Directors Duties Cases uk

Percival v Wright [1902] 2 Ch 401 is a UK company law case concerning directors' duties, holding that directors only owe duties of loyalty to the company, and not to individual shareholders. This is now codified in the United Kingdom's Companies Act of 2006 section 170. Allen v Hyatt (1914) the directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. It was held that the directors had made themselves agents for the shareholders in the sale of the shares and must therefore account to them for the profit they had made on the sale. In Gething v Kilner,[46] minority shareholders in a company facing a takeover bid (the offeree) objected on the basis that the offer document and the board's recommendation of acceptance of the bid were misleading. The offer document did not disclose that the offeree company's financial advisers recommended rejection of the offer. The board did not provide any rational explanation for its refusal to accept the advice. The minority shareholders sought an interlocutory injunction to restrain the offeror company from declaring the offer unconditional, thereby relieving any assenting shareholder of the offeree from any assent that had already been given. Brightman J refused to grant the relief. He considered that the evidence demonstrated that the offeree's board honestly believed the offer to be advantageous, and that it was a reasonable view to adopt. He referred to 'other remedies' available to the claimants should a wrong have been committed. However, he continued by saying: Peskin v Anderson. Former members of the Royal Automobile Club Ltd sued the directors for failing to disclose that they had plans to demutualise. They could have got £35,000 but had given up their membership. They claimed that the directors had breached a duty owed to them as shareholders to inform them of the upcoming demutualisation plan. Mummery LJ held that there was no breach of duty. General duties are always owed to the company, and specific duties owed to shareholders can only be generated through voluntary assumptions of responsibilities, in relationship to specific transactions. There was no such assumption of responsibility here. Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983] directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders. Re Smith and Fawcett Ltd [1942] Ch 304 is a UK company law case, concerning the meaning of "the interests of the company". It is relevant for the Companies Act 2006 section 172. Facts Act 10 of the company constitution said directors could refuse to register share transfers. Mr Fawcett, one of the two directors and shareholders died. Mr Smith co-opted another director and refused

to register a transfer of shares to the late Mr Fawcett‘s executors. Half the shares were bought, and the other half offered to the executors.JudgmentLord Greene MR held that in absence of mala fides, this was proper. Private companies are ‗much more analogous to partnerships than to public companies‘. Listed companies may not have such restrictions at all. The principles to be applied in cases where the articles of a company confer a discretion on directors…are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purpose. Fulham Football Club Ltd v Cabra Estates plc [1994] directors exercising their discretion in a manner which restricts their future conduct; this is not a breach of duty. Extrasure travel insurance ltd v scattergood [2002] where directors transferred £200000 to the parent company to help it to pay debts; On one hand, it was argued that directors were acting in good faith and on the other hand it was argued that directors were using their power for an improper purpose, the directors were guilty of abuse of power even though they were working in company‘s interest. 4 part test 1. What is the power, 2. Proper purpose, 3. Substantial factual purpose, 4. Decide… Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244 The defendant director (F) appealed against the decision that he was in breach of duty in failing to disclose his own misconduct to the respondent company (S), which was his employer, and that he was not entitled to his salary for the part of the month before he was dismissed for misconduct. F was the sales and marketing director of S whose business included the distribution of software for a company called Isograph. S attempted to negotiate more favourable terms for its business with Isograph but was unsuccessful and Isograph in 2000 terminated its contract with S. In the meantime F secretly approached Isograph with proposals which involved establishing his own company to take over the distribution contract. When S discovered F's misconduct he was summarily dismissed. S brought proceedings against F alleging breach of his duty as a director and employee. The judge held that there was no breach in seeking to divert the contract since Isograph had in fact terminated the contract because S had put forward unacceptable terms. However, the judge found that F was in breach of duty in failing to disclose his own misconduct and that loss resulted from that non-disclosure. F was dismissed on 26 June and since he was paid monthly in arrears he claimed his salary for 1 to 26 June. The judge held that the Apportionment Act 1870, s 2 did not apply and that F's claim failed. ISSUE (1) Whether a director had a duty to disclose his own misconduct. (2) Whether F had a good claim for his salary for 1 to 26 June under the Apportionment Act 1870. HELD (appeal allowed in part) (1) The fundamental duty that a director owed to act in good faith in the best interests of the company included a requirement for a fiduciary to disclose his own misconduct. On the facts there was no basis on which F could have come to the conclusion that it was not in the interests of S to know of his breach of duty. He could not fulfil his duty of loyalty to S except by informing it about his plan to acquire the Isograph contract for himself. That conclusion was not affected by the principle of the law of agency that information received by the agent was to be imputed to the principal, subject to an exception in the case of fraud by the agent. Bell v Lever Bros Ltd [1931] All ER 1, considered, did not decide that an employee could never owe a duty to disclose his own misconduct, nor that a director as a fiduciary could not owe any such duty. In

