Fairford Water Ski Club Ltd v Cohoon

In Fairford Water Ski Club Ltd v Cohoon & Anor [2021] EWCA Civ 143 the Court of Appeal allowed an appeal against the decision of HHJ Russen ([2020] EWHC 290 (Comm)) holding Mr Cohoon and two other defendants liable for breaches of duty in proceedings brought by Fairford, a company of which Mr Cohoon had been a director.

Fairford ran a members’ water skiing club. Mr Cohoon had also been concerned in a partnership called Watersports which ran a water skiing school and sold water skiing equipment, operating from a building which was leased from Fairford as part of a management agreement with Watersports. As Males LJ noted,

“The two businesses were independent of each other but…they were ‘somewhat intertwined’ reflecting, no doubt, the informal way in which they were run, without rigorous attention to the requirements of company law. The Club’s day to day administration was conducted from Watersports’ shop premises, with Craig [Cohoon] and his son Scott effectively running the Club’s business as well as that of Watersports. That remained the position until January 2017, when new directors were appointed and Craig resigned as a director of the Club.”

The judge at first instance found that there had been a conflict of interest that had not been properly declared. The Court of Appeal reversed that finding, holding that Mr Cohoon had sufficiently declared the nature of his interest in the management agreement at a board meeting in January 2007, noting in doing so that the purpose of s 317 Companies Act 1985 (then applicable) was to ensure disclosure of the director’s interest; it was not directed at whether any contract was in the company’s interest, which was covered by different statutory or fiduciary duties.

Dealing with the language and purpose of s 317 Males LJ identified six points which he considered relevant:

1. The terms of the section were wide, so could apply to any kind of interest, direct or indirect, which a director might have in a contract or proposed contract with the company of which he was a director. The nature of the declaration which the director was required to make depended on the nature of the interest and the context. If the nature of the director’s interest was clear and obvious, as in the case of an uncomplicated contract between the company and the director, very little may need to be said, but if the director’s interest were more indirect, a fuller explanation may be necessary. What was required was a clear declaration so that the board was fully informed of the real state of things.
2. The declaration had to be made at a board meeting. Declarations outside a board meeting did not count; and in contrast with the position under the 2006 Act, a declaration had to be made, even if the interest was already known to the other directors.
3. Disclosure should generally be made before the contract was concluded. The reference to a “proposed contract” contemplated that the terms of the contract might not necessarily have been finally settled by the time of the board meeting at which the declaration was made.
4. In the case of a proposed contract, the declaration had to be made “at the meeting of the directors at which the question of entering into the contract [was] first taken into consideration.” The question of entering into a contract could be considered over a series of board meetings. If so, the declaration had to be made at the first such meeting, but need not be repeated at subsequent meetings.
5. A general notice under subsection (3) could be given in very general terms. It was sufficient for the director to give notice that he was a member of a specified company or firm and was to be regarded as interested in any future contract which might be made with that company or firm.
6. The purpose of s 317 was to ensure disclosure of the director’s interest in a contract or proposed contract. It was not concerned with whether entering into the contract was in the company’s interest, as to which there were other statutory and fiduciary duties.

Having regard to those factors and applying them to the facts of the case, the court concluded that the disclosure made by Mr Cohoon had been sufficient to comply with s 317.

Whilst the judgment deals with the scope of s 317 Companies Act 1985, it is plainly of relevance to its successor, s 177 Companies Act 2006. The judge found it unnecessary to deal with submissions as to the potential application of s 1157 Companies Act 2006 to claims such as this but observed that, “if there was a breach of…duty of disclosure, it was of a highly technical nature,” which “might suggest that there was a compelling case for relief under section 1157.”