Directors should welcome a recent High Court judgement[1] with open arms.

Claims of breach of directors’ duties against five directors of the UK operation of Bernard Madoff (including his two sons), Madoff Securities International Limited (MSIL), were dismissed by the High Court in a judgement that provides further guidance to directors on the scope of their duties.

MSIL was an operation entirely funded by Madoff, who was the “almost sole voting shareholder” and served as MSIL’s CEO or chairman.

In its operations, MSIL made certain significant payments (amounting to $27m) to a third party for research and other services, interest payments made on personal loans by Madoff himself to MSIL and lifestyle payments made out to Madoff’s loan account (which included a £7m yacht and its upkeep).

The judgment held that the directors genuinely believed that such payments were in the best interest of MSIL since Madoff had made convincing arguments that this were the case. At the time (and surely without the benefit of hindsight), the directors had no reason to doubt Madoff’s competence, integrity and motives.

One of the more interesting aspects of the judgment is the judge’s analysis of the directors’ behaviour when their fellow director was Bernard Madoff, then widely perceived “as a man of integrity, whose honesty in all his business dealings was taken for granted; and as a man whose success and high standing in the financial world caused his views on financial matters to command widespread deference and respect”.

The High Court held that it is legitimate, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company however each individual director owes inescapable personal responsibilities and therefore must inform himself of the company’s affairs and join with his fellow directors in supervising them. Allowing oneself to be “dominated, bamboozled or manipulated by a dominant fellow director” would amount to “a total abrogation of this responsibility”.

While a director is entitled to rely upon the judgment, information and advice of a fellow director whose integrity skill and competence he has no reason to suspect, it is his duty to form an independent judgement as to whether acceding to a shareholder’s request is in the best interests of the company.

Importantly, however, directors may defer to the views of fellow directors. In being in a minority, the director is not in breach of his duties, the court confirmed. The director may “legitimately defer to those views where he is persuaded that his fellow directors’ views are advanced in what they perceive to be the best interests of the company, even if he is not himself persuaded”.

This judgment is another important confirmation that:

–          directors (both executive and non-executive) should not passively allow their fellow directors to manage the company without monitoring and scrutinising the decisions taken; and

–          each director must form an independent opinion; where he disagrees with other directors, he is not obliged to resign or refuse to be a party to implementing the decision.

After all, the Court acknowledged that board decisions require a certain amount of “give and take”.

[1] Madoff Securities International Limited (In Liquidation) v Raven and others [2013] EWHC 3147 (Comm) (Click here to access the judgement)

This article appeared first as a blog post on on 3 February 2014.