Personal liability of a director and liability of an agent – the cautionary tale of Tattersalls Limited v McMahon

Introduction

Bloodstock auction sales are a common means of selling thoroughbred horses - the thunder of racing hooves is often foreshadowed by the crack of the gavel. It was such an auction that gave rise to proceedings in Tattersalls Limited v McMahon [2021] EWHC 1629 (QB) in which the High Court examined agency law, the Companies Act 2006 (CA 2006), the application of the auction house’s conditions of sale, and credit agreements in an auction context.

Key points

• A company director who placed winning bids at a bloodstock auction on behalf of his company was held jointly and severally liable for the non-payment of the relevant lots.
• Sections 40 and 43 of CA 2006 do not support an argument that company directors acting on a company’s behalf are not agents, if they fulfil an agent’s role.
• There is a distinction between director’s actions that bind a company and agent’s actions on behalf of a company. However, company directors can act as agents whilst binding their companies and the common law of agency will apply to their actions where relevant.
• Parties bound by conditions of sale remain bound by their financial obligations under such conditions regardless of whether the relevant purchase is also subject to a credit agreement.

Facts

Douglas McMahon (the Defendant) co-founded Bluecrest Bloodstock Limited (Bluecrest) with the intention of purchasing and selling equine assets. Bluecrest’s business plan was predicated on attracting equity investors via the Enterprise Investment Scheme (EIS) – a government scheme that facilitates tax free venture capital investments.

Prior to receiving EIS approval and certification, Bluecrest, represented by the Defendant, attended an auction held by Tattersalls Limited (the Claimant) (the Auction). The Claimant extended GBP300,000 plus V.A.T. in credit to Bluecrest which Bluecrest utilised in purchasing two lots (the Lots). Bluecrest failed to gain EIS approval and consequently did not receive the anticipated venture capital investment, entering insolvency as a result. The Claimant took ownership of the Lots as a creditor and re-sold them at a later auction, receiving considerably less than the original sale price.

Claim

The Claimant brought an action against the Defendant to recover the losses it had incurred. This was pursuant to Condition 5.4 of the Claimant’s Conditions of Sale which stated: “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”. No Purchasers Authorisation had been provided by Bluecrest in advance of the Auction and therefore none was accepted by the Defendant. The Claimant thus argued that Condition 5.4 ensured that the Defendant was jointly and severally personally liable (together with Bluecrest) for the purchase price of the Lots, as no Purchaser’s Authorisation was in force.

Defence

Defendant’s counsel argued that Bluecrest alone was responsible for the debt to the Claimant as the Defendant had bound Bluecrest, citing sections 40 and 43 of the Companies Act 2006 which detail the powers of directors to bind a company and companies to enter into contracts. The logic of this argument was that Bluecrest was the only person involved in the Auction and so the Defendant was not a “bidder in the ring” for the purposes of Condition 5.4.

This argument was buttressed by the fact that Bluecrest had a specified bloodstock agent (Jamie Railton, albeit it was the Defendant who personally placed the winning bids), and that Bluecrest did not appoint a separate agent for the purposes of the sale. The Defendant also gave oral evidence stating that he believed he was bidding only on behalf of the company.

It was further submitted that the Claimant’s extension of credit to Bluecrest meant that the liability was owed under the relevant credit agreement to which the Defendant was not a party.

Judgment

The court upheld the claim and found the Defendant personally liable for the purchase price of the Lots plus associated costs of sale, less the proceeds of re-sale achieved by the Claimant via re-auctioning the Lots.

The court held that Section 40 CA 2006 provided that a company cannot rely on its constitutional restrictions of powers against a party acting in good faith whilst Section 43 CA 2006 made clear that a company may enter into a contract by writing under its common seal, or via a person acting with its express or implied authority. Nothing in these provisions supported the conclusion that the Defendant had not acted as an agent in this case.

Further, the fact that Bluecrest did not employ a distinct bloodstock agent did not mean that the Defendant did not fulfil the role of an agent for the purposes of Condition 5.4.

The above analysis was supported by the law of agency, as summarised in Bowstead & Reynolds on Agency (19th Edn). Notable for present purposes was Lord Diplock’s obiter dictum in Tesco Supermarkets Ltd v Nattrass [1972] AC 153: “Under the law of agency the physical acts and state of mind of the agent are in law ascribed to the principal, and if the agent is a natural person it matters not whether the principal is also a natural person or a mere legal abstraction.” Further, in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, Lord Hoffman set out the distinction between the rules for attributing human acts to a company, as exemplified by binding decisions of a company’s Board of Directors, and the laws of agency which are general rules for attributing the conduct of one party to another. Crucially, Lord Hoffman in that case did not find that those who bound companies were not agents and Lord Diplock’s above dictum “together with the weight of authority, clearly takes the view that they are.”

Applied to the present case, this meant that Bluecrest and the Defendant, as its agent, were jointly and severally liable for the purchase price of the Lots as per Condition 5.4.

As to the effect of the credit agreement, Carver J held that: “There is no logical or legal reason why the Defendant’s personal liability under that condition, by bidding in the ring, should be affected by a Credit Agreement with Bluecrest.”

Recommendations

Auction processes and agency law can be problematic for those in the sports sector and beyond.

Anyone involved in an auction process should ensure that the terms of the auction are reviewed and all required steps are taken pursuant to those terms to mitigate against personal liability. A failure to do so may lead to personal liability attracting to the agent.

Whilst directors can act as agents of a company as well as binding it via board decisions, care should be taken to ensure the role of the director and the capacity in which the director is acting are clearly agreed in advance.

A contract concluded between two parties does not automatically transfer financial liability under that contract to the parties to a credit agreement, notwithstanding the fact that credit may have been provided under such a credit agreement for the purpose of facilitating the conclusion of the contract.