The dissenting director – should I stay or should I go?
Tuesday 26th March

Anyone who has had the pleasure of being a director of a company will know that from time to time disagreements will arise between the directors. In the context of a company under financial stress, the approach that directors take to decision making is inevitably influenced by concerns about their own personal exposure to financial, regulatory, and reputational risk. This is despite the fact that under section 172 Companies Act 2006 and common law, directors are under a duty to have proper regard to the interests of creditors once they know or ought to know that the company is or is likely to become insolvent.

In the real world, financial stress produces personal stress at board level. The collaborative nature of board meetings and decision making can fracture. Strategically, the biggest question will usually be whether the company should trade on or restructure or close down. Operationally, there will be many difficult decisions to take almost on a day to day basis about such matters as paying creditors, managing cashflow, entering new contracts, etc.

From time to time we are asked to advise an individual director who disagrees with the way the board are responding to the problems that the company is facing. The question they ask is almost always the same: “Can I stay on without exposing myself to personal risk or should I resign?”

The position of a dissenting director was considered in the recent High Court decision in Stobart Group v Tinkler. Mr Tinkler was the former CEO of Stobart who had been dismissed because he communicated with various shareholders and employees about his dissatisfaction with certain decisions that the board was taking. At Court it was agreed that what a director should or should not do is primarily governed by the duty on each director under section 173 Companies Act 2006 to exercise independent judgment. However, there was a fundamental disagreement between Stobart’s and Mr Tinkler’s lawyers as to what proper observance of this duty entails. This is an area of law where there is a surprising lack of legal authority and the Judge resorted to considering a legal textbook. The Judge’s conclusion was:

“The individual director should therefore (as appropriate) raise, debate, reflect upon and then decide upon his own position on such matters at the level of the board, either as part of the majority or as a dissenting voice. Only by doing so will he facilitate his fellow directors’ compliance with their own duties to exercise an independent judgment and to act in the best interests of the company. The duty upon each director to exercise an independent judgment exists in order to support the board’s management of the company’s business in an efficient and competent manner. By invoking it to justify what might be, or border upon, freelance activity on his part, a director is likely to hinder rather than contribute to the board’s management of the business.”

The Judge made it very clear that, unless the company’s constitution says otherwise, directors’ duties of confidence mean that they cannot individually go off and disclose to shareholders or employees (or presumably creditors including the company’s bank) what has been discussed and decided by the board . Any disclosure would need the prior approval of the board, or be in the presence of the board. In addition to the duties of a director, the Court also noted that Mr Tinkler was bound by the terms of his employment contract including contractual duties of confidence.

The Judge noted the comments of the Court in Madoff v Raven that the exercise of an independent mind and a dissenting voice against the wish of the majority need not necessarily lead to resignation. The dissenting director should consider whether it is in the best interests of the company to defer to the majority decision. If he does feel sufficiently strongly that a proposed course of action is wrong then he should ask for opposition to be minuted. The Judge also observed that a director would have the ability to raise the matter at a meeting of shareholders, though this begs the question why the board would convene an EGM. The Judge notes that the textbook identifies resignation as an option for the dissenting director, according to the seriousness of the matter in dispute, and observes that a director might resign sooner rather than later if he feels there is a risk of him being held accountable for any resulting harm to the company or its creditors.

In practice, the decision whether to remain a director or resign is complex and depends on the particular circumstances of each company and each director. The decision has to weigh the benefits and risks of staying on against the consequences of resigning. Tunnel vision lawyers who can only talk to a director about wrongful trading, preferences, transactions at an undervalue will be missing the point that there will always be far more at stake that needs to be considered. One avenue that almost always has to be explored is how the dissenting director can persuade his fellow directors to gather better financial and information to make more informed decisions, and perhaps to commission an independent business review.

At Isadore Goldman we have several experienced directors who are accustomed to giving advice either to individual directors or to the full company board. Where the company has already engaged Insolvency Practitioners or other turnaround specialists to advice, we can be retained by directors personally to safeguard their interests. If you would like advice then please contact Andy Taylor, Frank Brumby or Nick Oliver.

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