The Court of Appeal (Lewison, Snowden, Bean LJJ) has today handed down a significant judgment concerning the duties owed by directors to their companies in Humphrey v Bennett  EWCA Civ 1433.
The underlying proceedings are a derivative claim arising from the affairs of a property development company, Esprit Land Limited. The Claimants are the minority shareholders and former directors of Esprit Land, while the Defendants are the majority shareholders and continuing directors.
The relevant part of the claim on this appeal was the Claimants’ allegation that, in breach of the Defendants’ duties under sections 175 and 177 of the Companies Act 2006, a development opportunity was diverted away from Esprit Land to another company connected to the Defendants. The Defendants reject this allegation. They contend that the Claimants declined to pursue the opportunity through Esprit Land, and that it was implicitly agreed that the Defendants could pursue it on their own account after this refusal.
At first instance, summary judgment was entered against the First Defendant. HHJ Rawlings, sitting as a High Court judge, found that he had failed to disclose sufficient information about the transaction to give rise to the defences under section 175 or 177(6) of the Companies Act 2006. For similar reasons, HHJ Rawlings also refused relief to the First Defendant under section 1157 of the 2006 Act, further holding that, where a benefit had been retained, it would be “highly unusual” for relief to be granted, and an “extremely powerful case” would be needed.
The Court of Appeal has now unanimously allowed the First Defendant’s appeal. In his leading judgment, Snowden LJ held that:
- The judge had misapplied the authority of Gwembe Valley Construction Company v Koshy  EWCA Civ 1048, and had imposed too high a standard of disclosure on the First Defendant. It was not fanciful to argue that the Claimants’ refusal of the opportunity, in the understanding that it would be pursued by the Defendants in their own right if not done through Esprit Land, could constitute authorisation or approval under sections 175 and 177 in a company of this nature. Of particular relevance was the status of Esprit Land as a small, informally-run company, which arguably meant that the scope of what needed to be disclosed was lesser. This point was also picked up by Lewison LJ in his short concurring judgment.
- The first instance judge’s original finding that inadequate disclosure should lead to the First Defendant being refused permission to rely upon a defence under section 1157 was, therefore, also wrong.
- The fact that, in the 2006 Act, Parliament has introduced specific relief mechanisms within sections 175 and 177 themselves does not mean that a failure to succeed under these defences disbars a director from relying upon the general defence in section 1157.
- The judge attached too much importance to the decision of Jonathan Crow QC in Re In a Flap Envelope Company Ltd  EWHC 3047 (Ch) in finding that it would be “highly unusual” for relief under section 1157 to be granted to a director who had retained a material benefit from his breach of duty, or that an “extremely powerful case” would be required. While capable of being one factor in the mix, these statements in prior cases were not to be treated as statements of principle or glosses on the statutory language, and a benefitting director may well be able to satisfy the test in section 1157 in the circumstances of each specific case.
- The informality of Esprit Land was clearly a question capable of affecting whether the First Defendant acted reasonably for the purposes of his defence under section 1157.
The decision therefore has significant implications for cases involving alleged breaches of a director’s fiduciary duties. Directors of small, informally-run companies may not need to provide the same level of disclosure as directors of a larger company might in order to afford themselves a defence under sections 175, 177 and 1157.
Furthermore, this is one of only two post-2006 Act decisions of the Court of Appeal substantively with the application of section 1157 of the Companies Act 2006. Indeed, it is the first which considers in detail how that relief mechanism intersects with the rest of the Companies Act 2006. The judgment therefore gives important guidance to practitioners and directors on the application of the test at section 1157.
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