UK: England and Wales: directors' liability for inaction

The High Court has today given judgment in Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch). The case concerned allegations of breach of duty made against several directors. It was argued that the inaction of these directors - including their failure to disclose to the board information known to them - had caused the losses resulting from the misappropriation of the company's assets by the managing director. The trial judge (Briggs J.) rejected this argument because causation could not be established but he nevertheless made some interesting points with regard to directors' duties.  In evaluating the claims Briggs J. considered the duties of directors (under the law before the codification of directors' duties in the Companies Act (2006)) and held that that the standard of care expected of directors is assessed using a dual objective/subject test. In this regard, Briggs J. observed (paras. [37] and [38]):

The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has. To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited [1925] Ch 407 that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property".

Briggs J. then proceeded to consider the proper course of action for a director resigning from his/her position in circumstances where he/she is concerned about the conduct of the other directors.  The comments of Briggs J. in this regard are of particular interest because he recognised that resignation alone may not be a sufficient response (at para. [39]):

The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd [1999] 2 BCLC 704, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company's shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern".