UK: The Supreme Court on the 'creditor duty' - its existence, content and engagement

And so we have it - one of the most important company law judgments of recent years: BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25. The existence of the common law 'creditor duty' (also known as the 'rule in West Mercia' after the case West Mercia Safetywear v Dodd [1988] BCLC 250) has been confirmed and its content and application explained. A summary of the judgment is available here and here (pdf). A summary was also read out by Lord Briggs in the Supreme Court yesterday - see below (if the video does not appear below, it can also be found here): 

UK: The directors' duty to consider the interests of creditors - Supreme Court judgment this week in BTI case

After an unplanned break from blogging, I am happy to return with news that, on Wednesday this week (October 5), the UK Supreme Court will deliver its judgment in BTI 2014 LLC v Sequana SA [2022] UKSC 25. The court was required to consider, to quote directly from its summary, whether "the trigger for the directors' duty to consider creditors is merely a real risk of, as opposed to a probability of or close proximity to, insolvency".  

UK: England and Wales: prejudicial, but not unfair

A good illustration that, in order to succeed in bringing a claim for unfair prejudice, the claimant must establish both unfairness and prejudice, is provided by the recent High Court judgment Hussain v Hussain [2022] EWHC 1880 (Ch). Chief ICC Judge Briggs found that conduct agreed to be prejudicial (withdrawals in excess of declared salaries) was nevertheless not unfair because of, amongst other things, an understanding regarding the rights of the family members to draw on the profits generated by the businesses.

UK: Government confirms proposals for audit and governance reform

The Department for Business, Energy and Industrial Strategy today published its response, and proposals, following last year's white paper consultation Restoring Trust in Audit and Corporate Governance: see here (pdf). The accompanying press release is available here.    

The Financial Reporting Council - set to become the Audit, Reporting and Governance Authority (ARGA) with new powers through legislation under the Government's plans - has welcomed the Government's proposals although its chief executive, Sir Jon Thompson, described as a "missed opportunity" the decision not to introduce a statutory version of the Sarbanes-Oxley internal control statement: see here. Instead, the Government will invite the FRC/ARGA to include such a statement in the UK Corporate Governance Code as part of a review of its internal control principles and provisions.

Dramatic changes to the auditing profession now seem most unlikely, the Government having decided against seeking to establish, at this stage, a new corporate auditing framework or a new professional body for auditing. Instead, ARGA is to be invited to work with the existing professonal bodies to improve auditor education and continuing professional development.

Other proposals include giving ARGA the power to set new minimum requirements for audit committees.  It will also be given the power to investigate and sanction certain breaches of reporting and auditing responsibilities by directors of public interest entities.

UK: England and Wales: the director's duty to promote the success of the company

In IBM United Kingdom Ltd v Lzlabs GmbH [2022] EWHC 884 (TCC), Mr Justice Eyre has explored the circumstances in which the director's duty to promote the success of the company, under section 172 of the Companies Act 2006, will be broken where the director causes the company to breach a contract or other legal obligation. Drawing heavily on Antuzis & Ors v DJ Houghton Catching Services Ltd & Ors [2019] EWHC 843 (QB), [2019] WLR(D) 254, his Lordship observed (at para. [36]): 

... not every instance of causing a company to breach a contract or a legal obligation will involve a director in a breach of the section 172 duties ... The key will be whether the director was properly acting to promote the success of the company taking account of the matters to which he or she is required by section 172 to have regard. In that exercise it will be necessary to consider the circumstances as a whole. Those will include the motivation of the director and the nature of the duties said to be broken but in addition the nature of the obligations being broken by the company and the consequences of the company's breach can be relevant to the question of whether the director can properly have been said to have been acting in the interests of the company."

 

UK: England and Wales: Court of Appeal considers ultra vires and directors' liability

Today has seen several Court of Appeal judgments handed down and published on the BAILII website. Two have caught my eye, the first of which is Ceredigion Recycling & Furniture Team v Pope [2022] EWCA Civ 22. Of note is what the court said about the operation of section 39 ("A company's capacity") of the Companies Act 2006. To quote the Chancellor: "The fact that section 39 abolishes the ultra vires doctrine as between the company and third parties does not relieve the directors from liability to the company for their breach of duty or wrongdoing merely because, qua members, they agreed with the course which was taken" (para. [47]). 

