The High Court gives a powerful reminder that, even in seemingly informal business relationships, especially within the context of a private limited company, corporate governance principles cannot be disregarded without significant legal risk.
Background:
This judgement concerns a dispute between Cyberaxle Ltd., a company established in September 2014, its sole shareholder, Ms. Manasseh (the second claimant), and Mr. Moosavi (defendant), a former employee and director. The core issues revolve around the ownership and division of mined cryptocurrency, the alleged wrongful re-transfer of 40 Ethereum coins, and disputed overpayments of Mr. Moosavi's salary.
Initially, Cyberaxle engaged in website design, with Ms. Manasseh handling business development as an unpaid shareholder while Mr. Moosavi served as the sole employee and director, earning £48,000 annually by 2017.
Around 2017, Ms. Manasseh initiated cryptocurrency mining, with Mr. Moosavi setting up equipment in her flat. Mr. Moosavi held a wallet, a digital device, and an online account into which cryptocurrency generated through the mining could be paid.
Subsequently, an oral agreement was made with Nicholas Katz of Land Logical Ltd. for mining at their Dartford site, which offered cheaper electricity. Computer equipment was to be bought by Land Logical, while Mr. Moosavi would perform technical work. The relationship between Ms. Manasseh, Mr. Moosavi, Mrs. Sturgeon, and Mr. Katz was informal, leading to poorly documented arrangements.
It was common ground that 75% of the mined cryptocurrency would go to Land Logical, with the remainder 25% stored in Mr. Moosavi's wallet. The core dispute was whether this 25% belonged to Cyberaxle or to Mr. Moosavi personally. The claimants asserted that, in April 2020, it was agreed that 40 Ethereum from Mr. Moosavi's wallet would be used to discharge a director's loan of approximately £4,680 owed by Cyberaxle to Ms. Manasseh. This agreement was, however, not documented in any minutes. There was also a claim for overpayment of Mr. Moosavi's salary.
Decision:
The High Court ruled that the claimants succeeded under all claims. The judgement heavily relied on ascertaining the terms of an oral contract. The Master concluded that the oral mining agreement, made by the end of 2017, was between Land Logical Dartford Ltd. and Cyberaxle, and not Mr. Moosavi personally, a judgement based on both the pre- and post-contractual conduct. Given the finding that Cyberaxle was the contracting party, the Master did not need to consider whether Mr. Moosavi owed separate director's or fiduciary duties to Cyberaxle to account for the coins. The coins, as the company's property, were merely paid to him as a matter of convenience.
Regarding the 40 Ethereum coins, the Court concluded that Mr. Moosavi was not entitled to them. This conclusion followed directly from the finding that Cyberaxle, and not Mr. Moosavi, was entitled to the 25% share of the mined cryptocurrency. Therefore, the coins were Cyberaxle's property. The transfer of the digital coins by Mr. Moosavi into and then out of Ms. Manasseh's wallet was thus deemed an unauthorised taking of company property.
The Master considered the company's Articles of Association, and any significant changes to an employee's salary, particularly a director's, would typically require formal board approval. The Judge found that there was no agreement to pay Mr. Moosavi an increased salary.
Implications:
This case underscores the importance of ensuring that decisions are recorded in writing. The implications of this case are significant, especially for small, informally run companies. Indeed, the absence of formal board minutes or resolutions for significant decisions such as salary increases, asset transfers, or defining contractual parties proved highly detrimental.
This case emphasises the critical distinction between an individual (even a director/employee) and the legal entity of the company. Sometimes, directors have some difficulty making this distinction when they are heavily involved. This case reinforces the principle of separate legal personality.
Had the Judge found that Mr. Moosavi was acting personally with the 25% share, his actions could have led to more extensive claims for breach of a director's duties (e.g., a duty to avoid conflicts of interest and a duty to promote the success of the company) if he diverted a corporate opportunity for his personal gain or enrichment. Directors must always be mindful of their duty to act in the best interests of the company and not to exploit corporate opportunities for personal gain, even if informally presented.
Remuneration for directors is a matter for the board. Any deviation from agreed terms must be formally documented and approved according to the company's articles.