addition Bell (above) did not cover the case where there was fraudulent concealment. The extension of the duty of loyalty to disclosure of a director's own misconduct was supported by policy considerations Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 is a leading UK company law case, concerning the duty of directors to act only for "proper purposes". This duty has been codified into the Companies Act 2006 section 171, and arises particularly in cases involving takeover bids Facts RW Millers was embroiled in a hostile takeover bid, by a large petrol company called Ampol. Ampol already controlled (with an associated company) 55% of the shares. The directors did not want Ampol to buy the shares of RW Millers as Howard Smith had bettered terms for take over by offering employment to the directors even in the future. So the directors of RW Millers issued $10m of new shares. They said it was to finance the completion of two tankers. The shares were given to Howard Smith Ltd who were going to take over RW Millers, and that blocked Ampol‘s rival bid. Without the issue, Howard Smith Ltd had no hope of succeeding in taking over the company. But with the new issue, Ampol could not complete its acquisition. Street J said that the argument of the directors that the tanker purchase was the dominant purpose was ‗unreal and unconvincing‘. Judgment Lord Wilberforce held that the issue was intra vires but that it was exercised for an improper purpose. ‗To define in advance [what that means is] impossible.‘ It must be adjudged ‗in the light of modern conditions‘, and referred back to Hogg v Cramphorn Ltd. His judgment continued.[1] ― The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self-interest—i.e. by a desire to retain their control of the company or their positions on the board—the matter is concluded in their favour and that the court will not inquire into the validity of their reasons for making the issue... It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self-interest of the directors, or at least the purpose of the directors to preserve their own control of the management. Further it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected... just as trustees who buy trust property are not permitted to assert that they paid a good price. But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to

be made... It would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management‘s decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at. Teck Corp. Ltd. v. Millar, (1972), 33 DLR (3d) 288 (BCSC) is the leading Canadian corporate law decision on a corporate director's fiduciary duty to resist a takeover bids. Justice Berger held that a director may resist a take-over so long as they are acting in good faith, and they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the corporation. The case represented a major change away from the standard set in the English case of Hogg v. Cramphorn Ltd. (1963). Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, is a leading case in UK company law regarding the rule against directors and officers from taking corporate opportunities in violation of their duty of loyalty. The Court held that a director is in breach of his duties if he takes advantage of an opportunity that the corporation would otherwise be interested in but was unable to take advantage. However the breach could have been resolved by ratification by the shareholders, which those involved neglected to do Regal owned a cinema in Hastings. They took out leases on two more, through a new subsidiary, to make the whole lot an attractive sale package. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the buyers brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. They had not gained fully informed consent from the shareholders. Judgment The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made their profits ―by reason of the fact that they were directors of Regal and in the course of the execution of that office‖. They therefore had to account for their profits to the company. The governing principle was succinctly stated by Lord Russell of Killowen, ―The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability

