Company Directors’ Duties – Negligence or Error of Judgment?

January 7, 2016

Company Directors’ Duties – Negligence or Error of Judgment?

Company directors inevitably make errors of commercial judgment now and again, but these rarely amount to a breach of the legal duties which they owe to shareholders, which occurs when decisions are made that are wholly unreasonable. A Court of Appeal case has underlined what a tricky dividing line that can be.

A company launched proceedings against two of its former directors, alleging that they had made a negligent decision to withdraw an application for a UK patent in respect of a technical advance which could have been extremely valuable. It was alleged that their conduct fell below the standards of care, skill and competence to be expected of a director and that they had breached the duties which they owed under their service contracts and Section 174 of the Companies Act 2006.

The company's case was rejected summarily by a judge, who found that, whether or not the directors' decision was right or wrong, it had been a reasonable one. They had considered that the company's position was at best precarious in negotiations concerning the patent and that withdrawal of the application would foster the company's future collaboration with a potential trading partner.

However, the Court of Appeal allowed the company's appeal against that ruling, finding that there were areas of stark evidential conflict in the case and that the judge had been wrong to deal with the matter on a 'summary' basis.

In the absence of full evidence, the judge was not justified in finding that the company's case was unarguable. The Court's ruling means that the matter will go forward to a full trial. However, the hurdle that must be surmounted by the company in order to prove a case of breach of duty by the directors remains a high one.