Directors’ fiduciary duties may not be breached if they act honestly

Directors’ fiduciary duties may not be breached if they act honestly in what they consider to be in the best interests of the creditors.

The High Court, in Francis Wessely and Peter Hughes-Holland (Joint Liquidators of Laishley Limited, in liquidation) v Richard White [2018] EWHC 1499 (Ch), has ruled that if a director has acted honestly in what they consider to be the best interests of the creditors, then a liquidator’s claim for the alleged director’s breach of fiduciary duty is unlikely to succeed.

Laishley Limited ceased to trade in May 2010 and went into administration around a month later. Subsequently it entered creditors’ voluntary liquidation in May 2011.

The company was engaged in the construction sector. In May 2010, its director (Richard White) had entered into deeds of release (“DOR”) in respect of two construction contracts which he honestly believed would be in the best interests of the creditors of the company. The DOR released both parties from their future performance obligations. The contractors were also released from liability to the company for any unpaid payment obligations. White had reached this decision after receiving advice from insolvency practitioners that a novation would avoid terminating the existing contracts and would enable a new company to complete performance of the contracts, thereby minimising losses to creditors. Several contractors had expressed an interest in taking a novation of the contracts for consideration ranging from £75,000 to £200,000. White (wrongly) understood that the first step of the novation process was to enter into the DOR, the consequence of which was that the contracts could not then be novated.

It was argued by the liquidators that White had caused the company to lose the value of the contracts and the right to payments due to it by entering into the DOR and this was a breach of his fiduciary duties to the company. The judge looked at White’s considerations about the best interests of the company and creditors before entering into the DOR; in other words, the judge applied a subjective test looking at what White believed the situation to be. White had also considered the interests of the contractors and the employees and formed the view that their interests and the interests of the creditors were the same, and that accordingly, there was no need for White to give more weight to the creditors’ interests. The judge concluded that White, in reliance on advice by insolvency practitioners, had an honest belief that these actions would be in the interests of everyone. White’s fiduciary duty was not breached by his mistaken belief that entry into the DOR was the first step in the novation process as it was a subjective, not objective, test to be applied. The liquidators’ claim was therefore unsuccessful.

In addition, contrary to the liquidators’ assertion, the judge made clear that the burden of proof in such a case rests entirely on the liquidator to prove that a director has breached his duty to the company and that the losses suffered flow from that breach.

For further information please contact John Bradshaw or Sarah Mower in our Insolvency & Business Recovery Team.

Please remember that it is important to takes specific legal advice in relation to your own particular circumstances.

John Bradshaw specialises in business insolvency and restructuring within the Business Services department at Barker Gotelee Solicitors in Suffolk.

Ipswich Insolvency Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email