Corporate disputes – 2024 in review

Summary

The role of a director in a company registered in England and Wales is multifaceted, requiring both commercial and strategic leadership and compliance with an intricate web of legal obligations. The statutory framework incorporates both fiduciary duties, which are rooted in loyalty and good faith, and duties of care and skill, which focus on a director’s competence and diligence. These obligations are owed to the company itself, reflecting the principle that a company is a separate legal entity distinct from its shareholders or directors.

In an ever increasing regulatory landscape, there is heightened focus on the duties and conduct of directors, driven by various influences including the growing importance of Environmental, Social, and Governance (ESG) factors in corporate decision-making, increased expectations around climate and environmental risks, and scrutiny of directors’ responsibilities  during periods of financial distress. Understanding these duties is critical, as failure to adhere to them can lead to significant legal consequences, including personal liability. 

Reporting misconduct

In Invenio Business Solutions Ltd & Anor v Goyal & Anor [2024] EWHC 1236 (Ch) the court confirmed that a director’s fiduciary duty to act in good faith in the best interests of the company included a requirement to disclose a director’s own misconduct, particularly where the failure to disclose was on the part of a company’s finance director in respect of matters having a financial impact on the company. It was essential to the stewardship of the undertaking that the finance director could be relied upon to act with honesty and integrity in relation to expenditure and liabilities.

Directors’ accessory liability

In Lifestyle Equities CV and Anor. v Ahmed and Anor. [2024] UKSC 17, the Supreme Court ruled that Company directors could not be held liable as accessories if they had no knowledge of the essential facts that made the Company’s primary act wrongful, even where the Company’s infringement was a strict liability tort. The Supreme Court concluded that it would be unjust to hold a person who causes someone else to commit a tort, director or otherwise, jointly liable as an accessory if that person was acting in good faith and without knowledge of the facts that made the primary wrongdoer’s act tortious. Accordingly, the correct test for accessory liability is knowledge of (or turning a blind eye to) the essential facts that made the underlying act unlawful. This is the case whether the claim is based on procuring the primary wrongdoer to commit the tort or on participation in a common design, both of which are distinct tortious bases for imposing accessory liability. In this case the court was satisfied that there was no evidence to suggest that the Company directors had the knowledge required to make them jointly liable as accessories. For further reading see: Caught in the know: why knowledge (or lack of it) is power when it comes to directors’ accessory liability | Eversheds Sutherland.

In Njord Partners SMA-Seal LP v Astir Maritime Ltd [2024] EWHC 1682 a company director was found liable for deceit and unlawful means conspiracy for misrepresentations made on behalf of the business. The High Court found that the director had played a more than minimal part in the preparation of the statement of net worth, and knew it contained false information. As such, he had sufficient knowledge to find him liable for the representations made. The court rejected the notion that a company director could be held liable for the tort of deceit solely for failing to correct a false statement made by another person on behalf of the company, despite knowing it was untrue. The judgment confirms that “mere silence, however morally reprehensible, will not support an action of deceit”. It is generally necessary to show the existence of some legal duty to speak before mere silence can itself become actionable.

The case re-emphasises the Supreme Court guidance in Lifestyle Equities, that a person may be jointly liable as an accessory to a tort as a result of assisting another to commit that tort, provided that the assistance is more than trivial and is given pursuant to a "common design" between the parties. 

The “creditor duty”, wrongful trading, and trading misfeasance

In Wright & Ors v Chappell & Ors [2024] EWHC 1417 (Ch)¹  the High Court held former directors of British Home Stores (BHS) personally liable for wrongful trading and trading misfeasance on the basis that the directors either knew or ought to have known that there was no reasonable prospect of avoiding insolvent administration or liquidation. 

The court found that the directors had breached a number of their duties in continuing to trade. If they had discharged their duties properly, they would have concluded that the BHS Group should not continue trading after a particular point and the losses occasioned by that continued trading would not have been incurred. Here the directors had entered into "insolvency-deepening” activities in breach of the requirement to have regard to the interests of creditors.  The point at which the ”creditor duty” is engaged will be highly fact-specific.

The court rejected arguments that the directors had relied on the fact that their legal advisers had not specifically advised that there was no reasonable prospect of avoiding insolvent administration or liquidation. The court held that it is solely a director's duty to decide on whether there is a reasonable prospect that the company's insolvency can be avoided, regardless of whether they have received legal or financial advice, and that such responsibility cannot be delegated.

Following this decision, trading misfeasance is being viewed as a novel way of approaching a misfeasance claim under section 212 of the Insolvency Act 1986, as distinct from (but with considerable overlap with) a wrongful trading claim under section 214 of the Insolvency Act 1986.

For a reminder of the key learning points arising in the Sequana judgment, in which there was much discussion as to when creditors’ interests should be considered, see: Illuminating the Twilight Zone: UK Supreme Court Sequana judgment. 

New voluntary Code of Conduct for UK Company directors

On 6 June 2024, the Institute of Directors (IoD) consulted on a new code of conduct for directors. The IoD's code, which on its face applies to directors of companies of all sizes and across all sectors, is structured around six principles of director conduct, each underpinned by a number of specific undertakings, namely leading by example, integrity, transparency, accountability, fairness, responsible business. The Code is intended to be a practical tool to help directors make better decisions. It aims to help directors build and maintain the trust of the public in their business activities, following recent high profile corporate scandals.

The IoD Code has been written for individual directors (executive and non-executive) of all sizes of companies in the private, public and not for profit sectors. Boards are encouraged to publicly commit to the Code.

The code is said to represent "a voluntary commitment". Specifically in reference to the general duties of directors under the CA 2006, the IoD says that its code: “does not add to these legal obligations … [nor] is it associated with a formal enforcement mechanism. Rather, it sets a bar for director conduct beyond the legal baseline as a means of enhancing the legitimacy and reputation of directorship in the eyes of society and stakeholders".

For further information, read our briefing: UK: Code of Conduct for company directors published.

Failure to prevent fraud

On 6 November 2024 the UK Government confirmed that the new offence of failure to prevent fraud, under the Economic Crime and Corporate Transparency Act 2023 (ECCTA), will come into force on 1 September 2025, and also published its long-awaited guidance on the offence.

The guidance provides welcome clarity for in-scope organisations about how they may commit that offence. Most importantly, the Guidance describes principles and measures that businesses need to show they have reasonable prevention procedures in place regarding the s199 offence – they provide the benchmark against which, ultimately, the criminal courts will assess the steps taken by organisations to prevent fraud. 

Taken together, this offence and section 196 of ECCTA are major changes for corporate criminality under UK law with significant repercussions for both corporates and directors. We have tracked these reforms throughout their journey into law – read more here.