Director Liability for Misfeasance

Fail 100% as a Director to protect the company from the loss suffered, then you ‘might’ well find yourself ordered to pay 100% of that loss, even if you did not personally benefit from any of it.

In the case of the appeal by Liquidators in Dumville v Rich [2019] EWHC 2086 (Ch) Mr Justice Mann overturned certain features of an earlier judgment by Deputy ICC Judge Schaffer.

The fact that a Director “might” have prevented the loss, as opposed to something more certain did not suggest on facts of this case that the Director, Mr Rich, was entitled to a 25% reduction on his liability.

In essence the court of first instance made a number of findings that Mr Rich had failed to protect property of the company. Mr Justice Mann appears to have suggested that the court of first instance had erred in an exercise of discretion in view of the findings it had made: “I consider that in this case his decision can and should be impeached because he reached a decision which depended on erroneous reasoning or which was not really open to him on the basis of all the serious breaches that he said had occurred.“

Mr Rich was said to have been responsible as a Director for a number of breaches which were deemed unreasonable and therefore Mr Justice Mann said that if indeed such findings have been made then the court of first instance perhaps ought not to have relied upon Section 1157 of the Companies Act 2006 to afford Mr Rich a credit of 25%. He said “Accordingly, the judge exercised his discretion by taking irrelevant factors into account, which means that his decision cannot stand. I can and should make the decision afresh myself, and I have little hesitation in saying that Mr Rich does not qualify for relief under section 1157. “.

Indeed Mr Justice Mann noted that Mr Rich’s conduct was as follows: “This is a case in which a director mindlessly but intentionally implemented a transaction or transactions to which he gave no thought, at the behest of another, in an undocumented manner, and having done so failed hopelessly to make sure that moneys which might have been recovered were recovered. In those circumstances I do not think it is open to a court to find that Mr Rich is liable for anything other than the whole of the loss which results.“

From the judgment the following extracts were notable:

26.What Mr Rich did was to part with company assets in a transaction which the judge found was of no benefit to DCL. He had no business doing that. He did so at the behest of someone who was not a director, though he had (indirectly) a substantial shareholding. He had no business doing that either. It does not reflect reality to say that Mr Rich did nothing to stop Mr Brown; he went further and “sanctioned” it (in the words of the judgment) and controlled the bank account – para 81.5, from which I infer he actually made the payments. He did not do anything to ensure the company was paid for the cars, in terms of documentation and procedures, and did “very little” to recover payments made to Mr Brown (which he should never have allowed to happen in the first place). True it is that he and Mr Brown were the substantial shareholders in the company, but the company was by then seriously balance-sheet insolvent (see the judgment at para 6), though it traded with the support of its main creditors (Mr Brown, essentially, as Mr Rich saw it).

27. The judge below set out correctly the nature of the duties of a director, including the wrongfulness of improper delegation. He described graphically the shortcomings of Mr Rich in all areas of the transaction, summarising them in paragraph 82:

28. The judge’s decision on the disputed quantum point was one of discretion, and is therefore entitled to all the respect on appeal generally afforded to such decisions. However, I consider that in this case his decision can and should be impeached because he reached a decision which depended on erroneous reasoning or which was not really open to him on the basis of all the serious breaches that he said had occurred. All his findings of breach are entirely justified and correct. It is therefore surprising to find that Mr Rich should only be liable for 75% of the loss (see paragraph 91). The only basis for the reduction appears in paragraph 91, where the judge’s emphasis on the word “might” suggests that he was implementing a separate principle that directors should expect to have to contribute to a loss which they “might” have prevented, whilst being given credit for the uncertainty imported by the “might“.

29. In one sense the judge is correct in that statement. A director who acts as described could well find himself liable to contribute. But that does not govern the amount of the contribution, and does not pre-determine that the director should necessarily pay less than 100% of the loss. The determination of the deputy judge suggests that the uncertainty introduced by the “might” requires some sort of deduction, and that is incorrect. It may or may not do so, but the judge does not analyse whether that should be the case on the facts of this case. It is not inevitable that the amount of the contribution should be tempered on a loss of a chance basis. That, in my view, presents an arguable error of principle.

30. Furthermore, even if there is something justifiable behind that sort of approach, I do not see how it is applicable to this case on the judge’s own findings of what happened. This is not a case in which a director had a single chance to stop a disadvantageous transaction carried out by someone else and failed to take it in a manner which was perhaps understandable but technically not justifiable. This is a case in which a director mindlessly but intentionally implemented a transaction or transactions to which he gave no thought, at the behest of another, in an undocumented manner, and having done so failed hopelessly to make sure that moneys which might have been recovered were recovered. In those circumstances I do not think it is open to a court to find that Mr Rich is liable for anything other than the whole of the loss which results. The judge made no findings from which one could assess now the degree of likelihood of the transactions taking place anyway, without his participation (as to which see further below). It is hard to see how they could have been made to take place without his intervention, and in any event his failure to ensure that moneys were collected remains.

31. In the circumstances it seems to me to be clear that the judge’s attribution of only 75% of the lost sums to Mr Rich as being a fair sum for him to pay is unprincipled and not justified by the evidence in the case or the nature of the breaches of duty (which were several) of which he found Mr Rich guilty in strong terms. I allow the appeal in relation that finding and determine that Mr Rich should be liable for 100% of the losses, subject to the next point.

32. It then becomes necessary to consider the judge’s findings under Companies Act 2006, which I have set out above. That section provides:

33. The three reasons given to by the deputy judge appear in his paragraph 94 (see above). The first seems to me to be unsustainable on his own findings. Mr Rich, at the direction of another, effectively parted with significant sums for no good reason and under circumstances which made recovery difficult if not, in part, impossible, and which certainly exposed the company to a large commercial risk. He created a problem unreasonably, and on the judge’s own findings did not take reasonable steps to fix it. I do not see how it can be said he acted reasonably at all, and it is not clear what the judge meant by “act[ed] reasonably in dealing with the problems he faced.”