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Director Abdication Overview

Director abdication is when a company director in breach of their duties does not keep themselves appraised of a company’s financial position and permits a Director who might be the controlling mind of the company, free rein over it.

What Is Director Abdication Of Responsibility

Family Businesses And Director Abdication

Directors’ duties require company Directors to give their loyalty to the company first and foremost where the company is concerned. Whilst it is inevitable in a family business that Directors will be in a position of some potential conflict ie. their duty to the company might give rise to a conflict with their duty to their other family member Directors, nevertheless in respect of company business matters their duty to the company comes first.

A Director who cannot where company business is concerned adhere to the hierarchy of this duty should conceivably not agree to be or act as a company Director in respect of such a company. If they do so and if that conflict of interest arises they may well find themselves jointly liable with the controlling mind Director for the losses that have arisen and thereby having to compensate the company in respect of the same.

Implications Of Director Abdication

When a Director abdicates responsibility they can be called upon to compensate for the losses arising from their breach of duty.

Queensgate Place Case

The case of Queensgate Place Ltd v Solid Star Ltd & Ors (Re Solid Star Ltd, Companies Act 2006 and Insolvency Act 1986) [2023] EWHC 2277 (Ch) was an unfair prejudice petition case under Section 994 of the Companies Act 2006

It touched upon the issue of Director abdication of responsibility where a Director was concerned and that is the purpose of reference to it.

There were two Directors of Solid Star Limited (“SSL”), Prakash Bhundia (“PB”) and Minesh Bhundia (“MB”). They were brothers. The Petitioner Queensgate Place Ltd (“QPL”) held 50% of the shares in SSL. SSL is now in Compulsory Liquidation.

It appears PB at the relevant times was SSL’s controlling mind.

QPL lent £3.5 million under a shareholder agreement, yet despite the sale of 20 developed units and development of a hotel had not received a distribution from SSL. QPL complained.

PB’s Control of SSL

PB was said to have treated:

… the funds of a number of companies which he controls or in which he has an interest as a single pot, from which payments can be made at will without any regard as to whether the payment being made is properly a liability of the company whose money is being used to pay it and without any adequate records being kept of such transactions. It is highly surprising that at the trial of this petition, the only available accounts for SSL are those filed at Companies House and that from y/e 30 June 2012 onwards those accounts are in abbreviated form, such that it is not possible to see to whom or by whom the company was owed money.

Prakash’s failure to exercise any adequate financial controls or accounting procedures for SSL has meant that substantial funds are said to have been paid out from SSL to other companies owned or controlled by Prakash in circumstances where there is no evidence other than Prakash’s uncorroborated assertion that the recipient had met liabilities on SSL’s behalf. The position has been made even more difficult by the fact that from 2013 onwards SSL does not appear to have even had a bank account. Additionally, it is clear that funds have been paid out in circumstances where there was no underlying liability of SSL to the recipient company. The most egregious example of this state of affairs are payments in excess of £2.3M that were made on behalf of SSL in repaying a loan that was owned by Lazuli.

Role Of MB And Director Abdication

The Court said the role of MB was far more limited to that of PB:

… clear from their evidence and from the underlying documents that at all material times Prakash has been the leading force in the business activities of SSL, Viking and other related companies. He has been in day to day charge of both the finances and the executive decision-making for these companies. The role of Minesh has been significantly more limited. Indeed, in the course of his cross-examination, Prakash went so far as to describe himself as the “sole director” of SSL.

Whilst MB said he was naive of his Director’s responsibilities the Court said from documentary evidence he was aware that a Director has duties such as having a proper accounting system, that Directors should take decisions as a Board which should be recorded by formal resolutions and:

…that there were dangers with his brother’s approach to the running of matters.

The Court said MB ought to have known a Director has to involve himself in approving annual accounts.

MB’s notes of a meeting with his brother PB on 1 July 2013 showed him to be aware of funds being moved around various companies controlled by PB and this was a risk to SSL.

Breach Of Duty by MB

The Court said MB’s duties included:

(1) That Minesh knew that he had a duty to inform himself about the company’s financial position.

(2) That he knew a company should have proper accounting procedures and records in place.

(3) That he knew by 2009 at the latest that company accounts needed to be approved by all of the directors of the company.

(4) That he had the measure of his brother and knew that Prakash was an optimistic risk-taker with a record for poor accountability and financial control and poor financial reporting.

(5) That he knew that SSL had shareholders other than Prakash / Viking and that duties were owed to these other shareholders.

(6) That he knew that funds were flowing back and forward between SSL and the other companies controlled by Prakash; and that the explanations provided for this by Prakash did not make sense.

(7) That he knew from about 2020 a number of properties that had been owned by SSL were being let out.

(8) That he was not aware of any rental income being recovered by SSL.

The Court said notwithstanding this that by 2007 onwards MB did not take adequate steps to address his concerns about the company or be involved in its annual accounts approval process.

Director Abdication Case Law

The Court looked at a few authorities such as:

… the decision of the House of Lords in Dovey v Cory [1901] AC 477. In that case a bank had sustained substantial losses because its chairman and manager had connived to produce fraudulent balance sheets. The House held that a co-director who had not been involved in the fraud was not liable to the company in negligence since directors may properly delegate the duty to prepare accounts unless there are grounds for suspicion. Lord Halsbury LC held at 486:

“I cannot think that it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calculations of the auditors himself. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management.”

