Case law update

IPA Insolvency Practitioner newsletter, January 2024

An insolvency case law update prepared by Dominic Vincent, Associate Director at Manolete Partners PLC.

Dominic Vincent is Associate Director for the North West. Dominic has over 20 years of experience as a solicitor in all aspects of insolvency and corporate recovery law. In private practice he was a partner with Weightmans solicitors and most recently helped establish the legal practice of a national insolvency and restructuring group. He has been recognised in Chambers as a notable practitioner and in the Legal 500 for both personal and corporate insolvency. Dominic is a member of R3 and the Insolvency Lawyers’ Association. He has had numerous articles and pieces published in various legal and national publications and journals. Dominic’s focus is on the northern insolvency market and he is based in Manchester.

This update looks at two recent cases where the court has been asked to consider section 1157 of the Companies Act 2006, under which a director may obtain relief from liability on a claim of breach of duty.

The duties as prescribed by sections 171-177 of the Companies Act 2006 are well known to most practitioners and are as follows:

• a duty to act within their powers (section 171);
• a duty to promote the success of the company (section 172);
• a duty to exercise independent judgment (section 173);
• a duty to exercise reasonable care, skill and diligence (section 174);
• a duty to avoid conflicts of interest (section 175);
• a duty not to accept benefits from third parties (section 176);
• a duty to declare interest in proposed transaction or arrangement (section 177).

What is rather less well known is the power afforded to the court under section 1157 of the Companies Act 2006 to grant relief to a director in proceedings for negligence, default, breach of duty or breach of trust if it appears to the court that the director is or may be liable for the breach but has acted honestly and reasonably, and that consequently having regard to all the circumstances of the case the court believes he ought to be excused from liability.

The statutory relief is discretionary and will depend upon the individual circumstances of each case. It is therefore important that it is properly pleaded and supported by persuasive evidence in order for it to succeed.

In the recent Court of Appeal decision in the case of Humphrey & Anor v Bennett [2023] EWCA Civ 1433 (which was a non-insolvency case that involved allegations of breach of duty within the context of a derivative claim brought by minority shareholders of a property development company), the court observed that section 1157 should be approached like any other defence.

In giving his judgment, at paragraph 80, Lord Justice Snowden stated that “a defendant who wishes to avail himself of section 1157 should plead the specific facts and matters upon which he intends to rely in order to demonstrate that there is a realistic prospect of a court granting him relief under that section at trial. If the matters pleaded by the defendant are inadequate, it will be open to the court to determine on a summary basis that he has no realistic prospect of obtaining such relief.”

Clearly therefore section 1157 is not something that can just be thrown in as a last resort. It must be fact specific and properly reasoned. Snowden LJ was at pains to specifically reject the argument that because section 1157 refers to the court having “regard to all the circumstances of the case”, it cannot be appropriate for a court to grant summary judgment against a director who indicates that he intends to ask the court for relief under section 1157 and as a consequence attempts to avoid summary judgment simply by throwing a reference to section 1157 into his defence and then asserting that the court cannot consider that issue until trial.
That being said, however, Snowden also rejected an argument that an attempt to rely upon section 1157 must necessarily fail in circumstances where a director has failed to comply with sections 175 and 177 of the Companies Act 2006. He referred to the leading case of Re D’Jan of London Ltd [1993] B.C.C. 646 which was decided under predecessor legislation to the Companies Act 2006 and which held that a director, who had signed an insurance form without reading it, was relieved from liability for breach of duty since he held 99% of the shares in the company and at the relevant time the company was solvent. Consequently the only persons whose interests were affected by his negligence were the director himself and his wife who held the other 1% of the shares.

Section 1157 was further considered in by the High Court in the trial of the case of Geoffrey Wayne Bouchier & Anor v Gary Booth & Anor reported at [2023] EWHC 3195 (Ch). This is a fairly unusual case in that it involved a claim for fraudulent trading under section 213 of the Insolvency Act 1986 as well as claims for breach of duty arising out of the same facts.

The case was brought by liquidators of two bridging finance companies Tiuta PLC and Tiuta International Limited against two former directors who, it was alleged, had facilitated the restructuring of some of the Companies’ underperforming loans in order to fulfil the ancillary purpose of maintaining bank support for the companies, with the consequential result that the accounts of the companies provided a misleading picture of health. In so doing, the defendants had acted dishonestly and so were liable for breach of duty, and a finding that they had carried on of the company’s business for a fraudulent purpose was also made.

In making a finding of both fraudulent trading and breach of duty, the court rejected a submission made by one of the defendants that relief ought to be given under section 1157. The judge observed in his judgment that section 1157 could have no relevance to the case given the finding that he had made that the conduct of the particular director was fraudulent.

These cases add to the bank of cases concerning the application of section 1157 and tend to emphasise that its effectiveness will always depend upon the facts of a particular case. It seems fair to say that in instances where breach of duty is proven or likely to be proven, although it is not impossible to successfully invoke section 1157, it is a difficult hurdle to clear.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Please note that guest content does not necessarily represent the views of the IPA.