arises from the mere fact of a profit having in the stated circumstances been made.‖ Lord Wright said (at 157), "The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Cook v Deeks[1] is a Canadian company law case, relevant also for UK company law, concerning the illegitimate diversion of a corporate opportunity. It was decided by the Judicial Committee of the Privy Council, at that time the court of last resort within the British Empire, on appeal from the Appellate Division of the Supreme Court of Ontario, Canada. Because decisions of the Judicial Committee have persuasive value in the United Kingdom, even when decided under the law of another member of the Commonwealth, this decision has been followed in the United Kingdom courts. In UK company law the case would now be seen as falling within the Companies Act 2006 section 175, with a failure to have ratification of breach by independent shareholders under section 239. Facts The Toronto Construction Co. had four directors, Mr GM Deeks, Mr GS Deeks, Mr Hinds and Mr Cook. It helped in construction of railways in Canada. The first three directors wanted to exclude Mr Cook from the business. Each held a quarter of the company's shares. GM Deeks, GS Deeks, and Hinds took a contract with the Canadian Pacific Railway Company (for building a line at the Guelph Junction and Hamilton branch) in their own names. They then passed a shareholder resolution declaring that the company had no interest in the contract. Mr Cook claimed that the contract did belong to the Toronto Construction Co and the shareholder resolution ratifying their actions should not be valid because the three directors used their votes to carry it. Advice The Privy Council advised that the three directors had breached their duty of loyalty to the company, that the shareholder ratification was a fraud on Mr Cook as a minority shareholder

and invalid. The result was that the profits made on the contractual opportunity were to be held on trust for the Toronto Construction Co. Lord Buckmaster said that the three had, ―

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deliberately designed to exclude and used their influence and position to exclude, the company whose interest it was their first duty to protect... the benefit of such contract... must be regarded as held on behalf of the company... [It was] quite certain that directors holding a majority of votes would not be able to make a present to themselves. This would be to allow a majority to oppress the minority... Such use of voting power has never been sanctioned by the court.

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it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority....if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts

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Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 is a UK company law case on the corporate opportunities doctrine, and the duty of loyalty from the law of trusts. It is also applicable for fiduciary duty of an agent under agency law which states that an agent has a fiduciary relationship with his principal. This is a position which is similar to that of a trustee. Mr Cooley was an architect employed as managing director of Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial Development Consultants found out and sued him for breach of his duty of loyalty. Roskill J held that even though there was no chance of IDC getting the contract, if they had been told they would not have released him. So he was held accountable for the benefits he received. He rejected the argument that because he made it clear in his discussions with the Gas Board that he was speaking in a private capacity, Mr. Cooley was under no fiduciary duty. He had ‗one capacity and one capacity only in which he was carrying on business at that time. That capacity was as managing director of the plaintiffs.‘ All information which came to

him should have been passed on. Roskill J, quoted, Parker v. MacKenna (1874) 10 Ch.App. 96, James L.J. said, at p. 124: ―I do not think it is necessary, but it appears to me very important, that we should concur in laying down again and again the general principle that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.‖ Throughout the last century, and also in the present century, courts of the highest authority have always strictly applied this rule. Bhullar v Bhullar [2003] EWCA Civ 424 is a leading UK company law case on the principle that directors must avoid any possibility of a conflict of interest, particular relating to corporate opportunities. It was not decided under, but is relevant for, s 175 Companies Act 2006. Facts Bhullar Bros Ltd was owned by families of two brothers. Each side owned 50% of ordinary shares. The directors were Mr Mohan Bhullar, his son Tim, Mr Sohan Bhullar and his sons Inderjit and Jatinderjit. The company had a grocery store at 44 Springwood Street, Huddersfield. It also owned an investment property called Springbank Works, Leeds Road, which was leased to a bowling alley business called UK Superbowl Ltd. In 1998 the families began to fall out.[1] Mohan and Tim told the board they wished for the company to buy no further investment properties. Negotiations began to split up the company, but they were unsuccessful. In 1999, Inderjit went bowling at the UK Superbowl Ltd alley. He noticed that the carpark next door (called White Hall Mill) was on sale.[2] He set up a company called Silvercrest Ltd (owned by him and Jatinderjit) and bought, but did not tell Bhullar Bros Ltd. But Mohan and Tim found out and brought an unfair prejudice claim (now s 994 CA 2006) on the basis that Inderjit and Jatinderjit had breached their fiduciary duty of loyalty to the company. Jonathan Parker LJ held that there was a clear breach of the rule that directors must avoid a conflict of interest. 41. Like the defendant in Industrial Development Consultants Ltd v Cooley,[3] the appellants in the instant case had, at the material time, one capacity and one capacity only in which they were carrying on business, namely as directors of the Company. In that capacity, they were in a fiduciary relationship with the Company. At the material time, the Company was still

