Court of Appeal weighs director's duties and liability relief in Humphrey v Bennett case

Citation: [2023] EWCA Civ 1433
Judgment on

Introduction

In the recent judgment Neil Leslie Humphrey & Anor v Paul Craig Bennet & Anor [2023] EWCA Civ 1433, the Court of Appeal (Civil Division) revisited fundamental aspects of company law, chiefly the duties of directors and the circumstances under which they may be relieved from liability for breach of those duties. This analysis will explore the essential facts, appraise the key legal principles applied in this litigation, and evaluate the court’s outcomes.

Key Facts

The core of the dispute revolved around allegations that Paul Bennett and Alison Murphy breached their duties as directors of Esprit Land Limited by disposing of a piece of land and diverting a business opportunity to a second company, Esprit Homes Construction Limited, to the exclusion of the other directors and shareholders, Mr. and Mrs. Humphrey. The alleged actions were said to be in contravention of the statutory and fiduciary duties as outlined in the Companies Act 2006.

Director’s Duties

The judgment delineates the specific directorial duties under sections 175 and 177 of the Companies Act 2006. Section 175 focuses on the duty to avoid conflicts of interest. Section 177 imposes an obligation to declare interests in proposed transactions or arrangements. The judgment underscores the necessity for sufficient disclosure for authorisation under these sections. The ‘Gwembe’ case is invoked for expounding that to avoid breaching duties, directors must disclose all material facts to shareholders - a principle analogous to board disclosure.

Sale of Company Land

The legal dialogue intensifies around the sale of the Wyken Grange land to a company controlled by one of the directors. Applications of sections 175 and 177 converge in examining potential conflicts of interest and the requisite declarations the director should have made.

Honest and Reasonable Actions

Another central aspect is the exploration of section 1157 of the Companies Act, allowing the court to relieve a director from liability if they acted both honestly and reasonably. The court acknowledges that the director’s perceived belief in an implicit understanding between parties could potentially fulfil the conditions of section 1157.

Outcomes

The Court of Appeal overturned the lower court’s summary judgment against Mr. Bennett, permitting his defenses under sections 175, 177, and 1157 to proceed to trial. The court debated whether the informal manner in which the directors managed company affairs could impact their comprehensions of each other’s knowledge and intentions. As for Ms. Murphy, despite Mr. Bennett’s victory, her position as a director without beneficial ownership in Construction led the court to treat her differently, affirming the decision to dismiss the application for summary judgment against her.

Conclusion

The Court of Appeal’s judgment in Humphrey v Bennett illuminates the judiciary’s veneration for the meticulous analysis of directorial conduct within the distinctive facts of each case, particularly in an informal business management environment. It signals the complexities inherent in assessing disclosure adequacy and consent in contexts where directors engage on multiple fronts. The judgment equally exemplifies the potential for relief under section 1157 to be contingent on an exhaustive fact-specific inquiry, resisting the seduction of one-size-fits-all legal applications. This recognition of boardroom realities ensures that the directors’ duties, while strict, are not insurmountable obstacles to practical commercial operations when balanced with equitable remedies.