Chohan v Ved: the High Court Ruling and what it means for directors

The recent High Court decision in Chohan v Ved reminds directors of the limits of their powers and highlights the:

• Importance of directors using their power for its proper purpose and adhering to their statutory duties
• limitations of the Duomatic principle
• The dangers of trying to rely on an oral joint venture agreement (“JVA”) for informal shareholder approvals.

Case overview

The parties involved in this case decided to purchase the freehold of 5 Theobald Court (“5TC”) via a special purpose vehicle, Nexbell Limited (“JVC”). The shares were to be held in equal shares between the two families. Mrs Chohan’s share was held on trust for her by Mr. Ved.

Mr. Ved, the sole director of JVC granted himself a favourable lease of 5TC (“new lease”).

It was alleged that, in granting the new lease, Mr. Ved breached his duties as a director by not exercising his powers properly, as required by law.

Mr. Ved attempted to defend his actions by citing the Duomatic principle, which allows for informal shareholder approval without a formal meeting. For this principle to apply it must be shown that all shareholders who have a right to attend and vote at a general meeting assent to the matter being determined.

The court found no evidence that this attempted ratification was anything more than an “internal decision” and went further by concluding that, on the facts of this case, “…unanimity requires the assent also of the beneficial shareholders.”

The court ruled that the new lease was void.

Key takeaways

• Directors’ responsibilities: Directors must act within the scope of their authority and for the correct purpose. Any deviation, particularly if it appears self-serving, can be legally challenged and potentially voided
• Limits of informal approvals: The Duomatic principle, while useful for informal shareholder approvals, has significant limitations. Its application is particularly limited when shares are held in trust. Valid consent must be explicit, clearly communicated and properly documented by all relevant parties, including beneficial owners. Relying on unwritten agreements or assumed consent is not only risky, but also likely to be legally insufficient
• Value of written agreements: To avoid disputes, especially in joint ventures, it is essential to have well-drafted, clearly written agreements that define the roles, responsibilities, and decision-making processes of all parties involved.

What does this mean for you?

• Document decisions: Always document shareholder approvals, even if they are informal. Documenting these approvals is essential to avoid disputes.
• Review agreements regularly: Ensure that joint venture and shareholder agreements are updated, and clearly define the roles and responsibilities of all parties involved. This can prevent conflicts and provide clarity in decision-making
• Seek legal advice: If there’s any doubt about the legality of an action or the scope of a director’s authority, consult a legal professional. Early advice can prevent costly disputes, preserve relationships and ensure compliance with legal obligations.

The Chohan v Ved ruling is a critical reminder of the need for diligent corporate governance. Directors must exercise their powers with care and ensure they are always acting with a proper purpose and in line with their statutory duties to avoid the pitfalls highlighted by this case.