Commercial Court: shareholders' agreement did not impose duties on company director

The unreported case, in which the commercial court held that a shareholders' agreement did not contain an implied term requiring a director to obtain his company's compliance with that agreement, demonstrated "the importance of the legal distinction between companies and the individuals that undertake acts on their behalf", said Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com.

"Just because an individual might habitually represent a company, that does not mean that he or she will assume personal obligations under agreements," he said. "Where claims are brought, those pursuing the claims need to be very careful to ensure that they claim against the right parties in the right capacities. Getting this wrong can be fatal."

Courts have limited powers to imply terms into contracts where the existence of those terms is necessary to enable that contract to be performed effectively. In this case the claimant, an investment vehicle called Liberty Investment Ltd, tried to argue that company director Karl Sydow had breached an implied term of cooperation. At the same time as Liberty applied to amend its claim to refer to the implied term, Sydow applied to have the case struck out.

Sydow was both the director of a company, and the sole shareholder in and controller of another company which was the majority shareholder of the first company, according to a summary of the case on Lawtel. The first company's articles of association granted Sydow control of its board. Liberty subscribed for a minority shareholding in the company under a shareholders' agreement between it, Sydow and the companies. That agreement required each shareholder to act to prevent the company taking on expenditure or debt of more than £100,000 without Liberty's written consent.

Claiming a breach of that agreement, Liberty began a claim against Sydow personally for failing to act to prevent the expenditure. Later realising its error, it applied to amend its claim on the grounds that Sydow himself was not actually a shareholder in the company, but rather the controlling mind of the company that was the shareholder. Instead, a term should be implied into the agreement requiring Sydow to cooperate in procuring the company's compliance, as both a director of that company and the sole shareholder of the corporate shareholder. Sydow argued that amending the claim in this way would result in Liberty having no cause of action against him, meaning that the claim should be struck out altogether.

According to the Lawtel case summary, the commercial court sided with Sydow. It found that Liberty's argument potentially confused what was "practically necessary" with what was "legally necessary for a company to perform its obligations". The implied term may have made Liberty's case easier, but that did not mean that Sydow was "personally" liable for the actions he took on behalf of the company, the court said.

"Looking at the agreement as a whole it seemed that the purpose was to allocate the balance of power, giving control and rights to [Sydow] and his connected companies and giving certain protections to [Liberty], which was a matter of commercial negotiation," the court said, according to the Lawtel summary. "The parties had been advised by skilled legal advisers and there was nothing to displace the assumption that the allocation of power was as it appeared on the face of the contract."