Commercial Update - February 2007
Introduction
Neither a borrower nor a lender be" and certainly don't turn a blind eye to it.
Directors are reminded of their joint and several liability in respect of loans to their fellow directors .
Section 330 of the Companies Act prevents a company making loans to its directors. There are some limited exceptions which include, for example, short term loans under £5,000.
A director who receives a loan in breach of section 330 and any director who authorises that loan must account to the company for any gain made and indemnify the company for any loss resulting from the loan. Further, a director commits a criminal offence when he knowingly authorises or permits the company to breach section 330.
The recent case of Neville (as administrator of Unireg Ltd.) and Anor v. Krikorian and Ors extended the potential liability of directors by stating that knowledge may be sufficient to hold a director responsible for any breach of section 330. In this case several loans had been made to a director by the company. A second director was aware that there was a loan account although he did not know the details of individual loans made. However, the loan account had been published in the accounts and the auditors report had been approved by the directors.
The court held that directors cannot escape responsibility for contents of a company's accounts by their own inactivity. Ignorance is not a defence. The directors were therefore held to know about the loan arrangements because these were disclosed in the accounts. Accordingly the Court of Appeal found that the second director was jointly and severally liable to repay all sums loaned from the time he became aware of the existence of the loan account even though he was not aware of the individual loans being made.
The second director was also found to be in breach of his duty as a director to the company for failing to take the necessary steps to recover the sums loaned on becoming aware of them. Consequently he was held liable to repay the company the difference between what could have been recovered at the time he became aware of the loan account and what could now be recovered.
Impact of the case
Directors are reminded of their joint and several liability in respect of loans to their fellow directors (even where there is no knowledge of the individual payments), their duty to recover the indebtedness and finally their duty not knowingly (or recklessly) to approve accounts which do not comply with the Companies Act. A director cannot put his head in the sand and choose to ignore the matter: he must, if he is to avoid liability, take positive steps to put a stop to any such breach.
Entire Agreement Clauses – Why?
Typically an Entire Agreement Clause will say that the agreement in question is the entire agreement between the parties and supersedes all previous agreements in relation to that particular subject matter. The clause helps to provide certainty of agreed terms by preventing any representation made by a party during the course of negotiations from becoming a term of the contract.
However, a recent case has reconfirmed that an entire agreement clause can defeat not just a representation made during the course of negotiations, but also an existing formal written agreement.
The case of Ravennavi SPA v New Century Shipbuilding concerned an Option Agreement for a shipbuilder to build 2 ships by 2007 or 'earlier if possible'. The option was exercised and the parties entered in to agreements to build the 2 ships. However, the new agreements simply required the ships to be built by 2007 and did not include the 'earlier if possible' wording. The new agreements contained Entire Agreement Clauses. The buyer brought a claim against shipbuilder claiming that it could, and should, have built the ships earlier.
The High Court decided that although the Option Agreement did oblige the shipbuilder to offer earlier delivery dates if possible, the Entire Agreement Clauses in the later agreements had the effect of replacing all the provisions of the Option Agreement. The buyer lost the case.
Impact of the Case
Both buyers and sellers need to be aware that an Entire Agreement Clause may have the effect of overriding any previous agreements between the parties. This may be acceptable, but equally it may not be the intention of the parties.
When negotiating and drafting agreements where there is an existing relationship between the parties need to be clear which existing contracts(if any) are intended to remain in force and which are intended to be caught by an Entire Agreement Clause and therefore be overridden. It may be sensible to state in an Agreement exactly which contracts (if any) are intended to fall outside the scope of the entire agreement clause and remain in force. Alternatively, it may be preferable to restate the continuing terms of an existing contract in a new contract. Either way, the parties need to ensure that the terms agreed are certain.
Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.
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