Humphrey v Bennett

The Court of Appeal considered a derivative claim alleging that directors breached statutory and fiduciary duties by diverting an opportunity to develop adjoining land and by causing the company to sell land to a company controlled by one of the directors. The key statutory provisions were sections 175 and 177 of the Companies Act 2006 (duty to avoid conflicts and duty to declare interests) and section 1157 (relief for officers who acted honestly and reasonably). The judge at first instance had granted summary judgment against Mr Bennett for breach of duties and ordered an account of profits, but refused summary judgment as to Ms Murphy; the Court of Appeal allowed Mr Bennett’s appeal in part, holding that his pleaded amended defence raised realistic issues for trial on (i) whether the other directors had authorised or ought to have been treated as aware of the conflict for the purposes of sections 175 and 177 and (ii) whether relief under section 1157 could be argued at trial. The court accepted that summary judgment was inappropriate on those pleaded grounds because there was a realistic prospect that a trial judge could find authorisation, awareness under section 177(6)(b), or that the s1157 test might be satisfied after a full investigation. It also confirmed the common-law principle that a director who is a director of both companies on either side of a transaction may be in a position of conflict.

Background and parties:

• This is a derivative claim brought by Mr and Mrs Humphrey on behalf of Esprit Land Limited against Mr Bennett and Ms Murphy, who were directors. The claim concerned the sale of a parcel of land (Wyken Grange) and the acquisition and development of an adjoining parcel (Ansty Road) and alleged diversion of the opportunity and profit to a company called Esprit Homes Construction Limited (Construction).

Procedural posture: Mr and Mrs Humphrey obtained permission under section 260 of the Companies Act 2006 to bring the derivative claim. At first instance HHJ Rawlings granted summary judgment against Mr Bennett on 28 June 2022 and made related orders, but adjourned and dealt separately with Ms Murphy on 5 October 2022. The case was then appealed to the Court of Appeal.

The nature of the claim / relief sought:

• The claim alleged breaches of statutory duties (sections 172–177 of the Companies Act 2006) and equivalent fiduciary duties, sought an account of profits and other relief on behalf of the company, and relied on disclosure, authorisation and relief under section 1157 in response to any breaches.

Issues before the Court of Appeal:

1. Whether the judge was entitled to grant summary judgment against Mr Bennett on the pleaded case.
2. Whether the draft amended defence raised realistic prospects of authorisation or awareness by the other directors so as to defeat the s175 and s177 causes of action.
3. Whether permission should have been given to plead and rely upon section 1157 as a defence or mitigation of liability.
4. Whether Ms Murphy’s position differed because she asserted she had no beneficial interest in Construction.

Reasoning and outcome:

• The court reviewed the requirements of disclosure and authorisation under sections 175 and 177, and the guidance in Gwembe (as to the extent of disclosure necessary to secure informed consent). It held that, on the pleaded facts, it was realistically arguable that the other directors had agreed that the Ansty Road project would be pursued outside the company such that they ought to have been aware of the practical consequences, including disposal of Wyken Grange, and that on the particular informal factual matrix alleged the scope of disclosure required might be less detailed than the judge had indicated.
• The court also held that a defendant cannot avoid summary determination of a s1157 defence simply by pleading it; the defendant must plead sufficient facts to show a realistic prospect of relief. Here, the pleaded material gave a realistic prospect that relief under s1157 could be argued at trial, so the judge should have permitted reliance on it.
• The Court of Appeal allowed Mr Bennett’s appeal to permit the amended pleading and to proceed to trial on the issues of authorisation/awareness under sections 175 and 177 and the section 1157 defence. The cross-appeal against the judge’s treatment of Ms Murphy failed.

Practical points: the decision emphasises caution when granting summary judgment in director-duty cases, the fact-sensitive nature of disclosure/authorisation inquiries, and that s1157 defences must be pleaded with sufficient particularity to show a real prospect of relief.

This is an appeal from HHJ Rawlings’ judgments of 28 June and 5 October 2022. The Court of Appeal allowed Mr Bennett’s appeal in respect of the grant of summary judgment and the refusal to permit his amended defence to rely on sections 175/177 and section 1157; the court held that the pleaded amended defence raised realistic issues for trial on authorisation/awareness under sections 175 and 177 and on relief under section 1157 and therefore summary judgment was inappropriate. The cross-appeal concerning Ms Murphy was dismissed. The court gave these decisions because the factual matrix alleged could support a finding of authorisation or awareness and because a s1157 defence must be determined on the basis of pleaded facts showing a realistic prospect of relief rather than being insulated from summary disposal by mere assertion.

Appeal to the Court of Appeal (Civil Division) from High Court of Justice, Business and Property Courts (Birmingham) – judgments of His Honour Judge Rawlings delivered 28 June 2022 and 5 October 2022. Reported in this court as [2023] EWCA Civ 1433 (Case No: CA-2022-002093).