Thursday, 15 September 2011

UK: Scotland: payment of 'discretionary bonus for past services' was breach of duty

The duty to act bona fide in the interests of the company, upon which Section 172 of the Companies Act (2006) is based, is a subjective duty. What matters is whether the director honestly believed that he was acting in the interests of the company. Establishing a breach of this duty is unlikely to be easy but, as Jonathan Parker J. observed in Regentcrest v Cohen [2001] BCC 494, it will be much harder for a director to persuade the court that he honestly believed his actions were in the interests of the company where those actions resulted in substantial detriment to the company.

A good illustration of this point is provided by the opinion of Lord Glennie in Dryburgh v Scotts Media Tax Ltd. [2011] CSOH 147, which was given last week. In respect of transactions which substantially depleted a company's assets by £756,649 - described by a director as a form of discretionary bonus for past services - Lord Glennie reached the opinion that this director did not believe that transactions were in the interests of the company and he was, therefore, in breach of the duty to act bona fide in the interests of the company. However, Lord Glennie held that this claim, together with another for negligence, was prescribed (i.e., the time for bringing the claim against the director had passed, in accordance with the Prescription and Limitation (Scotland) Act (1973)).

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