Disputes between directors often arise because of, and/or result in, disputes about company money. Directors need to be alert to how they are required to act, particularly in times of conflict. Section 172 of the Companies Act 2006 imposes a broad duty on directors to promote the success of the company however the term “success” is unhelpfully uncertain, especially where the company is in difficulty and/or where the company is wound up.
In the recent decision of Atkinson & Mummery (as joint liquidators) v Kingsley and Smith  EWHC 2913 (CH) the court examined the test under section 172 and found that a director had not acted unlawfully in not terminating another director’s access to the company bank account where she was not aware that company funds might be misapplied by him. However such cases are fact-specific and whether a director’s actions are held to a subjective or objective standard may boil down to whether he/she has evidenced whether a decision taken is in the company’s interest and the factors in section 172 given due consideration.
Liquidators of the company brought proceedings against the former directors seeking to (amongst other things) recover £83,000 which was transferred from the company’s account to a third party. The company bank account did not require the signatures of both directors to make the transfer. The transfer was made by Mr Kingsley without the knowledge of his fellow director Ms Smith. However the claim was only pursued against Ms Smith as the liquidators became aware during the proceedings that Mr Kingsley had already been made bankrupt.
The liquidators argued that the payment of £83,000 was unlawful, being made for no consideration, and because the relationship between the directors had broken down so severely, Ms Smith should have put in place arrangements to prevent Mr Kingsley from dealing with the company's assets without her authorisation. In failing to do so, they alleged that she had breached the duty to promote the success of the company under section 172 and the duty to exercise reasonable care, skill and diligence in under section 174.
Ms Smith’s position was that the payment was not unlawful, but that it was a dividend properly payable.
The general test for determining whether there has been a breach of section 172 is subjective, namely whether the director himself/herself honestly believed that their act or omission was in the company's interests. However, the subjective test only applies where there is evidence of actual consideration of the company's interests, for example minutes of discussions, to prove that the director paid due regard to the factors listed in section 172(1). In this case, Ms Smith had not considered prior to the transfer whether restricting Mr Kingsley’s access to the company’s bank account was in the interests of the company. There was no evidence that disagreements between the directors as to the management of the company had hampered their mutual trust enough to warrant restricting access to the company’s bank account and Mr Kingsley had never previously abused his right as a director to access the bank account.
In the absence of evidence, the proper test is objective i.e. whether an intelligent and honest person in the position of a director could, in the circumstances, reasonably have anticipated that their act or omission was in the company’s interests.
Notably, the court held that the objective test did not impose a requirement to determine whether Ms Smith was on notice that Mr Kingsley might misapply the company’s money. However, any actual knowledge or notice of such a risk would be part of the factual matrix and taken into account when objectively considering whether her omission amounted to a breach of section 172. The fact that the directors had been unable to agree on the company's future did not automatically lead to an obligation on Ms Smith to terminate Mr Kingsley’s access to the company's account.
The company’s history of paying dividends and Ms Smiths’ consistent account that the transfer was a dividend following the sale of the company’s development property supported her view that the payment was a dividend and not an unlawful payment made for no consideration.
The court held that even if Ms Smith was or may be liable, she had acted honestly and reasonably and, having regard to all the circumstances of the case, she ought fairly to be excused, therefore, the court relieved her from liability under section 1157. Ms Smith had not benefitted from the payment in any way and upon discovering the payment she took steps immediately to prevent it from happening again by freezing the company’s bank account until the mandate could be changed to require two signatures for any transfer.
There is always debate over the extent to which directors should document, in minutes of discussions, that they have paid due regard to the factors listed in section 172(1) when taking decisions. The above case demonstrates that whilst it is helpful to record such considerations, failure to do so may not prove fatal and the objective test for determining whether there has been a breach of section 172, whilst imposing a higher bar, does not require an investigation into whether the director was on notice or aware of a potential misapplication of company funds.
Nevertheless, if you become aware that a fellow director may use company funds for a purpose which is not in the best interests of the company, it is important to document your concerns and seek advice as soon as possible.