Duties of a dissenting director

This is an area of law & practice that is shrouded in mystery. In the context of a company in financial distress, most people tend to think that if a director disagrees with a course of action being taken by other directors, he/she should resign. We’ve never agreed with this, but in practice most directors don’t want to take personal risk. Since it is impossible to give cast iron assurances that they won’t be targeted for civil recovery proceedings or a disqualification investigation if the company fails, most directors who are not also significant shareholders decide to bail out & resign. However, most companies are owner managed businesses where some or all the directors are significant shareholders, and where the ability to resign is fettered by other matters such as breaching banking covenants, personal guarantee liabilities, etc.

There has now been a High Court decision which considers the duties of a dissenting director albeit not in the context of a company in financial distress. The case is Stobart Group Limited v William Andrew Tinkler [2019] EWHC 258 (Comm) where a dissenting director was removed on the basis of breach of his duties. There is particular focus in the judgment on the what the duty to exercise independent judgment means. In particular, and perhaps surprisingly, the Court decided that it was a breach of duty for the dissenting director to go direct to shareholders to discuss his dissent – though one gets the impression that it is how he went about this & what he did that was influential in the Court’s decision.

In the judgment, His Honour Judge Russen QC says that the duty to exercise independent judgment is one that exists to support the board’s management of the company. It does not entitle an individual director to act independently of the board. Where there is conflict between board members about specific issues, the steps a dissenting director may consider include: (i) raising the matter at board level; (ii) ensuring that any continuing opposition is minuted; (iii) if the questions are serious, raising the matter at a general meeting; and (iv) resignation.

Advising directors of a company under financial distress is very difficult to do. The advice they usually want is about how they can rescue the business even if that means a restructure through an insolvency process. This type of advice is mainly the province of experienced accountants, turnaround professionals, and Insolvency Practitioners rather than lawyers. In fact our view is that it is beyond the skill set of most insolvency lawyers to get involved in such situations in a helpful way because their only experience is in suing or defending directors after a company has gone into administration or liquidation. All they tend to do is produce a generic list of things that they advise the directors not to do, which increases the risk of claims if the business is not rescued and doesn’t address the directors’ main objectives. Isadore Goldman are different and several of our directors have experience of advising directors of companies in distress, working alongside their other professional advisers.