#3572 - Directors' Duties 2 - Company Law

Sections 175-177 replace old fiduciary duties of loyalty as follows:

Section 175 – no-conflict rule

incorporates no-profit rule insofar as it overlaps with no-conflict rule

Section 176 – no-profit rule, insofar as it concerns bribes or secret commissions from third parties

Section 177 – self-dealing rule

Applies where director is entering transaction with company

SECTION 175

Section 175(1): director must avoid a situation in which he has or can have an interest which conflicts or might conflict with interest of company.

Section 175(6): also applies where D has conflict of duties.

Section 175(3): duty does not apply in relation to D’s transactions with the company

i.e. where D is entering into transaction with company, relevant duty is s.177

Applies if D makes use of property, information or an opportunity belonging to company.

Diversion of Corporate Opportunities

Is breach where director exploits an opportunity of commercial interest to the company

i.e. personal interest has come into conflict with duty to company

Section 175(2): immaterial whether company could have taken advantage of the property, information or opportunity exploited by D

Thus is breach even if:

company would not have actually made use of the opportunity

Bhullar v Bhullar [2003]

company had already declined the chance to take up offer

Boardman v Phipps [1967]

Directors Who Resign

Is not breach of duty to:

merely plan to compete with company whilst still a director

Balston Headline Filters [1987]

or taking steps in preparation which do not amount to conflict of interest

Foster [2007]

However director resigning his directorship may be liable under where after his resignation he exploits property of former company.

Property of former company may be either:

1. Existing work of former company (e.g. clients, contracts)

2. Maturing business opportunity

   i.e. developing opportunity which D encountered in capacity as director, and which was thus property of company

3. or information/trade secrets of former company

• Foster v Bryant [2007]

  There must be some sort of ‘link’ between resignation and taking up of the business

  In absence of bad faith whilst still a director, is no breach of duty

  Foster v Bryant [2007]

Relevant Factors

Whether D is liable for use of maturing business opportunity depends on:

Ripeness of opportunity

How long after resignation D takes up opportunity

Circumstances of termination of D’s directorship

• Foster v Bryant [2007]

  D less likely to be liable where he has not resigned out of any desire to appropriate company’s property

  Although even if this case, still liable if he breaches no-profit rule prior to resignation taking effect

  Foster v Bryant [2007]

Duties of Disclosure

Suggested that a director who intends to resign to start competing business must declare this intention as soon as it becomes ‘irrevocable’

and that other members of board who know of this directors’ intention are also under duty of disclosure

Shepherd Investments Ltd [2006]

Though contradicted in Framlington [1987]

Duty probably falls under s.172 by analogy with Item Software [2004]

Limits

Duty has become smaller

Where D excluded from running of company, s.175 duty practically non-existent

i.e. if D has no say in how company run, conflict of interest cannot arise

Plus Group v Pyke [2003]

However even where C is forced out of company, has duty not to put himself in position of conflict whilst he is still director.

Foster v Bryant [2007]

No possibility of conflict of interest

Section 175(4)(a): is no breach if situation cannot reasonably be regarded as likely to give rise to conflict of interest

Thus unlikely to be breach where:

1. Opportunity falls outside company’s present range of business activities

   e.g. company is not accustomed to pursuing such opportunities

2. Company has decided not to pursue the opportunity

   E.g. Queensland Mines v Hudson [1978]

Competing Directorships

Pre-2006 Approach

1. Traditionally thought that mere holding of competing directorships is no breach of duty

   i.e. is no rigid rule preventing this

   Mashonaland [1891]

   Approved in Bell v Lever Bros [1932] (HL)

2. This proposition questioned in later case

   but not overruled

   Plus Group v Pyke [2003] (Sedley LJ)

3. Even if potential conflict of interest, can be remedied by consent of boards of both companies

   Ultraframe [2005]

4. Ultimately whether there is breach is fact-specific question

   e.g. Plus Group v Pyke [2003]

5. However is always breach of duty where competing directorships causes actual conflict of interest

   e.g. where D divulges one company’s information to another

Post-2006 Approach

Section 175(5): section applies to conflicts between a duty and a duty

This inclusion may mean courts will be harsher in treatment of competing directorships

i.e. so that Mashonaland no longer applies

Watts: has been held that a partners and senior employees of a company cannot work for two competing businesses at same time

i.e. as this is automatic breach of fiduciary duty

Scottish Co-Operative Wholesale v Meyer [1959]

Thus why should situation of directors be any different?

