Upholding Director Duties: Lessons from Recent Case Law

The role of a director is a position of great influence, but it also comes with significant legal obligations. While directors are empowered to steer their companies toward success, they remain bound by legal duties that dictate how they must act. These duties, enshrined in the Companies Act 2006, require directors to uphold certain principles of fairness, transparency and accountability.

Recent case law has served a stark reminder of how the courts deal with breaches of these duties, reinforcing the serious consequences that can follow when directors fail to adhere to their responsibilities.

One such reminder is the case of Nexbell Ltd, where the court examined a sole director’s breach of duty under section 171(b) of the Companies Act 2006. This case involved a joint venture agreement (JVA) between two former friends, one of which, the defendant, was the sole director and shareholder of a company that owned the freehold of a property.

The defendant granted himself a new lease with enhanced tenant rights, which included the security of tenure provisions under the Landlord and Tenant Act 1954 and conferred on him substantial advantages over that of the claimant.

The court held that the actions of the defendant did not align with the proper purpose of promoting the company’s business for the benefit of its members. Rather, they found his primary intent was to safeguard his personal position as a tenant, which constituted a misuse of his powers as a director and his actions were found to have breached his duty under section 171(b).

The importance of these duties is further highlighted by the eagerly anticipated judgment of Wright v Chappell, delivered on 11 June 2024, Here the court dealt with claims of misfeasance and wrongful trading in the wake of the BHS Group collapse.

The respondents were directors of four companies in the BHS Group. The liquidators who were appointed, argued that the directors knew, or should have known, from the time of their appointment, that the companies had no reasonable prospect of avoiding insolvent liquidation. The key issue was that, had the directors placed the companies into administration by 17 April 2015, an estimated £140.1 million would have been available to fulfil creditor claims. Instead, they chose to continue trading, subsequently exacerbating the companies’ financial losses.

The court dismissed the wrongful trading claim for certain periods but later found that two of the directors (H and C) should have known that liquidation was inevitable, and both were ordered to contribute £6.5 million each to the companies’ assets. It was further held that H and C had breached their duties under section 171(b) and section 172 of the Companies Act 2006 by approving funding arrangements that did not serve the companies’ interests and by failing to consider creditors’ interests.

Taken together, these two cases serve as a powerful reminder of the importance of directors’ duties and the duty to uphold them. In both instances, directors were found to have breached their legal obligations, either by continuing to trade when insolvency was inevitable or misusing their powers for personal gain. These rulings also highlight the potentially serious, and costly consequences of neglecting these duties and underscores the need for directors to exercise their powers to protect the company and those associated with it.