Humphrey & Anor v Bennett

Factual and Procedural Background

The case concerns two appeals in a derivative claim brought by the Plaintiff against the Defendant and the Defendant's partner. The claim alleges breaches of statutory and fiduciary duties by the Defendants as directors of Company A, specifically relating to the disposal of a piece of land and diversion of a development opportunity to another company controlled by the Defendants.

Initially, the Plaintiff and the Defendant's partner owned Company A and invited the Plaintiffs to acquire a 49% shareholding and become directors. The company purchased a landlocked piece of land (the "Wyken Grange land") in 2018 with the intention to develop it alongside an adjoining piece of land (the "Ansty Road land") as part of a joint project ("the Ansty Road project").

After completion and sale of other development sites, the Defendants caused Company A to transfer the Wyken Grange land to Company B (a company controlled by the Defendants) at the original purchase price, despite the land having obtained planning permission. Subsequently, the Ansty Road land was acquired by a relative of the Defendant, financed by loans from companies owned by the Defendants, and then partially transferred to Company B for development.

When the Plaintiffs complained about lack of information regarding these transactions, they were removed as directors of Company A. The Plaintiffs obtained court permission to bring the derivative claim against the Defendants for breaches of duties under the Companies Act 2006 and common law.

The Defendants filed a Defence denying breaches, claiming the Plaintiffs refused to invest further funds for the project, and that the project was pursued outside Company A by Company B and related entities. The Defendants sought to amend their Defence to include further particulars and a defence under section 1157 of the Companies Act 2006.

The trial judge granted summary judgment against the Defendant (Mr. Bennett) but refused summary judgment against the Defendant's partner (Ms. Murphy), allowing her to amend her Defence. The Defendant appealed the summary judgment and refusal to permit amendment, while the Plaintiffs cross-appealed regarding Ms. Murphy's position.

Legal Issues Presented

1. Whether the Defendant breached his statutory duties under sections 175 and 177 of the Companies Act 2006 by failing to disclose and properly authorise conflicts of interest in relation to the sale of the Wyken Grange land and the Ansty Road project.
2. Whether the Defendant's proposed amended Defence raised a real prospect of success such that summary judgment should not have been granted.
3. Whether the Defendant is entitled to relief from liability under section 1157 of the Companies Act 2006 on the basis that he acted honestly and reasonably.
4. Whether the Defendant's partner owed similar duties and whether summary judgment was appropriate against her.
5. Whether the Plaintiffs' cross-appeal regarding the Defendant's partner's interest in Company B and the applicability of statutory duties was well-founded.

Arguments of the Parties

Defendant's Arguments

• The Defendant contended that the Plaintiffs had refused to invest further capital to fund the Ansty Road project through Company A, and thus it was agreed the project would be pursued outside Company A by Company B and related entities.
• The Defendant argued that this understanding constituted sufficient authorisation under section 175 for the transactions and that full disclosure to the Plaintiffs was not required in the detail asserted by the Plaintiffs.
• The Defendant maintained that the sale of the Wyken Grange land to Company B was at full market value, negating claims of improper profit or breach.
• The Defendant sought to rely on section 1157 to be relieved from liability, arguing that he acted honestly and reasonably in the circumstances.
• Procedurally, the Defendant argued that the Particulars of Claim did not adequately specify the duties breached, constituting litigation by ambush.

