Breaching Fiduciary Duty: Humphrey v Bennett [2023] EWCA Civ 1433

In the matter of Humphrey v Bennett [2023] EWCA Civ 1433

In the case of Humphrey v Bennett [2023] EWCA Civ 1433, the Court of Appeal in the UK handed down a judgment which examined the importance of directors upholding the fiduciary duties they owe to their companies and ensuring that directors have no conflicts of interest in their dealings.

Please note that this article considers a case heard in the UK.

 

Facts

Mr and Mrs Humphrey (“Humphreys”) argued that Mr Bennett and Ms Murphy (“Directors”) breached their fiduciary duty to Esprit Land Limited (“the Company”) by personally exploiting a business opportunity.

The Company acquired a plot of land and obtained permission to develop the land by building new houses upon it. The Humphreys refused to invest any additional funds for the development. Following the Humphreys’ refusal, the Directors arranged for the Company to sell its assets to a second company, Esprit Homes Construction Limited (“EHC”). The Directors were also the directors of EHC, and Mr Bennett was the sole shareholder.

The property was sold to EHC at the same price that the Company had purchased it for, with no reflection that permission to build houses had been obtained.

As a result, the Humphreys brought a derivative claim on behalf of the Company, arguing that the Directors had breached their fiduciary duties.

 

Legislation

The Companies Act 2006 (UK) (“the Act”) governs directors’ duties, and includes:

1. Section 175, which states that a director has a duty to avoid conflicts of interest;
2. Section 177, which states that a director has a duty to declare an interest in transactions; and
3. Section 1157, which enables the court to grant relief from liability to a director who has breached their duty but has acted honestly and reasonably.

 

Lower Court Decision

The Lower Court found that the Directors had not complied with their duties under section 175 and 177 of the Act. Additionally, there was no basis to grant relief to the Directors under section 1157 of the Act.

Ultimately, the Court granted summary judgment to the Humphreys.

 

The Court of Appeal

The Court of Appeal found that the Lower Court applied the approach laid out in section 175 and section 177 of the Act too rigidly. In particular, the Court of Appeal held that the Lower Court did not consider the nature of the Company and how it operated, noting that the thresholds for sections 175, 177 and relief under 1157 may be different for a small and informally run company as opposed to a large company with a formalised board structure and reporting systems.

With regard to section 1157, the Court of Appeal held that the relief should be applied broadly. The Court of Appeal rejected the argument that a director could only rely on this section if they had an ‘extremely powerful case’ and found that the Directors, on the available facts, could potentially have made out a defence at trial and as such summary judgment should not have been awarded.

 

Takeaway

While this case was decided in the UK, Australia’s legislation and duties for directors are highly similar to that of the UK. This case demonstrates the importance of identifying potential conflicts of interest and dealing with them early on. When dealing with potential conflicts of interest, directors should err on the side of caution.

For more information regarding your duties as a director or any potential breach of your duties, please contact Mr Stipe Vuleta or Ms Sayward McKeown of our office.

 

*This article was prepared with the assistance of Annabel Randall.