The importance of early advice: GQA Qualifications Ltd v Clayton

In this English case of UK-wide significance, a company brought various claims against its former CEO, including for breach of his fiduciary duties.

The background

GQA Qualifications awards formal qualifications across a number of industries. Its memorandum of association required all of its profits to be put back into the business, rather than being distributed to its members. Over the years, the business expanded: its turnover in 2003 was approximately £310,000, and by 2023 this had grown to over £4 million. All of its directors apart from the CEO (who were all also shareholders) proposed a scheme to distribute these surplus profits to themselves, by awarding retrospective performance bonuses and transferring assets to a new for-profit parent company.

The CEO, Michael Clayton, considered that this was not in the company’s best interests. He consulted a former solicitor, who advised that the other directors may be acting fraudulently and in breach of their director’s duties. On that advice, Mr Clayton advised a number of parties (including GQA’s regulators and some clients) that his fellow directors were being investigated for fraud, and that he intended to suspend them and ultimately remove them from office. Before he could do so, GQA removed him from office and raised proceedings in the High Court of England & Wales.

Specifically, GQA brought various claims, including for breach of his employment contract, breach of confidence, and (most interestingly for our purposes) breach of his fiduciary duties.

The decision

The court held that Mr Clayton had acted contrary to s 171(a) of the Companies Act 2006, but had not acted in breach of his duty under s 172.

The former section required him to act in accordance with the company’s constitution. Mr Clayton had no power to suspend the other directors.

The latter section required him to act in the way he considered, in good faith, would be most likely to promote the success of the company for the benefit of its members. This duty requires directors to act honestly. The court found that Mr Clayton’s belief about the intent of the proposed scheme was genuine and strongly held, and that he was motivated by a desire to stop the other directors from doing something which he considered was for their personal benefit. Importantly, in acting on the legal advice he received, he had turned his mind to what he considered would be most likely to promote the success of the company. He was also acting in line with the terms of GQA’s memorandum.

Conclusion

The lesson from this case is one that is valid in many different situations: company directors should take professional advice at an early stage.

Of course, directors cannot act blindly on legal advice, and must still apply their minds to what is in the company’s best interests. But taking advice, and relying on it where it was reasonable to do so, would have been a good way to demonstrate they were acting honestly and in good faith, as Mr Clayton was able to do here.

If you would like to have a further discussion about any of these issues, or other insolvency-related matters, please contact our Commercial Disputes and Restructuring and Business Advisory teams or your usual Shepherd and Wedderburn contact.

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