A recent High Court decision appears to depart from established case law regarding restriction applications against non-executive or nominal directors.

In this case the Court was required to consider whether the payment of excessive director remuneration at a time of overall decline in the company’s financial performance was sufficient to warrant a restriction declaration against either or both of the directors of the company. The decision is notable for two reasons.

Nominal directorship

One of the two directors of the company was the wife of the second director and pleaded that she did not play any part in the running of the business and was primarily motivated by ‘ties of affection’ when she agreed to act as director in the company. The Court noted that ordinarily the position was that a nominal director could not have themselves excused from accountability simply by virtue of being a ‘nominal’ director. However, the Court went on to state that this position did not mean that that a female director can never escape liability where she embarks upon a directorship primarily out of ties of natural affection nor that a passive director/nominal director can never be excluded from liability.

Real moral blame

The Court concluded that, in such cases, for liability to attach there must be evidence of ‘real moral blame’ on the part of the director. In this instance, the Court noted that the relevant director played no real part in the running of the company nor did she draw a salary from the company. The Court did not find any real moral blame on her part to justify a restriction order. This decision contrasts with recent case law where ‘nominal’ directors were typically not relieved from restriction declarations.

While this decision is certainly noteworthy, it should be noted that the Companies Acts 2014, due to commence on 1 June 2015, will make it permissible for some companies to have a sole director and, as such, applications against ‘nominal’ directors of those companies will become much less frequent.

Restriction Declarations on Consent

The Court noted that where directors consent to restriction declarations, it is not always clear that such consent is ‘informed’ consent. The Court recommended that any such director complete a ‘consent letter’ in a very specific and detailed format suggested by the Court. The suggested form of consent contains very specific language and it remains to be seen if the Court will require consent to be provided in this format or if the Court will simply treat this as ‘best practice’. In any event, restriction orders made on consent are likely to become a thing of the past when the Companies Act 2014 comes into effect as directors will be able, for the first time, to give voluntary restriction undertakings to the Director of Corporate Enforcement, thereby dispensing with the requirement for Court Orders in such circumstances. 

Contributed by Craig Sowman.

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