UK: England and Wales: the duties of non-executive directors

A recent judgment of the High Court - Secretary of State for Business, Energy And Industrial Strategy v Selby [2021] EWHC 3261 (Ch) - is of interest because of the discussion it contains regarding the duties and expectations placed on non-executive directors (NEDs) and the message it sends about what NEDs are expected to know, and concern themselves with, in respect of their companies. The NED in the case was disqualifed from acting as director for four years. ICC Judge Prentis found that the NED had, amongst other things, failed to investigate thoroughly the reasons for an "extraordinary uplift" in the company's turnover, something the judge said was a "reprehendable abrogation of duty ... whether the uplift was owing to business which was legitimate or not" (para. [234]).

UK: Supreme Court judgment next week - proprietary claims and priority

The UK Supreme Court has announced that it will hand down its judgment in CPS v Aquila Advisory Ltd [2021] UKSC 49 on 3 November next week. The issues before the court, to quote directly from the summary provided, were these: "Where a proprietary claim is brought by a company against its directors to recover proceeds of crime received in breach of fiduciary duty: (1) Can that proprietary claim be asserted in priority to a confiscation order obtained by the Crown Prosecution Service? (2) Can the illegality of the directors be attributed to the company in circumstances where the company suffered no loss and stood to profit from the crime?"

Australia: Treasury review of the insolvent trading safe harbour

The Treasury is seeking views as part of its review of the insolvent trading safe harbour introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017: see here. 

Australia: Court of Appeal of Western Australia considers the reflective loss principle

Last month I noted a decision of the New South Wales Court of Appeal concerning the (shareholder) reflective loss principle: Central Coast Council v Norcross Pictorial Calendars Pty Ltd [2021] NSWCA 75. The principle has been considered again, at appellate level, in a judgment handed down today by the Court of Appeal of Western Australia: Mineralogy Pty Ltd v Sino Iron Pty Ltd [No 2] [2021] WASCA 105.

 

The court (Buss P; Murphy and Beech JJA) found that the following principles emerged from the authorities (para. [268], to quote directly):

• Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder to make good a diminution of the value of the shareholder's shareholding where that loss merely reflects the loss suffered by the company.
• This will be so even if the company has declined or failed to take action to recover the loss.
• If the company suffers loss, but has no cause of action to sue to recover that loss, a shareholder with a cause of action who suffers loss to the value of his shares may sue in respect of it.
• The reflective loss principle does not prevent a shareholder suing for a loss suffered from a breach of duty owed to him or her where the loss is separate and distinct from the loss suffered by the company.
• The principle extends to the case where both the company and the shareholder have a claim for breach of duty or breach of contract which caused the loss.

UK: England and Wales: unfair prejudice - a majority shareholder's petition and an order regulating the company's affairs

Judgment was delivered today by His Honour Judge Hodge, sitting as a judge of the High Court, in Macom GmbH v Bozeat & Ors [2021] EWHC 1661 (Ch). The case - a successful petition brought under sections 994-996 of the Companies Act 2006 (the unfair prejudice remedy) - is noted here because in two respects it is unusual: first, the petitioner was a majority shareholder; second, the relief provided was an order regulating the affairs of the company.

UK: Government consultation - audit and governance reform

A quick note. The Government has, this morning, published a press release announcing the start of a consultation on "wide-ranging reforms to modernise the country’s audit and corporate governance regime": see here. At the time this post was originally posted, the consultation document (a white paper, I believe) had not been published - it ought to appear here later today (most likely after the Secretary of State for Business, Energy and Industrial Strategy has delivered a statement about the reforms in Parliament - as is expected according to the order paper for today).

UK: directors' duties, delegation and oversight - a view from the Judicial Committee of the Privy Council

The Judicial Committee of the Privy Council delivered its opinion today in Byers v Chen (British Virgin Islands) [2021] UKPC 4: see here or here (pdf). The case concerned a claim by liquidators against a former director of a company. Of particular interest is what the Board had to say about directors' duties (at para. [92]): 

It has been held in a number of cases, correctly, in the Board’s opinion, that a director may not knowingly stand by idly and allow a company’s assets to be depleted improperly: see, for example, Walker v Stones [2001] QB 902, at 921D-E per Sir Christopher Slade; Neville v Krikorian [2006] EWCA Civ 943; [2007] 1 BCLC 1, paras 49-51 per Chadwick LJ; Lexi Holdings v Luqman [2007] EWHC 2652 (Ch), paras 201-205 per Briggs J (as he then was). To the contrary, a director who knows that a fellow director is acting in breach of duty or that an employee is misapplying the assets of the company must take reasonable steps to prevent those activities from occurring".

