan funded by each family equally. Shortly after 5TC had been purchased by the Company, Mr and Mrs Ved each declared a trust of 25 shares in favour of Mrs Chohan, who thereby became the beneficial owner of 50% of the Company. The parties recognised that there was an oral joint venture agreement concerning 5TC (‘the JVA'), but disputed its terms, in particular in relation to their occupation of 5TC.
When 5TC was purchased, there remained some time to run on Eutopia's lease. It was decided that Eutopia's lease would be surrendered to the freehold owner, who would then grant a new lease to Mr Ved immediately before the sale of the freehold to the Company, subject to that lease.
The freehold owner granted a 5 year lease to Mr Ved t/a Sterling Associates before the sale (‘the Original Lease'), which was contracted out of the security of tenure provisions of Pt II LTA 1954. On the same day the Original Lease was granted, the Company exchanged contracts to purchase the freehold interest in 5TC.
After the acquisition completed, Mr Ved/Sterling Associates granted Mr Chohan a licence to occupy part of the first floor of the premises.
The parties wished to find sub-tenants for the ground floor of 5TC. However, it became clear that Mr Ved could not grant a 5-year sub-lease because the Original Lease was now shorter than that.
The parties' relationship then began to sour. Ultimately, Mr Ved procured that the Company grant him a new lease for a term of approximately 6 years (‘the New Lease'). This was on terms advantageous to Mr Ved. The New Lease extended the term of the Original Lease and was largely in the same terms except that it now included the security of tenure provisions of LTA 1954 and included a tenant-only rolling break clause.
The Claims
With regard to Mrs Chohan's derivative claim against Mr Ved, the only issue was whether the Court should make the declaration sought – that the New Lease was void, or the Company was entitled to and did avoid the New Lease.
The Court held:
- Pursuant to s.171(b) of CA 2006, Mr Ved owed the Company a duty to exercise his powers for the purposes for which they were conferred;
- Pursuant to s.172 of CA 2006, he was required to act in a way that he, in good faith, he considered would be most likely to promote the success of the Company for the benefit of its members as a whole;
- These duties were fiduciary in nature and in order to establish breach, Mrs Chohan was required to show more than incompetence (Extrasure Travel Insurances Ltd and anr v Scattergood and anr [2003] 1 BCLC 598);
- When Mr Ved granted himself the New Lease with the benefit of statutory security of tenure, he knew he was procuring for himself a material advantage over and above that which he previously had, and over and above that to which he was entitled under the JVA. He knew that by so doing, he would gain an indefinite right to remain at 5TC in circumstances where his occupation could only be brough to an end by the Company if one of the limited statutory grounds could be proved. He did this because his relationship with Mr Chohan had irremediably broken down and he wished to place himself in the best possible position;
- 171(b) CA 2006: Applying the Extrasure test: (i) the relevant power was the Company's power, as the freehold owner, to grant leases of 5TC; (ii) the proper purpose was obtaining a rental income for the Company without unduly imposing an obligation upon it to comply with LTA 1954 to regain possession; (iii) the substantial purpose for which Mr Ved in fact exercised the power was to safeguard his personal position as tenant, providing him and his business with statutory protection as well as the upper hand in negotiations with Mr Chohan; (iv) Mr Ved's exercise of the power was not for a proper purpose. He therefore acted in breach of his duty under s.171(b) CA 2006;
- 172(1) CA 2006: The test was whether the director honestly and subjectively believed that his act or omission was in the company's interest (Re Regentcrest plc v Cohen [2001] 2 BCLC 80); but where there was no evidence of actual consideration by the director of the best interests of the company, whether an intelligent and honest man in the position of the director of the company could, in all the circumstances, reasonably have believed that the transaction was for the benefit of the company (HLC Environmental Projects Ltd [2014] BCC 377). The Court held that there was no evidence of Mr Ved actually considering whether the entry into the New Lease was in the best interests of the Company. The test was therefore objective. An intelligent an honest man in Mr Ved's position would not have altered the terms of the Company's lease from a contracted-out to a contracted-in lease. Mr Ved was in breach of his duty under s.172(1) CA 2006.
Mr Ved sought to rely on the principle established in Re Duomatic Ltd [1969] 2 Ch 365 – that where it can be shown that all shareholders who have a right to vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in a general meeting would be. In certain circumstances, therefore, a director may have a defence to a breach of duty claim if he can show that his actions were assented to by all the company's shareholders. Mr Ved suggested that he and his wife, as the registered shareholders of the Company, assented to the Company entering into the Lease.
The Court stated:
- There was no evidence of Mr Ved consciously considering and ratifying the decision on behalf of the shareholders or it being more than ‘internal decision'; nor was there evidence of Mrs Ved having knowingly assented to the Company entering into the New Lease;
- On the facts of the case, unanimity required the assent of the beneficial shareholders – including Mrs Chohan. Such consent was absent.
Accordingly the Duomatic principle did not assist Mr Ved.
Conclusion
The Court therefore decided that Mrs Chohan was entitled to a declaration that the grant of the New Lease by the Company to Mr Ved was null and void.
Mr Ved's Part 20 claim sought declaratory relief. However, both parties recognised in closing submissions that it would be more appropriate for them to consider the Judge's factual findings before seeking any further order or declaration from the Court.
This case contains a useful exploration of the extent of the Duomatic principle, particularly in the property context. It will be important for parties seeking to invoke it to adduce evidence of shareholder assent to the relevant matter. The decision serves as a useful reminder that the Court may decline to permit reliance on the principle where such evidence is unavailable.
It also demonstrates that in certain circumstances a breach by a director of his or her duties provides a ground upon which a lease may be declared void.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.