2. Board Authorisation

• Section 175(4): prior board authorisation will prevent there being a breach.

• Thus can only be given prior to breach of duty.

• Section 175(5): authorisation may be given in a:

1. Private company, provided there is nothing in constitution invalidating such consent (permissive)

2. Public company, provided there is a provision in constitution authorising directors to consent (restrictive)

   NB this is the only means by which board authorisation can be given

   Under old common law, mere renunciation of an opportunity might have sufficed (without necessarily authorising D to take it himself)

   Queensland Mines v Hudson [1970]

   However must now be case that taking up of opportunity by D is actively approved

Full and frank disclosure

For valid authorisation, director’s disclosure to others must be “full and frank”

merely saying “may I remind you that I have an interest” does not suffice

Gray [1952]

Thus director must disclose the nature and extent of his interest

Minimum procedural requirements

Section 175(6):

1. Must be a valid quorum at meeting where authorisation given

   and when counting, quorum does not include director who is interested

2. Interested director’s votes are not counted when vote on authorisation takes place

   Additionally any articles specific to company must be complied with.

3. Remedies

   Breach of section 175 treated as a breach of trust

   i.e. corporate opportunities are treated as company’s ‘intangible assets’

   Foster Brant [2007]

   Where company wishes to take profits obtained through diverting of opportunity, can seek:

1. Equitable compensation for loss suffered by company

• however quantifying this loss often impossible

2. Account of profits

• director is liable for the full profit made from opportunity

3. Or constructive trust over profitable assets acquired in breach

• preferable to other two if director is insolvent

Profits

Profits for which D is accountable must bear reasonable relationship to breach of duty

Thus court may make allowance to D for skill and labour put into exploiting opportunity

Ultraframe [2006]

Constructive Trust

1. Constructive trust is available over any company property that D has misapplied

2. Constructive trust not generally available over profits acquired through use of corporate opportunity

   i.e. is necessary to show that the assets held are the product of the opportunity

   this usually very difficult (e.g. if money goes in and out of company set-up to exploit opportunity

   hence account of profits usually preferable (strict causal link not required)

   Ultraframe [2005]

Third Party Profits

1. ‘Jointly Liable’

   Suggested that directors are jointly and severally liable with a company to which profits from stolen opportunity are paid

   even where it is not appropriate to lift corporate veil

   CMS Dolphin [2001]

2. Not jointly liable

   Director is only liable for profits made personally (and not those paid to company)

   is no such thing as ‘joint liability’ for breach of trust.

   Ultraframe [2005]

   Company is liable to account for profits where:

1. knowing receipt

2. or if it is ‘alter ego’ of director (so corporate veil can be pierced)

   Ultraframe [2005]

   NB regardless of whether director is liable for profits, will always be liable to pay equitable compensation for loss caused by his breach of duty.

SECTION 176

Director of a company must not accept a benefit from third party for reason of:

1. His being a director

2. His doing (or not doing) something as director

   Section 176(4): is no infringement if acceptance of benefit cannot be reasonably regarded as likely to give rise to conflict of interest.

   Is no defence of board authorisation (unlike section 175)

   thus only escape route for D is if company’s articles permit him to take a benefit, or members ratify breach (see below)

   Remedies are same as those for breach of s.175 (see above)

SECTION 177 + 182

Section 177

s.177(1): if director is directly or indirectly interested in a proposed transaction with the company, must declare nature and extent of that interest to other directors.

s.177(3): if declaration subsequently becomes inaccurate or incomplete, further declaration must be made

s.177(6): no need to declare:

1. if situation cannot be regarded as reasonably likely to give rise to conflict of interest

2. if director is not aware of proposed transaction

3. to extent that other directors are already aware of conflict

• are treated as aware of anything they ought to be aware of

  Disclosure must be “full and frank” (see above)

  Gray v New Augarita...