Bhullar v Bhullar

is a leading UK company law case on the principle that directors must avoid any possibility of a conflict of interest, particular relating to corporate opportunities. It was not decided under, but is relevant to, section 175 of the Companies Act 2006.

Facts
Bhullar Bros Ltd was owned by families of two brothers. Each side owned 50% of ordinary shares. The directors were Mr Mohan Bhullar, his son Tim, Mr Sohan Bhullar and his sons Inderjit and Jatinderjit. The company had a grocery store at 44 Springwood Street, Huddersfield. It also owned an investment property called Springbank Works, Leeds Road, which was leased to a bowling alley business called UK Superbowl Ltd. In 1998 the families began to fall out. nb it was clear that the families were continuing their feud into the court. As John Behrens QC noted in the High Court (25.3.2002) at [9], "9. I was not impressed with any members of either of the 2 families or Mr Khela as witnesses. I did not form the view that they were trying to assist me by telling me what they could remember. Rather I think that their evidence was tailored to what they conceived to be their best advantage. As there are a large number of disputed factual issues in the case it is right that I should briefly give the reasons that led me to form this unfavourable view.

1. The case as a whole is rife with dishonesty right from the commencement of the business in 1964 to the present day. Thus Mohan and Sohan were convicted of dishonesty in the early 1960s. Very substantial sums of money have passed through the Company and not been recorded in the Company's books. Indeed I was told that the whole purpose of the red book was to record payments not otherwise recorded. There can, in my view be no doubt that all members of the family were aware of the practice and went along with it. Included within this were the substantial loans to members of the family such as Mr Khela and Santokh.

2. In almost every dispute as to the facts the evidence is divided on family lines. If the witnesses had genuinely been telling me what they remembered one would have expected some divergence from this.

3. Mohan and Sohan are both elderly and were giving evidence through interpreters. Proper allowance has to be made for that. However I felt that they were both evasive as witnesses and often refused to answer a question directly or answered a different question from the one that they were asked. I was in particular satisfied that Mohan was not telling me the truth over the red book and the entries in relation to the repayment of Mr Khela's loan.

4. Inderjit was in the witness box for nearly 2 days. He was caught out in at least 2 lies in relation to PSL. He signed a letter to the solicitors for PSL stating that the £20,000 had come from his own funds when it had not. The second lie was an attempt to obtain money by deception in the form of an increased dividend from Musefield's administrator. He plainly represented that BBL had paid out £30,000 and £2,500 in costs to PSL. He asked that BBL's proof of debt be increased by £32,500 when he knew perfectly well that BBL had not paid a penny of the debt or costs. A sum of £20,000 had been paid by Mr Majid and the costs met by Mr Khela.

5. Tim was in the witness box for more than a day. I thus had a good opportunity to assess him. Shortly after the litigation commenced Tim was prepared to install covert recording devices and to listen in to private conversations between Sohan and Inderjit and between the Group A shareholders and their lawyers for a period of over 6 months. Tim tended to answer questions put to him with short speeches designed to justify what happened. He did not answer questions directly. He was not caught out with lies in the same way as Inderjit but that does not mean that he impressed me any more. This is a case where almost nothing was committed to writing and thus there is less scope for such lies to be exposed. I felt he knew a lot more about the Santokh loan than he was having me believe. It was his case that for no apparent reason Inderjit told Mr Bones that the money had been repaid and gave him false invoice numbers to account for it. To my mind it is clear that the reason that a lie was told to Mr Bones was that the family wanted to keep the loan out of the books. Mr Bones spotted the payment in the bank account and thus some explanation had to be found. I think both Tim and Inderjit were fully aware that the loan had not been repaid and that Mr Bones had been told that it had.

6. Mr Khela had cost Sohan's family a huge amount of money. His evidence tallied with that of Inderjit in all material respects. His explanation for the repayment of the £99,459.49 seemed to me to be wholly incredible.

7. I formed less of an adverse view of Jatinderjit than some of the other members of his family; but in the end I felt his evidence was tainted with the same family loyalty as affected the remainder of the evidence."

To wit, at [283]-[286] Tim was found to have been covertly listening to the other side's conversations with a bug, and this was held to be relevant to the amount he could recover, according to Re London School of Electronics Ltd Mohan and Tim told the board they wished for the company to buy no further investment properties. Negotiations began to split up the company, but they were unsuccessful. In 1999, Inderjit went bowling at the UK Superbowl Ltd alley. He noticed that the carpark next door (called White Hall Mill) was on sale. He set up a company called Silvercrest Ltd (owned by him and Jatinderjit) and bought, but did not tell Bhullar Bros Ltd. But Mohan and Tim found out and brought an unfair prejudice claim (now s 994 Companies Act 2006) on the basis that Inderjit and Jatinderjit had breached their fiduciary duty of loyalty to the company.

Judgment
Jonathan Parker LJ held that there was a clear breach of the rule that directors must avoid a conflict of interest.

41. Like the defendant in Industrial Development Consultants Ltd v Cooley, the appellants in the instant case had, at the material time, one capacity and one capacity only in which they were carrying on business, namely as directors of the Company. In that capacity, they were in a fiduciary relationship with the Company. At the material time, the Company was still trading, albeit that negotiations (ultimately unsuccessful) for a division of its assets and business were on foot. As Inderjit accepted in cross-examination, it would have been "worthwhile" for the company to have acquired the Property. Although the reasons why it would have been "worthwhile" were not explored in evidence, it seems obvious that the opportunity to acquire the Property would have been commercially attractive to the Company, given its proximity to Springbank Works. Whether the Company could or would have taken that opportunity, had it been made aware of it, is not to the point: the existence of the opportunity was information which it was relevant for the Company to know, and it follows that the appellants were under a duty to communicate it to the Company. The anxiety which the appellants plainly felt as to the propriety of purchasing the Property through Silvercrest without first disclosing their intentions to their co-directors – anxiety which led Inderjit to seek legal advice from the Company's solicitor – is, in my view, eloquent of the existence of a possible conflict of duty and interest.

42. I therefore agree with the judge when he said (in paragraph 272 of his judgment) that "reasonable men looking at the facts would think there was a real sensible possibility of conflict".

Brooke LJ and Schiemann LJ concurred.