trading, albeit that negotiations (ultimately unsuccessful) for a division of its assets and business were on foot. As Inderjit accepted in cross-examination, it would have been "worthwhile" for the company to have acquired the Property. Although the reasons why it would have been "worthwhile" were not explored in evidence, it seems obvious that the opportunity to acquire the Property would have been commercially attractive to the Company, given its proximity to Springbank Works. Whether the Company could or would have taken that opportunity, had it been made aware of it, is not to the point: the existence of the opportunity was information which it was relevant for the Company to know, and it follows that the appellants were under a duty to communicate it to the Company. The anxiety which the appellants plainly felt as to the propriety of purchasing the Property through Silvercrest without first disclosing their intentions to their co-directors – anxiety which led Inderjit to seek legal advice from the Company's solicitor – is, in my view, eloquent of the existence of a possible conflict of duty and interest. 42. I therefore agree with the judge when he said (in paragraph 272 of his judgment) that "reasonable men looking at the facts would think there was a real sensible possibility of conflict". Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200 is a 2007 UK company law case, concerning the fiduciary duty of directors to avoid conflicts of interest. It follows some considerable unrest in the courts about the strictness of the law relating to taking corporate opportunities. Mr Foster and Mr Bryant were directors of the plaintiff, a surveying company, and pretty much all their work came from a company called Alliance. Mrs Bryant also worked for the company, until Mr Foster said she was going to be made redundant. Unsurprisingly, this made Mr Bryant unhappy. He resigned. Alliance still wanted both of them to keep working. It said that Mr Bryant should still give his services. Mr Foster argued that Mr Bryant's services should be contracted out through their company still, not a separate one. But he lost the argument. Mr Bryant, fully funded by Alliance, set up a new company. However this was all done a few days before the resignation had actually taken effect. In the light of the preceding events, the company sued Mr Bryant, alleging that he had breached his fiduciary duty during the period between resigning, and his resignation taking contractual effect. FBS Ltd (i.e. Mr Foster) sued Mr Bryant for breach of his fiduciary duty of loyalty, and the diversion of corporate opportunities to himself. Upholding the judge, the Court of Appeal found there was no breach of fiduciary duty in this case. Rix LJ delivered the principal judgment, starting with the Canadian Supreme Court case,

Canadian Aero Service Ltd v O'Malley. Here, defendant directors had resigned so that they could take the benefits for themselves of a project that they had been negotiating on behalf of the company. Laskin J had held that the defendants were ―faithless fiduciaries‖, their duties survived resignation, their resignation had been influenced by wanting to get the opportunity, and that they were in breach of trust. However, he stressed that he was ―not to be taken as laying down any rule of liability to be read as if it were a statute‖, but rather the standards of loyalty, good faith and the no-conflict rule should be looked at with reference to all the circumstances. "Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness [sic] and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge." Rix LJ felt that Laskin J was right to see the strict equitable rule as nevertheless merit based. He also referred to three further cases, in the spirit of an article by Prof. John Lowry from 2000, which supported a more 'nuanced' approach.[1] First, in Island Export Finance v Umunna[2] Hutchinson J (who relied on Laskin J's judgment) extensively, took the view that the proposition that liability arises from the mere fact that the defendant's position as a director led him to a post-resignation opportunity, was too widely stated. In Balston Ltd v Headlines Filters Ltd[3] Falconer J, following the views expressed by Hutchinson J, stated, ―In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of any preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director.‖ Thirdly, in Framlington Group Plc v Anderson[4] Blackburne J held that in the absence of special circumstances, like a prohibition in a service contract, a director commits no breach of duty merely because, while a director, he takes... "...steps so that, on ceasing to be a director... he can immediately set up business in competition with that company or join a competitor of it. Nor is he obliged to disclose to that company that he is taking those steps.‖ Rix LJ draws the conclusion from these three cases, and the authorities cited by the trial judges in their judgments, that although the general equitable principle which places an embargo on conflicts of duty is beyond doubt, the extent of a director's duty may depend upon the particular circumstances of the case. Furthermore, drawing on Lawrence Collins J's reasoning in CMS Dolphin Ltd v Simonet, where the claimant company successfully claimed

