Court relief for directors who acted honestly

Q: How might this work in practice?

Illustration only. A company goes into liquidation. The liquidator brings a misfeasance claim under section 212 of the Insolvency Act 1986 against two directors. The first director approved a £40,000 dividend after the company's accountant prepared management accounts showing distributable profits; the accounts later proved wrong because of a stock valuation error. The second director arranged for the company to pay £25,000 towards his personal tax bill and recorded it as a business expense. The first director asks for relief under section 1157. He received a share of the dividend like every other shareholder, but he relied on figures from a qualified adviser, had no reason to doubt them, and recorded the board decision properly. The court might relieve him wholly or in part, possibly on terms that he repays the part of the dividend he personally received. The second director has no realistic prospect of relief: he took company money for his own benefit, and excusing him would leave him better off at the creditors' expense. Our page on unlawful dividends explains how dividend claims arise.

Section 1157 of the Companies Act 2006 lets a court relieve a company officer, wholly or in part, from liability for negligence, default, breach of duty or breach of trust if the officer acted honestly and reasonably and ought fairly to be excused. It is a discretionary safety valve, not a defence the director can claim as of right, and it does not stop the claim being brought in the first place.

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What does section 1157 actually say?

Section 1157(1) applies in proceedings for negligence, default, breach of duty or breach of trust against an officer of a company, or against a person employed by the company as auditor. If it appears to the court that the officer is or may be liable, but that they acted honestly and reasonably and, having regard to all the circumstances of the case (including those connected with their appointment), ought fairly to be excused, the court may relieve them either wholly or in part, on such terms as it thinks fit.

Three points follow from the wording:

The court first has to find that the person is, or may be, liable. Relief is about excusing a liability, not about deciding whether there was a breach.
All three conditions must be met: honesty, reasonableness, and the overall judgment that the person ought fairly to be excused.
The court can give partial relief. It can cut the amount payable rather than wipe it out, and it can attach terms.

The section replaced section 727 of the Companies Act 1985, which was repealed with effect from 1 October 2008.

Who can ask for relief?

The section covers an officer of a company and an auditor, whether or not the auditor is an officer. Section 1173 defines an officer of a body corporate as including a director, manager or secretary, so a company secretary can rely on it as well as a director.

The power has been extended beyond companies. It is applied, with modifications, to limited liability partnerships by the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. Section 192 of the Charities Act 2011 applies it to auditors and examiners of charities that are not companies and to charity trustees of a CIO. Trustees in general have a similar power under section 61 of the Trustee Act 1925, which uses the same honestly and reasonably test, and section 191 of the Charities Act 2011 lets the Charity Commission itself relieve charity trustees, auditors and independent examiners on the same test.

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Can a director apply before anyone sues?

Yes. Under section 1157(2), an officer or auditor who has reason to apprehend that a claim will or might be made against them for negligence, default, breach of duty or breach of trust may apply to the court for relief. The court then has the same power to relieve them as it would have had in proceedings brought against them.

This is useful where a director has discovered a problem, such as a payment that turns out to have been unauthorised, and wants certainty rather than waiting for a liquidator or a shareholder to act. It is still a court application with its own costs, and the director must be able to show the same honesty and reasonableness as in a defended claim.

Section 1157(3) deals with the rare case tried by a judge with a jury: the judge can withdraw the case from the jury and enter judgment for the defendant if satisfied that relief should be given.

When is relief likely to be granted?

The statute leaves the decision to the court, so the outcome turns on the facts. Relief is most realistic where:

the director gained nothing personally from the breach;
the director took and followed proper professional advice, for example from the company’s accountant or solicitor, on the point that went wrong;
the breach was technical or procedural, such as a failure to follow a formality, rather than a misuse of company money;
the director acted openly, kept records and corrected the problem promptly once it came to light.

The Insolvency Service’s technical guidance for official receivers, at paragraph 32.39, says that when a director faces a recovery application the court may allow a lesser amount of compensation to be paid if the director acted on professional advice. The same paragraph says the court would be unlikely to grant relief if doing so would leave the director benefiting from the loss caused to the company or its creditors, and that the director can seek a contribution from the professional advisers in those circumstances.

When will relief usually be refused?

Honesty is necessary but not enough. A director who was honest but careless will struggle to show they also acted reasonably. Relief is unlikely where the director kept the company’s money or property, paid themselves amounts they were not entitled to, ignored warnings, or simply did not engage with the company’s affairs. Paragraph 32.40 of the same guidance treats a director as a trustee of company property that comes under their control, and says a director who has misapplied or retained it must make good the loss and any personal gain. Asking the court to let a director keep the benefit of a misapplication cuts directly against that principle.

Relief is also not a substitute for getting the decision approved properly. If members are willing to forgive a breach, section 239 allows ratification by resolution of the members, with the votes of the director and connected members disregarded. See our page on ratifying a director’s breach of duty.

How does section 1157 fit with indemnities and insurance?

Section 232 makes void any provision that exempts a director from liability for negligence, default, breach of duty or breach of trust in relation to the company, and any company indemnity against that liability except as permitted by sections 233 to 235. Section 233 allows the company to buy insurance for a director against such liability. So a company cannot simply write relief into its articles or a service contract; the protections are court relief under section 1157, member ratification under section 239, permitted indemnities and insurance. Our page on indemnifying directors explains what a company may and may not promise.

Protection	Who decides	Main limit
Relief under section 1157	The court	Director must have acted honestly and reasonably and ought fairly to be excused
Ratification under section 239	Members, excluding the director’s votes and those of connected members	Requires a members’ resolution
Indemnity	The company, within sections 232 to 235	Cannot cover liability to the company itself except as the Act permits
Insurance	The company buys it under section 233	Depends on policy terms and exclusions

How might this work in practice?

Illustration only. A company goes into liquidation. The liquidator brings a misfeasance claim under section 212 of the Insolvency Act 1986 against two directors. The first director approved a £40,000 dividend after the company’s accountant prepared management accounts showing distributable profits; the accounts later proved wrong because of a stock valuation error. The second director arranged for the company to pay £25,000 towards his personal tax bill and recorded it as a business expense.

The first director asks for relief under section 1157. He received a share of the dividend like every other shareholder, but he relied on figures from a qualified adviser, had no reason to doubt them, and recorded the board decision properly. The court might relieve him wholly or in part, possibly on terms that he repays the part of the dividend he personally received. The second director has no realistic prospect of relief: he took company money for his own benefit, and excusing him would leave him better off at the creditors’ expense. Our page on unlawful dividends explains how dividend claims arise.

What mistakes do directors make with section 1157?

Treating it as a defence to plead instead of answering the claim. The court only reaches section 1157 if there is or may be liability. The director still needs to engage with the facts and the law.
Assuming honesty is enough. The test also requires reasonable conduct. A director who did not read the accounts, did not ask questions, or left everything to a co director will find it hard to show reasonableness under the standard in section 174, explained in our page on the duty of care, skill and diligence.
Relying on advice without being able to prove it. If the defence is that the director followed professional advice, the advice, the information given to the adviser and the board minutes need to exist and be kept.
Waiting too long. Where a director knows a claim is coming, section 1157(2) allows an application in advance; acting early, and repairing the problem, supports the argument that the director behaved reasonably.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.