Plaintiffs' Arguments

• The Plaintiffs alleged that the Defendants breached their duties by diverting Company A’s assets and opportunities for their own benefit and that of Company B, without proper disclosure or authorisation.
• The Plaintiffs argued that the Defendants failed to inform them of critical information regarding the sale of the Wyken Grange land and the Ansty Road project, contrary to statutory requirements under sections 175 and 177.
• The Plaintiffs contended that the Defendants could not rely on section 1157 for relief since they obtained a material benefit from their breaches and did not act reasonably or fairly.
• In cross-appeal, the Plaintiffs argued that the Defendant's partner was equally subject to the statutory duties due to her directorship of Company B, and the judge erred in distinguishing her position from that of the Defendant.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gwembe Valley Construction Company v Koshy [2003] EWCA Civ 1048	Common law requirement for full disclosure by directors of all material facts to shareholders to avoid breach of fiduciary duty and unauthorised profit.	The court applied the principles analogously to the statutory duties under sections 175 and 177, identifying minimum disclosure requirements for authorisation and declaration of conflicts of interest.
Re In a Flap Envelope Company Ltd [2003] EWHC 3047	Section 1157 relief requires an extremely powerful case to relieve a director who obtained a material benefit from breach of duty.	The court referenced this authority in assessing whether the Defendant could be relieved of liability under section 1157, ultimately rejecting summary relief based on this principle.
Doncaster Pharmaceuticals Group Ltd v The Bolton Pharmaceutical Co 100 Ltd [2006] EWCA Civ 661	Caution against over-use of summary judgment where fuller investigation might alter the outcome.	The court emphasized the need for trial in this case due to factual complexities and the informal nature of the company's operations.
Re D'Jan of London Limited [1994] 1 BCLC 561	Relief under section 1157 may be granted even if negligence or breach of duty is found, if the director acted reasonably.	The court accepted that failure to comply with statutory mechanisms for authorisation may not preclude relief under section 1157.
Dickinson v NAL Realisations (Staffordshire) Ltd [2020] 2 BCLC 120	Section 1157 relief is not limited to personal claims and may apply even when proprietary claims are made, potentially transferring property ownership.	The court noted the complexity in assessing "material benefit" and the discretionary nature of relief under section 1157.
Transvaal Land Company v New Belgium (Transvaal) Land and Development Company [1914] 2 Ch 488	Common law rule that a director of two companies involved in a transaction has a conflict of interest requiring disclosure and authorisation.	The court held that being a director of both companies triggers fiduciary duties and conflict of interest rules, supporting the statutory framework.

Court's Reasoning and Analysis

The court first identified the statutory framework under sections 175 and 177 of the Companies Act 2006, which impose duties on directors to avoid conflicts of interest and to disclose interests in proposed transactions to the board. The court found that the Defendant, as sole director and shareholder of Company B, had a conflict of interest when causing Company A to sell the Wyken Grange land to Company B and in facilitating the acquisition of the Ansty Road land by related parties.

The court applied the principles from Gwembe, requiring full disclosure of material facts including the identity of the purchasing company, the price paid, and the anticipated profit, to obtain valid authorisation or to comply with the duty to declare interests. The Defendant failed to plead or prove such disclosure or authorisation, and the Plaintiffs were not aware of the transactions until after they occurred.

The court rejected the Defendant's argument that the Plaintiffs' refusal to invest in the project authorised the diversions, holding that ownership of the land and opportunity remained with Company A, and that the Defendant's personal interests conflicted with those of Company A. The sale at the original purchase price, despite planning permission increasing value, further indicated breach.

Regarding section 1157 relief, the court noted that although relief is discretionary and requires the director to have acted honestly and reasonably, the Defendant had not pleaded sufficient facts to show a realistic prospect of relief, particularly given the failure to disclose and the benefit obtained by Company B.

However, the court allowed the Defendant to amend the Defence to include these matters and permitted the issues to proceed to trial, recognizing factual disputes and the informal nature of the company's operations that could affect the reasonableness and fairness assessments.

In relation to the Defendant's partner, the court held that mere directorship of Company B without beneficial shareholding did not necessarily trigger the same duties, and summary judgment was inappropriate. The court also held that the Plaintiffs' cross-appeal on this point failed, as the judge had correctly distinguished the parties based on the evidence.

The court emphasized that summary judgment should be approached cautiously in complex fiduciary duty cases, particularly where factual uncertainties exist and fuller investigation may alter the outcome.

Holding and Implications

The court's final decision was to ALLOW the Defendant's appeal against the summary judgment and refusal to permit amendment of the Defence, and to DISMISS the Plaintiffs' cross-appeal regarding the Defendant's partner.

The effect of this decision is that the Defendant may amend his Defence to raise statutory defences and rely on section 1157 relief, and the claim against him will proceed to trial where factual disputes can be resolved. The Defendant's partner remains protected from summary judgment and may also amend her Defence. The decision does not establish new precedent but underscores the importance of full disclosure and proper authorisation in director conflicts, and the cautious use of summary judgment in complex company law disputes.