High Court warns directors to get match fit for new reporting regulations
It is understandable that directors might be reluctant to seek legal advice – be it due to concern about time or cost or a potential conflict of interest if seeking advice internally. However, as a recent case demonstrates, this is a small price to pay to avoid the time and financial cost of a claim, especially when a company's subsequent precarious financial position shines a light on an officer's behaviour and competence.
Directors should seek advice from in-house or external legal professionals whenever executing documents, even if they believe that they understand the consequences of what they are signing. They should also record their decision-making process to ensure that they comply with the Companies (Miscellaneous Reporting) Regulations 2018. Wessely v White serves as a timely warning in this regard.(1)
Failing company attempts to recover losses against director
The joint liquidators of construction company Laishley Limited claimed that its former director, Mr White, had caused the company and its creditors loss by signing deeds of release terminating two of the company's construction contracts prematurely. They claimed that White had not complied with his duties under Section 172 of the Companies Act 2006.
White had intended to benefit Laishley's employees and creditors by novating the contracts and mistakenly believed that signing deeds of release was part of the novation process. Rather than seeking legal advice on the implications of signing the documents, he relied on the advice of trusted quantity surveyors.
However well-intentioned the move, the deeds of release – in addition to ending Laishley's future obligations under the contracts – served to terminate the employer's obligations to pay any outstanding sums for work already completed. Therefore, the joint liquidators claimed that White's actions had caused Laishley's creditors to lose the £275,000 that another company had bid for that work.
The judge had to determine whether White had complied with his statutory duties under Section 172 of the Companies Act 2006, which requires directors to consider a number of factors when making decisions on behalf of their company. The paramount consideration for the director of an insolvent company must be the interests of its creditors, not the employees.
Because White had considered the relevant interests of the creditors, the judge explored his state of mind (a subjective test) to determine whether he had breached his duty as a director. Under pressure and without understanding the consequences of his actions, White honestly (though mistakenly) believed that signing the deeds of release would benefit Laishley's employees and creditors. The judge therefore held that White had not breached his duties as director.
There was also a question mark over the loss claimed by the liquidators and so the claim may not have succeeded even if White had been in breach.
Lessons for directors
The decision adds little to the law on directors' duties, but it is of interest due to the scrutiny it places on the way that directors operate. It is understandable that directors might be reluctant to seek legal advice – be it due to concern about time or cost or a potential conflict of interest if seeking advice internally. However, as this case demonstrates, this is a small price to pay to avoid the time and financial cost of a claim, especially when a company's subsequent precarious financial position shines a light on an officer's behaviour and competence.
While lawyers are used to recording their thought processes, it is not always intuitive for directors and executives. With the new reporting requirements under the Companies (Miscellaneous Reporting) Regulations 2018 looming (including the requirement that directors of large private and public companies explain how they comply with Section 172), the decision serves as a timely reminder to get into good habits. In short, directors should record the material factors taken into account when reaching decisions and not shy away from obtaining legal advice.
(1)  EWHC 1499.