UK: England and Wales: directors, bribery and section 176 of the Companies Act 2006

Judgment was delivered yesterday in Kings Security Systems Ltd v King & Anor [2021] EWHC 325 (Ch). While first instance, it is nevertheless noteworthy for the trial judge's discussion of whether the introduction of section 176 ("Duty not to accept benefits from third parties") of the Companies Act 2006 had removed the availability of tort based claims against a director in respect of bribery. The trial judge, Andrew Lenon QC, held that section 176 did not have this effect, observing that if section 176 had indeed removed the ability to bring such claims:

.... the liability of the briber and the liability of the bribed director would be governed by different rules. In the absence of clear words, I do not consider that this was the intention of the legislator. Even if the effect of section 170(3) is to substitute the general duties for the tort of bribery ... section 170(4) provides that 'the general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.' The law relating to bribery therefore remains relevant. Advancing a separate cause of action in bribery where there are grounds for claiming a breach of section 176 of the 2006 Act may, however, add nothing more than colour". 

EU: Commission report - directors' duties and sustainable corporate governance

The European Commission has published a study on directors' duties and sustainable corporate governance: see here. The study found that, to "some extent", regulatory frameworks and market practices, contribute to corporate short-termism; and various options for reform our outlined. 

Australia: Victoria Court of Appeal reasserts that fiduciary duties may survive end of the relationship that gave rise to them

The Victoria Court of Appeal gave judgment several days ago in Schmidt v AHRKalimpa Pty Ltd [2020] VSCA 193. The decision is of note because of the discussion it contains concerning whether, and in what circumstances, fiduciary duties may survive the end of the relationship that gave rise to them. The court stated (at para. [142]): 

We acknowledge that there is authority in jurisdictions outside Victoria to the effect that a fiduciary duty does not survive the termination of the relationship that gave rise to it. However, in our view, in the absence of a contrary decision by the High Court, the law in Victoria is as stated by this Court in Edmonds [[2005] VSCA 27]. That is, depending on the circumstances of a particular case, fiduciary duties may survive the termination of the relationship that first called those duties into being".

Malaysia: the conduct of directors of listed companies and their subsidiaries

The Securities Commission yesterday published guidelines on the conduct of directors of listed companies and their subsidiaries: see here (pdf). The Commission explains, in the accompanying press release, that the new guidelines "take into account the evolving Malaysian corporate governance landscape, lessons learnt from the [Commission's] regulatory work in enforcing corporate governance breaches and the need to ensure that Malaysia’s framework remains relevant and effective".

Australia: the role, responsibilities and duties of the company chairman

Judgment was delivered today by Beach J, sitting in the Federal Court, in Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098: see here or here (pdf). I note the decision because of the important and lengthy discussion it contains (relative to other Commonwealth decisions) concerning the role, responsibilities and duties of the chairman of the board of directors (see, in particular, paras. [1398] to [1429]).

OECD Report: The Duties and Responsibilities of Boards in Company Groups

The OECD, as part of its corporate governance series of publications, has published an overview, covering 45 jurisdictions, of the duties and responsibilities of boards in the context of corporate groups: see here.

UK: England and Wales: directors' duties and company administration

ICC Judge Barber gave judgment yesterday in Re Systems Building Services Group Ltd [2020] EWHC 54 (Ch). I note the case here because of the interesting discussion it contains regarding the extent and nature of the general duties of directors in the context of company administration. Judge Barber stated (at paras. [55] and [56]):

....the general duties of a director of a company to the company set out in ss171 to 177 [Companies Act 2006] do survive the company's entry into administration and creditors' voluntary liquidation. Whilst in office, a director continues to owe the company the duties laid down in ss171 to 177 CA 2006, as applied and interpreted in accordance with the underlying common law rules and equitable principles on which such duties were based: s170(3) and (4).

The fact that, on a company's entry into administration or creditors voluntary liquidation, the Insolvency Act 1986 is engaged, imposing a series of additional specific duties on the part of a director and limiting his managerial powers to those authorised under or in accordance with the Act, does not, in my judgment, operate so as to extinguish the fundamental duties owed by a director of a company to the company as reflected in ss.171 to 177 CA 2006."