Are two directors required to authorise the commencement of legal proceedings? Yes says the High Court.

The High Court has considered whether one of two directors (Director A) had authority to instruct solicitors on the company’s behalf to apply for an injunction to restrain the presentation of a creditor’s petition to wind the company up.

Unusually, the petition was supported by the other director (Director B). The two directors, who co-owned the company, had fallen out. Director A had accused Director B of breach of duty in diverting a corporate opportunity.

As is typical, the company’s articles empowered the directors to manage the company’s business and permitted delegation of their powers to a managing director (MD) or other executive director. Here, however, there had been no such delegation. MDs may sometimes have power by virtue of their appointment to commence proceedings on the company’s behalf (Smith v Butler [2012] EWCA Civ 314). Here, however, neither director had been appointed MD.

In these circumstances, the general rule is that no one director may authorise the commencement of proceedings without a board resolution (Mitchell & Hobbs (UK) Ltd v Mill [1995] 7 WLUK 316). Much depends on the facts however. In Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd [2005] EWHC 736 (Ch) for example, Peter Smith J considered that the courts would not allow two conflicted nominee directors to take advantage of their breach of duty by blocking proceedings brought by the company against their appointor through solicitors instructed by the other two directors.

In this case Director A argued that Director B, in supporting the petition, was hoping to thwart a potential claim against him for breach of duty and submitted that Fusion assisted his case. The court did not agree. Director B was not the object of the current proceedings, and so was not taking advantage of his breach of duty to block proceedings against him.

Nor was it right to say that, in supporting the petition, Director B was acting in breach of duty. The company’s financial position had deteriorated to such an extent that the common law duty on directors to put the interests of creditors first had arisen (BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112). This explained Director B’s supporting the creditor rather than the company.

Therefore Director A had lacked authority to instruct solicitors to make the application on the company’s behalf. The court ordered that it be struck out.

Case: Rushbrooke UK Ltd v 4 Design Concepts Ltd [2022] EWHC 1110 (Ch) (13 May 2022) (HHJ Paul Matthews, sitting as a judge of the High Court).

Source: Practical Law