Overview Of How Can A Director Avoid Liability For A Breach Of Duty
How Can A Director Avoid Liability For A Breach Of Duty? The Court may waive a Director’s liability if it considers they have acted honestly and reasonably and considers it fair to relieve him or her. It has discretion to do this under Section 1157 of the Companies Act 2006.
Section 1157(1) is the route to this form of relief that can result in the Court waiving Director liability even if they have acted in breach of duty:
If in proceedings for negligence, default, breach of duty or breach of trust against—
(a) an officer of a company, or
(b) a person employed by a company as auditor (whether he is or is not an officer of the company),
it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.
Directors’ duties are set out in Part 10 Chapter 2 of the Companies Act 2006. Directors’ duties require a Director to act with reasonable care and skill by virtue of Section 174 of the Companies Act 2006.
A failure to do so within their powers may well place a Director in jeopardy and unable to obtain a Court waiver of liability under Section 1157.
Whose Interests Are Being Prejudiced?
It was demonstrated in the case of Re D’Jan of London Ltd [1994] 1 BCLC 561 quoted in Dickinson v NAL Realisations (Staffordshire) Ltd [2017[ EWHC 28 (Ch) when a Director was running a solvent successful company at a given point in time and overlooked something when in doing so the only interests being prejudiced at that point were their own then the Court might be forgiving.
However, it might be less forgiving had such a breach of duty arisen at a point in time when the Director’s duty had shifted more towards the need to act in the interests of creditors due to the Creditor Duty than in the interests of the shareholders.
Has The Director Considered The Company’s Interests?
A Limited liability company is one that is a separate legal person from its Directors and Shareholders. This is a position recognised long ago from the case of Salomon v A Salomon and Co Ltd [1897] AC 22.
In order to show a Director has acted reasonably he or she will need to show they have acted in the best interests of and considered the company as distinct from their own personal interests.
For those reasons, a Director may struggle to obtain Section 1157 relief when they have entered into a transaction which is to the detriment of the company and which is to their own personal benefit.
How Is Honesty Judged?
The burden is on a Director seeking relief under Section 1157 to show they might be deserving of their liability being waived. Furthermore, matters of honesty cannot be judged subjectively.
These two points were highlighted in the matter of Bairstow & Ors v Queens Moat Houses Plc [2001] EWCA Civ 712 which considered Section 757 of the Companies Act 1985 (the predecessor to Section 1157):
The judge’s reasons appear at pp.43-9 of the dividends judgment. He began by directing himself, correctly, that the burden of proving honesty and reasonableness was on those who were asking for relief. He also directed himself that s.727 enabled the court “to consider the matter from an essentially subjective point of view”. That cannot, with respect, be right as regards reasonableness. It is questionable whether it is right as regards honesty. As Lord Nicholls said in Royal Brunei Airlines v Tan [1995] 2 AC 378, 389,
“The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”
The Court “may” excuse a Director who has acted in breach of duty but it may not necessarily do so even if they have acted honestly and reasonably. Section 1157 clearly signals it is a discretion to be exercised by the Court after consideration of “all the circumstances of the case” regardless of whether or not the Director has been sued by a Liquidator or successor company Directors.
