Case law: Court clarifies when court will relieve directors from liability for breach of statutory duty
Directors of UK companies will welcome clarification as to when the court will relieve them from liability for breaches of their statutory duties on grounds they behaved honestly and reasonably.
This update was published in Legal Alert - January 2018
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Directors' statutory duties include duties to avoid situations in which their interests conflict, or may conflict, with those of their company; not to accept benefits from third parties; and to declare their interests in transactions entered into by their company.
However, if directors breach their duties, a court can relieve them from liability (wholly or in part) under company law if it believes they acted honestly and reasonably.
Two brothers had breached their duties as directors by diverting a commercial opportunity that should have been offered to their company, for their personal benefit. One of the brothers (J) was the ringleader, and the other (Q) merely acquiesced by taking 20 per cent of the profit from the opportunity, which J had promised him.
Both brothers claimed that the court should relieve them from liability in this case. Notably, Q argued that:
- J's promise to pay him a share of the profit from the opportunity was not legally binding and therefore did not amount to an interest in the opportunity
- He believed J's interest in the opportunity had already been authorised by the shareholders, which meant that his own interest (if any) in it had had also been authorised
- His breaches of duty did not harm the company's interests – indeed, his own work on the opportunity aligned with the company's interests, so there was no conflict
- He did not realise that he should have asked for his own interest to be authorised
The court found that:
- Even if J's promise to Q was not legally binding, it did not mean Q was not interested as a director in the opportunity
- There was a clear potential for Q's interest to conflict with his company's interests, so it was not reasonable for Q to believe there was no potential conflict
- Q's actions could have caused general harm and damage to the company, even if they did not result in a specific loss
- Q was a lawyer with an understanding of company law, and should have been aware of the requirement to disclose his interest.
The Court found that while Q honestly believed that J's interest in the opportunity had been authorised, his failure to disclose his own interest was not reasonable. It therefore refused to relieve him of liability for his breaches of his statutory duties.
The ruling shows that when deciding whether to relieve directors from liability for breach of their duties on grounds they acted honestly and reasonably, the test of honesty is subjective: did the director honestly believe his conduct was not a breach? On the other hand, the test of reasonableness is objective: did the director's conduct meet the standards expected of a careful and competent director in that situation?
- Directors of UK companies should continually consider whether their conduct may amount to breach of statutory duty and, if so, whether they have acted honestly and reasonably, so that a court may relieve them of potential liability
Case ref: Cullen Investments Limited and others v Brown and others  EWHC 2793
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.