Relationship breakdown
The High Court has held that, when the relationship between the two directors of a company broke down, one director had not been under a duty to put arrangements in place to stop the other director from making payments out of the company’s bank account (Atkinson and Mummery v Kingsley and Smith [2020] EWHC 2913 (Ch)).
Facts
During Spring 2010 the relationship between K and S deteriorated and by Summer 2010 part of the business was in a loss-making position. The letting business (the other business was that of property development). In light of this, by the end of 2010, the directors decided to wind down the whole business and dividend any profits to them that remained.
In January 2011, the company received the proceeds of sale of from a development. Shortly afterwards, S instructed the company’s bank to issue a banker’s draft to a third party without the knowledge of K. On becoming aware K blocked the company’s bank account until the bank mandate was changed to require two signatures for any transfers.
In September 2011 the company went into administration and this turned into liquidation in August 2012.
The liquidators brought claims against the two directors to (among other things) recover the payment to the third party. They claimed that as the payment had been made for no consideration or benefit to the company the directors had been in breach of their duties to the company, requiring reimbursement.
S subsequently went bankrupt so the liquidators pursued K primarily.
The liquidators argued that as the relationship between K and S had broken down so severely K should have taken action to stop S drawing the bankers draft and that this amounted to a breach of duty under the Companies Act 2006 to promote the success of the company and to exercise reasonable care, skill and diligence.
Decision
The court disagreed with the liquidators. In deciding whether K had breached their duties under the Companies Act 2006 a subjective test had first to be applied. In this case had K honestly believed that not restricting S’s unilateral access to the company’s bank account was in the interests of the company?
In reality, K had not actually considered the question at all.
The court therefore had to apply an “objective” test instead: would an honest and intelligent person in K’s position have left S in a position of trust with unilateral access to the company's accounts?
Therefore the question was whether an intelligent and honest director of the company could, in the circumstances, reasonably have anticipated that steps would need to be implemented to prevent S making the payment through unilateral access to the company's accounts.
The court believed that the liquidators were relying too heavily on hindsight.
The court found that there was no evidence that the break down in the relationship between S and K over the management of the company was such to warrant restricting unilateral access to the company’s bank account particularly as S had not acted in such a way before.
The court also found that even if it had found that K had breached their duties, K should be excused for acting honestly and not benefitting from the payment. Moreover K had taken immediate steps on finding out about the payment to prevent it happening again.
Comment
Although the particular facts play a large part in assessing any allegation of breaches of directors’ duties there are a couple of useful takeaways:
- In judging the duty to promote the success of a company a court will apply a dual “subjective-objective” test.
A subjective test: based on the information available, did the director honestly believe they were acting in the best interests of the company and its shareholders? If so then the court would not readily second guess them.
An objective test: to apply so as to ensure a director does not simply turn a blind eye to important matters.
- Directors should be mindful of potential misfeasance by fellow directors. K for example had no reason to believe S would behave as they did and on finding out took prompt safeguarding action.
For directors, it would be sensible to take legal advice if there is any doubt as to whether their conduct or the conduct of a fellow director conflicts with or has conflicted with their duties to the company and its shareholders. In addition, in the case of a fellow director, the safeguarding measures that would be proportionate to put in place.
For help or advice on company law and director's duties please speak to Roy Colaba or Leanne Schneider-Rose l.schneider-rose@sydneymitchell.co.uk
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