that Simonet, its former managing director, was in breach of fiduciary duty by diverting a maturing business opportunity to a new company established by him following his resignation, Rix LJ stressed that there should be ―some relevant connection or link between the resignation and the obtaining of the business‖. In so doing, he placed emphasis upon the need to demonstrate both lack of good faith with which the future exploitation was planned while still a director, and the need to show that the resignation was an integral part of the dishonest plan. Thus, in cases where liability for post-resignation breach of duty had been found, there was a causal connection between the resignation and the subsequent diversion of the opportunity to the director's new enterprise. That said, Rix LJ recognised the difficulty of accurately summarising the circumstances in which retiring directors may or may not be held to have breached their fiduciary duties given that the issue is ―fact sensitive‖. It was clear, however, that the defendant's resignation was innocent of any disloyalty or conflict of interest. Moses LJ, while recognising that the resolution of issues of breach of fiduciary duty are fact specific, felt ―almost‖ nostalgic for the days when there were inflexible rules of equity which were inexorably enforced by judges ―who would have shuddered at the reiteration of the noun-adjective‖. Buxton LJ, also endorsing Rix LJ's judgment, stressed that the facts were particularly unusual and the Court was right to adopt a realistic approach to the alleged breach of duty. It is, he said, ―unreal to contend that, faced with Mrs Watts proposal, [the defendant] should have gone out of his way to seek to deter her from it.‖ Re D’Jan of London Ltd [1994] 1 BCLC 561 is a leading English company law case, concerning a director's duty of care and skill, whose main precedent is now codified under s 174 of the Companies Act 2006. The case was decided under the older Companies Act 1985. Without reading it, Mr D'Jan signed a change to an insurance policy which was erroneously filled out by his insurance broker, a Mr Tarik Shenyuz. He did not read it before he signed, and it contained a mistake, which was that the answer 'no' was given to the question of whether in the past he had 'been director of any company which went into liquidation'. This meant the insurance company, Guardian Royal Exchange Assurance plc, could refuse to pay up when a fire at the company‘s Cornwall premises destroyed £174,000 of stock. The company had gone into insolvent liquidation by the time Mr D'Jan realised that the form had been incorrectly completed. The liquidators sued Mr D'Jan to recoup the lost funds on behalf of the company's creditors (who together were owed £500,000). They alleged both negligence and misfeasance under s 212 of the Insolvency Act 1986. Hoffmann LJ held that failing even to read the form was negligent, even though it may be common practice, but that Mr D'Jan's liability should be reduced because as majority shareholder and debtor it was primarily his own money that he risked, rather than other people's. The duty of care owed by directors in section 214 Insolvency Act 1986 was an accurate statement of the common law duty also (now codified in CA 2006 section 174). Because Mr D‘Jan held 99 and his wife 1 out of the 100, Mr D'Jan pleaded that in accordance

