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Spouse directors: the risks of saying ‘I do’

Section 172 of the Companies Act 2006 requires, among other things, that directors act in good faith and have regard to the likely consequences of decisions in the long term. Section 173 of the Companies Act 2006 requires directors to act with independent judgment. By doing nothing a director can be in breach of their duties.

In the case of Manolete Partners Plc v Nag [2022] EWHC 153 (Ch), Mrs Nag commented that she had been a full time mother and housewife since 2006, but that she knew on paper that she was a director, shareholder or secretary of various companies. She admitted that she had signed a number of documents and that various transactions could not have happened without her authorisation. She said that she never read any of the documents but simply signed them because her husband had told her to do so and she trusted him. The transactions that had been made could have only happened with her signature.

The judge noted that the issue for Mrs Nag was the real consequences in law that flow from acting as she did, given her state of mind which she had set out in her evidence. “There is a difference between having a high level of trust in your spouse and simply doing whatever your spouse asks you to do, regardless of whether it is right or wrong.” What Mrs Nag did “amounts to wilful blindness which is not the way that an ordinary decent person would have behaved in the circumstances.” In the context of directors’ obligations to their companies, it is clear from the judgment that independent judgment means just that.

Comment

The decision is a useful clarification on the law in relation to spouse directors who do not consider that they actually play any role in the company apart from a name on paper.

In the real world it is not uncommon for people to act as requested when asked to do something by a loved one; people do not generally enter into personal relationships with people whom they do not trust. Regardless of this, it is clear from this judgment that a spouse who simply chooses to comply with their partner’s wishes without having any consideration or taking any steps to check whether it is right or wrong will be equally as liable as the instructing spouse. The law does not consider the level of trust Mrs Nag referred to as an excuse for not having exercised independent judgment.

Whilst it is easy to look at things with hindsight, there are some simple steps that Mrs Nag could have taken to avoid finding herself in this difficult position. At the least she could have:

  • read the documents that she signed;
  • when she was presented with complicated documents that she did not understand, she could have sought independent legal advice;
  • she could have asked what she was signing and why her signature was necessary in order to be able to make a slightly more informed decision;
  • been curious when she authorised the sale of her shares in the sum of £400,000 when 15 months earlier they had no value at all.

Whatever the reason an individual becomes a director, they will be liable for the consequences should they not comply with their duties.

The decision develops our understanding of the applicable law by making it clear that there is no such thing as being a director in name only.

While the judgment concerns the position of spouses, the consequences of failing to take an active part in decision making and relying on the judgment of others will apply in other situations. Directors who endorse the decision making of other directors should do so only after considering the decision independently, and should record their deliberations.

You can read the full judgment here.

For more information on this article, please contact Holly Ransley.

 

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