Wessely & Anor (Liquidators of Laishley Ltd) v White

A director’s duty to act in the best interests of an insolvent or doubtfully solvent company is treated as a duty to act in the interests of creditors as a whole. Where the director actually considers the company’s and creditors’ interests, and no material interest is unjustifiably overlooked, the relevant test is subjective: whether the director honestly believed that the decision was in the company’s or creditors’ interests. The court must assess the conduct without hindsight.

A claim for equitable compensation requires proof of loss caused by the breach. The burden ordinarily remains on the claimant to prove both breach and loss. It may shift only where the defendant’s conduct has prevented proper proof of the loss.

The joint liquidators of Laishley Ltd brought a claim against its former managing director for equitable compensation. They alleged that he breached his duties by executing deeds releasing the company from two building contracts shortly before its administration and liquidation.

The liquidators claimed the loss of the contracts’ value and of accrued payment and retention rights. The central issues were whether the respondent’s conduct breached his statutory duties, whether any breach caused loss, whether evidence of the alleged contractual equity was admissible, and whether the burden of proof should be altered.

1. Admissibility and valuation. The evidence of a surveyor who was also a witness of fact was inadmissible as expert opinion on the value of accrued contractual payment and retention rights. No permission had been given for expert evidence, and no proper contractual or valuation evidence established that the rights had any value. Evidence of what the respondent and fellow directors would pay for novation was admissible as evidence of value, rather than expert opinion.
2. Directors’ duties. Sections 171 and 172 of the Companies Act 2006 codify the relevant common-law duties. Where a company is insolvent or of doubtful solvency, the interests of creditors as a whole become paramount. If there is no evidence that the director considered those interests, or if a material interest was overlooked without objective justification, an objective test applies. Where the director actually considered the relevant interests and no material interest was unjustifiably overlooked, the test is subjective: whether the director honestly believed that the act was in the company’s or creditors’ interests.
3. The respondent genuinely believed that releasing the contracts was the first step towards novation, and that novation would benefit the company, its creditors and other affected parties. Although he was mistaken and inexperienced, he had considered the relevant interests. His conduct therefore did not breach sections 171 or 172.
4. Causation and proof of loss. Equitable compensation is compensatory and requires loss in fact caused by the breach. The liquidators failed to prove that the deeds caused loss. The company had already ceased work and was in breach, so the employers could have terminated the contracts. The only significant bids were not shown to be financially viable or acceptable to the employers. No admissible evidence established loss of accrued contractual rights.
5. The burden of proving breach and loss remained on the liquidators. A different approach may be justified where a proven breach prevents the claimant from proving the value of its loss, but that was not this case. The application was dismissed.

Not stated in the judgment.