with the principle of the Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd,[1] that shareholders all acting by consensus bind the company's actions, his actions were ratified by the company and he should not be liable. Hoffmann LJ held that actual ratification is required, not just a likelihood that shareholders would ratify. However owning 99 shares was relevant to the court‘s exercise of discretion to relieve directors for breaches of duty under section 727 CA 1985 (now section 1157 CA 2006) because it ‗may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else‘s.‘ His judgment went as follows. Both Mr D'Jan and Mr Shenyuz are highly intelligent men who gave their evidence with confidence and the conflict is not easy to resolve. But I prefer the evidence of Mr D'Jan. He did not strike me as a man who would fill in his own forms. I think he would have wanted Mr Shenyuz to earn his commission by attending to these matters and I accept that he signed in the expectation that Mr Shenyuz would have completed the form correctly. Nevertheless I think that in failing even to read the form, Mr D'Jan was negligent. Mr Russen said that the standard of care which directors owe to their companies is not very exacting and signing forms without reading them is something a busy director might reasonably do. I accept that in real life, this often happens. But that does not mean that it is not negligent. People often take risks in circumstances in which it was not necessary or reasonable to do so. If the risk materialises, they may have to pay a penalty. I do not say that a director must always read the whole of every document which he signs. If he signs an agreement running to 60 pages of turgid legal prose on the assurance of his solicitor that it accurately reflects the board's instructions, he may well be excused from reading it all himself. But this was an extremely simple document asking a few questions which Mr D'Jan was the best person to answer. By signing the form, he accepted that he was the person who should take responsibility for its contents. In my view, the duty of care owed by a director at common law is accurately stated in sec. 214(4) of the Insolvency Act 1986. It is the conduct of: ―… a reasonably diligent person having both(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.‖ Both on the objective test and, having seen Mr D'Jan, on the subjective test, I think that he did not show reasonable diligence when he signed the form. He was therefore in breach of his duty to the company.

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Mr Russen said that nevertheless the company could not complain of the breach of duty because it is a principle of company law that an act authorised by all the shareholders is in law the act of the company: see Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. Mr D'Jan held 99 of the 100 issued ordinary shares and Mrs D'Jan held the other. Mr D'Jan must be taken to have authorised the wrong answer in the proposal because he signed it himself. As for Mrs D'Jan, she had never been known to object to anything which her husband did in the management of the company. If she had known about the way he signed the form and it was too late to put the matter right, the chances are that she would also have approved. She could hardly have brought a derivative action to sue her husband for negligence because he could have procured the passing of a resolution absolving himself from liability. The difficulty is that unlike the Multinational case, in which the action alleged to be negligent was specifically mandated by the shareholders, neither Mr nor Mrs D'Jan gave any thought to the way in which the proposal had been filled in. Mr D'Jan did not realise that he had given a wrong answer until the insurance company repudiated. By that time the company was in liquidation. In my judgment the Multinational principle requires that the shareholders should have, whether formally or informally, mandated or ratified the act in question. It is not enough that they probably would have ratified if they had known or thought about it before the liquidation removed their power to do so. It follows that Mr D'Jan is in principle liable to compensate the company for his breach of duty. But sec. 727 of the Companies Act 1985 gives the court a discretionary power to relieve a director wholly or in part from liability for breaches of duty, including negligence, if the court considers that he acted honestly and reasonably and ought fairly to be excused. It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of sec. 727 despite amounting to lack of reasonable care at common law. In my judgment, although Mr D'Jan's 99 per cent holding of shares is not sufficient to sustain a Multinational defence, it is relevant to the exercise of the discretion under sec. 727 . It may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else's. And although for the purposes of the law of negligence the company is a separate entity to which Mr D'Jan owes a duty of care which cannot vary according to the number of shares he owns, I think that the economic realities of the case can be taken into account in exercising the discretion under sec. 727. His breach of duty in failing to read the form before signing was not gross. It was the kind of thing which could happen to any busy man, although, as I have said, this is not enough to excuse it. But I think it is also relevant that in 1986, with the company solvent and indeed prosperous, the only persons whose interests he was foreseeably putting at risk by not reading the form were himself and his wife. Mr D'Jan certainly acted honestly. For the purposes of sec. 727 I think he acted reasonably and I

think he ought fairly to be excused for some, though not all, of the liability which he would otherwise have incurred. Mr D'Jan has proved as an unsecured creditor in the sum of £102,913. He has been paid an interim dividend of 40p in the pound and the liquidator has paid a further dividend of 20p but withheld payment to Mr D'Jan pending the resolution of these proceedings. In my view, having been responsible for the additional shortfall in respect of unsecured creditors, I do not think that he should be allowed any further participation in competition with ordinary trade creditors. On the other hand, I do not think it would be fair to ask him to return what he has received or make a further contribution out of his own pocket to the company's assets. I therefore declare that Mr D'Jan is liable to compensate the company for the loss caused by his breach of duty in an amount not exceeding any unpaid dividends to which he would otherwise be entitled as an unsecured creditor.