The recent Court of Appeal judgment in Humphrey v Bennett [2023] EWCA Civ 1433 marks a significant shift in the interpretation of directors' fiduciary duties under the Companies Act 2006 of England and Wales, and more particularly the disclosure duties of directors when concerning small, informally-run companies. Given that these principles are applicable in Cyprus through common law, the above case has the potential to recast the state of director duties in the island, in addition to its more immediate impacts in England and Wales.
The heart of the dispute in Humphrey v Bennett involved allegations by the minority shareholders and former directors (claimants) of company ‘X’ against the majority shareholders and current directors of the same company ‘X’ (defendants), a property development company. The claimants accused the defendants of diverting a development opportunity from company ‘X’ to a third company linked to the defendants, in breach of their fiduciary duties.
Specifically, while company ‘X’ purchased the plot of land ‘A’ with a view to redevelop it, the claimants had refused to invest further into the project by purchasing an adjacent plot of land (‘B’) to allow for access into the otherwise landlocked plot ‘A’ and accordingly the company lacked the funds to proceed. As such, the defendants sold plot ‘A’ to another one of their companies for the price that Company ‘X’ had paid for it. Following the sale, the defendants acquired access rights through plot ‘B’ and proceeded with the development independently of company ‘X’.
In the Court of first instance, the 1st defendant/director was found to have breached his fiduciary duties in respect of company ‘X’ by, inter alia, failing to disclose his conflict of interest in regards to the sale of plot ‘A’. In reaching this conclusion, the Court found that directors must make a full and extensive disclosure of all material facts to all potential shareholders and directors to abide by their fiduciary duties.
Nonetheless, the Court of Appeal overturned this first instance judgment, finding that the judge had set an excessively high standard of disclosure by relying on inapplicable case law. As such, it may be derived that the required level of disclosure for small, informally-run companies should be less stringent.
This judgment serves as a crucial guide for Cypriot legal practitioners and directors alike. Cypriot companies, particularly smaller and less formally structured ones, may find that the standards and expectations regarding fiduciary duties, including disclosure duties, are now viewed through a more relaxed lens, more attuned to their operational realities since this recent case law suggests that directors of smaller companies might not need to adhere to the same rigorous disclosure standards as those in larger firms.
