The Continuing Value of Relief for
Directors’ Breach of Duty
Rod Edmunds and John Lowry
The nature and scope of relief for directors in breach of their duties did not ﬁgure
prominently in the Steering Group’s fundamental review of company law. Little is
proposed beyond removing one of the two pre-conditions for relief laid down in
section 727 of the Companies Act 1985; the requirement of reasonableness. This
article seeks to subject the relieving discretion to a more radical re-appraisal.
Drawing upon the views expressed by its architects together with the current
judicial approach adopted towards the provision, it is argued that its underlying
rationale would be better met if the test for relief was based solely upon the court’s
determination of fairness. It will be demonstrated that such a model would better
serve to bolster the fundamental tenets of transparency, simplicity and
accessibility that underpin the approach of the Government’s White Paper
towards company law reform while also reinforcing the continuing value of relief.
An errant director may seek total or partial relief from liability under section 727
and the court decides that it ought fairly to be excused.
Throughout its century
this judicial relieving provision has failed to excite a great deal of
academic discussion or comment.
Nor, unsurprisingly, did it ﬁgure prominently
University of Sussex and the Centre for Commercial Law Studies, Queen Mary, University of
London, respectively. The origin of this article is a lecture delivered at the Institute of Advanced
Legal Studies in June 2002. In addition to thanking the participants, the authors wish to record
their gratitude to Vanessa Finch and James Penner, both of the LSE, Philip Rawlings, University
of Warwick, and to the anonymous referees for their helpful comments on an earlier draft.
1 Section 727(1) provides: ‘If in any proceedings for negligence, default, breach of duty or breach
of trust against an ofﬁcer of a company or a person employed by a company as auditor (whether
he is or is not an ofﬁcer of the company) it appears to the court hearing the case that that ofﬁcer
or person is or may be liable in respect of the negligence, default, breach of duty or breach of
trust, but that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case (including those connected with his appointment) he ought fairly to be
excused for the negligence, default, breach of duty or breach of trust, that court may relieve him,
either wholly or partly, from his liability on such terms as it thinks ﬁt.’
2 See the Companies Act 1907, s 32, which was substantially reproduced in the Companies
(Consolidation) Act 1908, s 279 which extended the availability of relief to any ‘person occupying
the position of director’. The original provision in the 1907 Act, which was based upon the
Judicial Trustees Act 1896, s 3 (now Trustee Act 1925, s 61), granted the court discretion to
relieve a director from liability in negligence. Further subsequent modiﬁcations include extending
its reach to cover (i) ‘default, breach of duty, or breach of trust’ (Companies Act 1929, s 372);
and (ii) ‘an ofﬁcer of the company or a person employed by the company as an auditor’
(Companies Act 1948, s 448). For comparable provisions in other jurisdictions see: Corporations
Law, s 1318 (Australia); Companies Act 1955, s 468 (New Zealand).
3 It does not feature prominently in major textbooks such as P. Davies, Gower’s Principles of
Modern Company Law (London: Sweet & Maxwell, 6
ed, 1997) 652; J.H. Farrar and B.M.
Hannigan, Farrar’s Company Law (London: Butterworths, 4
ed, 1998) 427–428; and J. Birds,
A.J. Boyle, E. Ferran and C. Villers, Boyle & Birds’ Company Law (Bristol: Jordans, 4
545. The provision fares better in practioner works such as Gore-Browne on Companies (Bristol
Jordans Loose-leaf, 44
ed) at 27.21.5; British Company Law & Practice (Bicester, Oxon: CCH
Editions Loose-leaf) 32–950; and Corporate Law Service (London: Butterworths Loose-leaf)
rThe Modern Law Review Limited 2003 (MLR 66:2, March). Published by Blackwell Publishing Ltd.,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 195