Failed claims against a director: whose goodwill is it anyway? - Reynolds v Stanbury

read time: 5 mins
26.01.22

In the recent decision of Mark Reynolds (Liquidator of CSB 123 Limited) v Caroline Stanbury [2021] EWHC 2506 (Ch) the High Court provided helpful guidance on the ownership of personal goodwill and directors' duties in the context of a transfer of business. The decision also highlights the importance of directors seeking professional advice, which can prove crucial when defending claims brought by office-holders.

Brief background

The factual background is set out in our article here. The liquidator of CSB123 brought a breach of duty claim against the company's former director, Caroline Stanbury, in respect of transfers of parts of the business to Gift Library.com Limited and Style Counsel Limited , the Newco, for no, or little, consideration. CSB123 was formerly known as Style Counsel Limited and we'll refer to the company as Style Counsel in this article. The restructuring process was led by a City law firm and accountants with the consent of Style Counsel's shareholders.

Claims for misfeasance

The Liquidator issued a misfeasance claim against the Director under section 212 Insolvency Act 1986 alleging, broadly, that by transferring the styling business to Newco and the handbag and jewellery business to Gift Library for no consideration, she was in breach of the duties she owed to Style Counsel as its director. Our article provides further commentary on the claims here.

The key, although not exhaustive, list of directors' duties are set out in sections 170 - 181 Companies Act 2006. In the present case, the Liquidator alleged that the Director breached the following duties in ceasing to work for Style Counsel and continuing in a personal capacity:

  1. to act in accordance with the company's constitution and exercise powers for the purpose for which they are conferred (s171);
  2. to promote the success of the company (s172);
  3. to exercise independent judgment (s173);
  4. to exercise reasonable care, skill and diligence (s174); and
  5. to avoid conflicts of interest (s175).

The decision

ICC Judge Barber heard the application in April/May 2021, considering as follows:

Directors’ duties

The judge stressed that not every directors’ duty is owed at all times and for all acts. Each of them must be considered in relation to a specific set of facts. She considered various authorities on directors' duties and noted in particular:

  • a director has a power to resign from office, which is not a fiduciary power, even if that resignation might have an adverse effect on the business (CMS Dolphin Limited v Simonet [2001] 2 BCLC 704);
  • when a director resigns for other reasons than to take over business of a company, but subsequently receives an order from a client of that company, there is no automatic breach of fiduciary duty (Island Export Finance Ltd v Umunna [1986] BCLC 460);
  • the ‘no conflict’ rule is a broad rule which must be applied with common sense and to situations resulting in a real conflict of duty and interest, and not to some theoretical conflict (Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606);
  • principles in relation to directors' duties must be applied with care to both facts and other principles, such as that of personal freedom to compete (Foster Bryant Surveying Ltd v Bryant [2007] 2 BCLC 239).

Personal goodwill

The judge considered in detail the concept of goodwill and when it vests in a director personally rather than in a company. Here, the Director’s position was that there had been no transfer from the company as all and any relevant value in the business lay in the personal goodwill of the Director, which was an asset belonging to her personally and not Style Counsel.

Firstly, the judge noted the following authorities and guidance on goodwill:

  • It was defined in Inland Revenue Commissioners v Muller and Co's Margarine [1901] AC 217 at 223-4 as: "… the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom.."
  • ‘The Valuation of Business Interests’ by Campbell and Johnson: "…[it] accrues to a specific person. It arises from his or her personal characteristics and attributes as evidences by particular abilities, particular physical characteristics, good name and reputation."
  • HMRC’s Capital Gains Tax Manual (CG68010 Goodwill) treats personal goodwill differently on a transfer of business in that, if the business is transferred as a going concern, personal goodwill will not be transferred to a purchaser unless specifically included in a contract.
  • In the Scottish case of Reid v Reid [1938] SLT 415, the court mentioned that such personal goodwill will often be vested in a highly personal professions, such as surgeons, artists or advocates.
  • the goodwill of a sole trader, who later incorporates their business as a company, is not automatically transferred to the company (Sofra Bakery Limited [2013] EWHC 1499 (Ch)).

The judge helpfully provided the following guidance on factors to consider when determining whether goodwill will attach to an individual or a company:

  1. whether the business itself is attached to an individual (i.e. their abilities, characteristics, name or reputation) or a company (i.e. its brand name, location, resources);
  2. whether the business would remain with the company in the event that the individual ceased to be employed by the company;
  3. whether customers engage with the individual or the company (with the individual relationship remaining a secondary issue); and
  4. whether the individual's name or the company would have any bearing on the customer's desire to carry out business with the individual.

In the case at hand, the judge was satisfied that the goodwill was attached to the Director personally and the incorporation of Style Counsel made no difference to the Director's clients as they continued to engage her directly.

Professional advice

The Director relied on professional advice of a reputable City law firm and the accountants when restructuring her businesses. Despite the Liquidator’s allegation that she failed to perform her director's duty (particularly to exercise independent judgment) and defer to them, the court was satisfied that it was responsible and reasonable for the Director to do so. The court went so far as to state that, even if the conclusions on the goodwill and valuation of Style Counsel were incorrect, the case was “plainly a case for liability to be excused under s.1157 of the companies Act 2006”.

Comment

The guidance in relation to personal goodwill in this case will be welcomed by both directors and office-holders as this aspect can often prove to be a highly contentious issue. Broadly, the test focuses on the assessment of the extent to which a company's existence, operation and prosperity depend on an individual. The decision also highlights that a common sense approach will be applied by courts when considering the principles on directors' duties in cases against directors. We discuss the claims and the court's decision in more detail here.

For further information on this article, please contact Cathryn Butler or another member of our Restructuring & Insolvency team.

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