Green v Walkling & Ors

A director’s common-law duty of care is assessed objectively, but the court must consider the circumstances restricting the director’s freedom to act, including statutory money-laundering obligations. Where a director obtains appropriate legal advice about conflicting duties and follows it in good faith, that is strong evidence that the duty has been discharged and may mean that the director has fulfilled it. Taking advice is relevant but not invariably mandatory.

Relief under section 727 of the Companies Act 1985 requires honesty, reasonableness and a discretionary conclusion that the director ought fairly to be excused. The court may consider the wider circumstances and avoid a harsh and oppressive result.

The liquidator of Ortega Associates Ltd applied under section 212 of the Insolvency Act 1986 against Peter Walkling, a director, concerning the payment and alleged misappropriation of £443,000 from the company following the sale of its business. It was alleged that he breached his common-law and fiduciary duties by failing to prevent the payment to the holding company or protect the proceeds for creditors, and by participating in a transaction in which he allegedly expected a substantial personal bonus.

Mr Walkling had discovered a substantial VAT fraud, made an authorised disclosure, and acted under legal advice concerning the risk of committing the tipping-off offence under the Proceeds of Crime Act 2002. The central issues were whether his conduct breached his duties and, if so, whether relief under section 727 of the Companies Act 1985 should be granted.

1. Application dismissed. Mr Walkling had not breached his common-law duty of care or fiduciary duty. The question under the common-law duty was objective: what a reasonably competent director would have done in the circumstances, including the constraint created by section 333 of the Proceeds of Crime Act 2002.
2. It was unrealistic to expect him to stop the sale merely by refusing to sign. The sale was objectively reasonable and he had no rational explanation for opposing it which would not risk alerting Mr Moate to the investigation. He had demanded that the proceeds be used to pay creditors, but the company’s solicitors ignored him. A demand for a ring-fenced account would probably have had the same result.
3. An injunction application might objectively have been available, but the court could understand his concern that it would cause Mr Moate to suspect the investigation. The fact that no such step was suggested by his solicitor was relevant.
4. Legal advice is a relevant and important, though not decisive, consideration. In a specialist area such as the Proceeds of Crime Act 2002, a director unfamiliar with the legislation may properly seek advice about reconciling conflicting duties. A director who obtains appropriate advice and follows it to the best of his ability would prima facie have fulfilled his duty. Mr Walkling had done so.
5. The alleged fiduciary conflict was not established. The supposed £140,000 bonus was not payable from the sale proceeds, and the judge found that Mr Walkling neither expected to receive it nor allowed it to influence his decision.
6. Section 727 of the Companies Act 1985 therefore did not arise. Alternatively, Mr Walkling had acted honestly and reasonably, any breach would have been technical or minor rather than pervasive or compelling, and the circumstances overwhelmingly justified relief. An order against him would have produced a grossly unjust result.

First-instance application under section 212 of the Insolvency Act 1986. The application against Mr Walkling was dismissed.