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Directors’ reasonable reliance defence

by Stephen on July 18th, 2022

A recent UK High Court case has placed the spotlight, once again, on the reasonable reliance defence of directors.

In an April 2022 decision, Hunt v Balfour-Lynn, the UK High Court dismissed a liquidator’s claim that the directors had breached their duties to the company by entering into a tax avoidance scheme.  (In the alternative, the liquidator argued that entry into the scheme had defrauded creditors, by transferring assets at an undervalue, in breach of the UK insolvency regime).

Over an extended period, Marylebone Warwick Balfour Management Ltd (the Company) incurred tax losses under a tax avoidance scheme that meant that the Company avoided paying over £27m in PAYE and National Insurance contributions.  It had distributed dividends – and was unable to fund the shortfall ultimately held to be payable to the UK Revenue.

The directors denied any breach of duty.  Central to their defence was that before entering into the tax avoidance scheme, and at all times during involvement in the scheme, the directors had relied on the financial and professional advice received from expert tax advisers at a well-known accounting firm.

The liquidator, in strongly-worded terms, claimed that the directors’ reliance was not reasonable and was

“…in fact, reckless and irrational and reckless given the financial and reputational consequences for the Company in circumstances where [the UK Revenue] had made it clear that it did not consider that the scheme was legitimate and had commenced proceedings to challenge it”.

The liquidator’s claims failed.  The Court held that the expert tax advisers were engaged on an ongoing basis to provide advice.  The directors had relied on this advice, and they were entitled to do so.  And while it was the directors who were making decisions on the part of the Company, and not the tax advisers, in the making of those decisions there was:

“nothing on this evidence which ought to have led them to be second-guessing the advice of [advisers], experts in this field.” 

Interestingly, the judge went on to note that the directors considered the tax advisers particular and cumulative and consistent advice and took it at face value.  They were entitled to do so.  In proper discharge of their duties, they had the wisdom to take this top-level advice throughout, and to use the tax advisers to oversee the scheme.  The fact that the Court of Appeal later found that the equivalent to the scheme [did not work] to protect again the UK Revenue for PAYE and National Insurance claims did not affect that reasonable reliance (defence).

Directors and reasonable reliance

Some aspects of the decision in Hunt v Balfour-Lynn are unsurprising.  Directors have been able to relay on professional advice when discharging their duties.  Despite the fact that the UK Revenue had repeatedly advised the directors of their potential liability, the Court held that there was nothing wrong with the director’s adopting a “sit and wait” policy on the basis of professional advice from the expert tax advisers.  But I wonder if a New Zealand Court would reach the same conclusion.

The reasonable reliance defence is embodied in section138 of the Companies Act – but it is subject to the qualifications that the director acts in good faith, makes proper inquiry, and does not believe that reliance on such advice is unwarranted. 

Part of the difficult legacy of Debut Homes, appears to be that the High Court doubted whether section 138 actually provided a defence – as reliance on such advice appeared to be contrary to a finding of a breach of duty.  But then the judge said (if the defence is to hold up) the professional advice must be of a type contemplated by the wording of section 138, and cannot be reliance on “generalised and loose statements”.  The Court of Appeal agreed.  And the Supreme Court agreed with both lower courts, and found that (as a matter of fact) the accountant’s views were generalised and not the type of advice contemplated by section 138.

As a result, some care should be taken to ensure that (to make out the reasonable reliance defence) all of the limbs of section 138 are shown to exist.  But I still wonder how a New Zealand court might react when a Board relying on expert advice, but faced with an uncertain or contingent liability, did not make some provision for it.  Absent an Australia-style ‘business judgement rule’ embedded in the Companies Act, would a New Zealand court find that this was a matter for commercial judgment, which was exercised by the Board, informed by expert advice (which met the section 138 test) which the directors had consistently sought and obtained?


On some levels, the decision in Hunt v Balfour-Lynn is positive reinforcement for the reasonable reliance defence.  There are points of difference in New Zealand and directors should take care to make sure that the limbs of section 138 are ticked off. 

But, until we see whether the courts are going to pursue (or distinguish) the type of critical scrutiny of the advice relied on that was seen in Debut Homes, and perhaps until Goddard J’s calls (in the Court of Appeal decision in Mainzeal) for a review of the law governing insolvent trading get some traction, close attention will need to be paid to the limits on a reasonable reliance defence.

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