However, Dovey v Cory was a case where the director had properly taken part in the approval of the company’s accounts, but had relied upon (fraudulent) information provided by the chairman and manager. By contrast, here Minesh abdicated all responsibility for the financial management of the company. He did not seek any underlying financial information about the position of the company; he did not even seek to participate in the exercise of the approval of the accounts. In my judgment it is one thing to take an effective part in the management of the company but be deceived by fraudulent co-directors; it is altogether another not to take part at all.

Ms Bayliss and Mr Kane also relied upon Huckerby v Elliott [1970] 1 All ER 189 as authority for the proposition that a director is not under a general duty to supervise the running of the company so as to prevent frauds committed by co-directors or employees, at least where there are no grounds for distrusting them (my emphasis). In that case Lord Parker LCJ held at 193:

“I know of no authority for the proposition that it is the duty of a director to, as it were, supervise his co-directors or to acquaint himself with all the details of the running of the company. Indeed it has been said by Romer J in Re City Equitable Fire Insurance Co Ltd ([1925] Ch 497 at 428-430) that amongst other things it is perfectly proper for a director to leave matters to another director or to an official of the company, and that he is under no obligation to test the accuracy of anything that he is told by such a person, or even to make certain that he is complying with the Law.

It was pointed out that business cannot be conducted otherwise than on principles of trust, and accordingly as it seems to me on the evidence produced by the prosecution there is disclosed a state of affairs where the appellant left matters concerning the licences to her co-director, Mr Lunn, who was the secretary of the company and fully acquainted with the business. One asks oneself this: has she any reason to distrust Mr Lunn or to feel that he was not carrying out his duty?”

This was a case involving criminal liability for the acts of a co-director, and may be of limited assistance in this case. In any event, again there seems to me an important distinction to be drawn between a director who seeks to play a role in the management of a company, but who delegates certain matters to another director or an employee; and a director who is in effect a cipher; who (like Minesh) never attended a board meeting, never sought to call a board meeting, never approved a set of accounts and took no adequate steps to obtain financial information about the company. I am satisfied that the decision in Huckerby v Elliott does not provide carte blanche for a director to wholly abdicate responsibility by delegating all matters to a co-director without conducting any proper enquiry or consideration as to whether such delegation is appropriate. As Lord Parker identified in the extract from his judgment set out above, in deciding whether to delegate matters the director must ask themselves whether they have any reason to distrust the proposed delegate or to feel that they were not carrying out their duty.

Here, not only did Minesh have reasons to distrust Prakash and to feel that he was not carrying out his duty, it is clear from the e-mails sent and notes kept by Minesh in 2013 he did indeed distrust his brother and considered that his brother was not carrying out his duty at that time. Despite this, he did nothing to restore proper governance to SSL.

On balance, I do not consider that Minesh’s actions (or more strictly speaking, his inactions), whilst naïve and demonstrating an abdication of the responsibilities of his office as a director were dishonest. His conduct seems to have been borne from a dislike of confrontation and an unwillingness to stand up to his brother. Nonetheless, I am satisfied that Minesh has negligently breached his fiduciary duties as a director of the company. In particular I am satisfied that in effectively delegating the entire control of the company to Prakash he:

(1) Failed act in a way most likely to promote the success of the company for the benefit of its members as a whole (s 172 CA 2006).

(2) Failed to exercise independent judgment (s 173 CA 2006);

(3) Failed to act with reasonable care, skill and diligence (s 174 CA 2006); and

(4) Took no steps to ensure that the accounts of the company gave a true and fair view of its assets.

The position in the case of Minesh requires more analysis. His breaches of duty were not positive acts, but were instead omissions which created the circumstances under which Prakash was able to operate unchecked.

On behalf of Minesh, Ms Bayliss and Mr Kane seek to argue that Prakash was so dominant and in control of SSL, that there was effectively nothing that Minesh could have done which would have made any difference.

This argument is, in my view, a counsel of despair and one that I am unable to accept. It cannot be the case that one of two directors is entitled to sit back and not intervene or take steps to intervene in the governance of the company, when he is on notice that the co-director is acting in breach of his fiduciary duties to the company (even if not fully aware of the extent of those breaches). In his submissions Mr Moeran pointed to a number of steps that could have been taken by Minesh. If Minesh had persisted in his inquiries into SSL’s financial arrangements he would have discovered that no proper account existed for the inter-company payments and loans. He could have sought injunctive relief on behalf of the company to prevent Prakash from dealing with the company’s finances in this way, or at the very least informed the shareholders of the position so that they could take steps to protect their position. In my view Minesh simply abdicated all responsibility for the governance of the company. As HHJ Paul Matthews observed in Re AMT Coffee Ltd [2020] 2 BCLC at [222]

“The reality is that if a person cannot properly perform the onerous duties of a company director that person should not hold office. [They] must accept the consequences of [their] actions or inactions.”

Result For MB

The Court held MB was responsible at some level for much of the unfair prejudice.

I am therefore satisfied that Minesh’s breaches of duty were causative of much of the unfair prejudice sustained by QPL. The exception is any loss to SSL that was caused by the first two PX1 sales.

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Author: Elliot Green
Last Updated: June 12, 2024

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Disclaimer: What Is Director Abdication Of Responsibility?

This page is not legal advice and is not to be relied upon as such. This article What Is Director Abdication Of Responsibility? is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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