Property Joint Ventures – What could possibly go wrong? Part 2

In the second of a series of property joint ventures going wrong, we look at the recent case of Nexbell Ltd in which a lease granted by the sole director of a company to himself was void, on the basis that it was granted not for the benefit of the company but for the sole director's benefit in a dispute between shareholders.

There is a lengthy background to the dispute. Mr Chohan and Mr Ved agreed to purchase a commercial property via a joint venture company as an investment. The property was, at the time it was acquired, occupied by another company owned by Mr Ved under a short-term lease. Mr Ved was initially the sole shareholder and director of the JV company. After various share transfers, Mr Ved became the sole legal shareholder, but he held 50% of the shares on trust for Mr Chohan's wife. There was a subsequent falling out between the parties, which has been the subject of much litigation.

The latest chapter concerns Mr Ved's decision to grant, on behalf of the JV company and in the context of the acrimonious dispute, a new lease to himself on better terms than the previous lease in place (the "New Lease"). In particular, the New Lease was protected by the Landlord and Tenant Act 1954, whereas the original lease was not. The Court found that this was done to give Mr Ved additional leverage in the dispute with Mr Chohan. It was therefore held that entering into the New Lease was a breach of Mr Ved's duties as a director of the JV company, under s.171(b) of the Companies Act 2006, in that the New Lease was not entered into for the benefit of the JV company and its members as a whole.

The next question addressed by the Court was whether, as the sole legal owner of the shares in the Company, Mr Ved was able to ratify the breach. It is an established legal principle that if all shareholders unanimously approve an action taken by a director, then that will provide a defence to a breach of duty claim (known as the "Duomatic principle" after the case in which this was decided). It was held that, in order for this principle to apply, the beneficial owner of the shares (Mr Chohan's wife) would also need to assent. It was not sufficient for the legal owner of the shares to consent. Mr Ved therefore could not rely on the Duomatic principle to ratify his actions.

Take-aways for those involved in joint-venture disputes are therefore:

• Don't assume that just because one party is a sole director that they can act in a way so as to give an advantage to themselves in a dispute. Every action taken must be in the best interests of the company for the benefit of its members as a whole.
• To rely on the Duomatic principle, the consent of any beneficial owners of shares is also required.