Company law - Liability for co-directors

When are the good directors liable for the wrongs of the bad director?

In this case there was a dominant director and two passive directors. The two passive directors needed to show that they had no liability to the company for the wrongdoings of the dominant director.

(A) Liability

The judge found that the passive directors had breached their duties as directors. This was not because they were parties to any misapplication - on the evidence, the judge found that they knew little or nothing of the impugned transactions until after they had happened - but because they had entirely abrogated their responsibilities to the dominant director - the MD. This was not a case of permissible delegation with supervision but of a complete failure on their parts to engage in any responsibility. They allowed themselves to be wholly dominated by the MD.

However, the finding of breach of duty did not lead to a personal liability on the part of the passive directors. This was because their breach did not cause the loss to the company. Insofar as the company suffered loss, the immediate cause was that the dominant director had procured the company to enter into transactions for which he required, but did not obtain, the authority of the board or shareholders. Moreover the judge had little doubt that, had the passive directors sought to impose some system of control on the MD, he would simply have engineered their removal so that he could continue to act in the unfettered way he considered was his right.

(B) Relief

Companies Act 2006 s 1157 says that in proceedings for negligence, default, breach of duty or breach of trust against a director, the court hearing the case may relieve the director from liability if it appears to the court that he acted honestly and reasonably and having regard to all the circumstances of the case (including those connected with the director's appointment), he ought fairly to be excused.

Could it be said that the two passive directors acted reasonably in not engaging with their office/ duties? The judge seems to say that had they done so they would have been sacked by the dominant director. It is clear that they acted honestly. So it looks as if the court came out in their favour here - ie granted immunity from any claim against them for breach of duty.

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