28 September, 2021
In the recent matter of Tattersalls Limited v McMahon, the High Court examined the application of both agency law and the Companies Act 2006 (CA 2006) with regard to the potential liability of a company director.
Douglas McMahon (the Defendant) was a co-founder of Bluecrest Bloodstock Limited (Bluecrest) -a company formed with the intention of investing in horses. Bluecrest was, however, established on the premise that it would prove attractive to potential investors on the back of it achieving Enterprise Investment Scheme status (EIS). EIS is a government scheme that offers investors relief on investments in companies that have obtained the appropriate approval and certification from HMRC.
Prior to receiving EIS status, the Defendant attended an auction held by Tattersalls Limited (Tattersalls). Tattersalls had, in advance of the auction, agreed to provide Bluecrest with £300,000 of credit subject to a credit agreement. At said Auction, the Defendant purchased two horses.
Following the auction, Bluecrest failed in its goal of achieving EIS status and investment in the company was not forthcoming. Bluecrest was subsequently wound up without repaying the line of credit to Tattersalls. As a creditor, Tattersalls took ownership of the horses and then re-sold them at a later auction albeit at a lower price which led to Tattersalls bringing an action against the Defendant.
Contrary to Tattersall's position, it was the Defendant's belief that during the auction he was acting as a director of the company rather than as an agent and it was the Defendant that submitted the winning bid.
Tatteralls' conditions of sale formed the basis for the claim. Pursuant to Condition 5.4 of Tattersalls' Conditions of Sale:
"Unless there is in force a Purchasers Authorisation accepted in writing by [the Defendant] the highest bidder in the ring and any principal for whom he may be acting shall be jointly and severally liable under the contract of sale"
In this instance, no Purchaser's Authorisation had been provided by Bluecrest prior to the Auction therefore, both the Defendant and Bluecrest were jointly and severally liable for the price of the horses purchased.
It was held that the Defendant was personally liable for the purchase price of the horses plus the associated costs of sale (less the proceeds of re-sale).
The court found that, while a director's actions can bind a company there is a distinction between them acting on behalf of the company and performing the role of an agent. With particular regard to auctions, where a director is fulfilling a role of an agent (particularly where there is no evidence to suggest that they are not) Sections 40 and 43 of CA 2006 do not apply. In this instance, nothing in the evidence provided by the Defendant suggested that he acting as a director rather than an agent.
Whilst directors can bind a company, depending on the precise circumstances pertaining to their authority, their actions may be construed to be those of an agent. Therefore, directors and other representatives alike should ensure they proceed with care and that the capacity in which they are acting is agreed upon in writing between the parties.
The Commercial department at Forbes Solicitors are specialists in commercial agency and regularly assist in advising on and putting in place agency agreements.
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