Directors Duties

Question 1

Percival v Wright [1902] 2 Ch 421

Answer 1

Percival v Wright [1902] 2 Ch 401 is a UK company law case concerning directors’ duties, holding that directors only owe duties of loyalty to the company, and not to individual shareholders. This is now codified in the United Kingdom’s Companies Act 2006, section 170.

Facts
Shareholders in Nixon’s Navigation Co. wanted to sell their shares, and requested that the company’s secretary find purchasers. Some directors of the company purchased the shares at £12.10s per share, which price was based upon independent valuation. After the sale, the shareholders discovered that before and during the negotiations for that sale, the board of directors had been involved in other negotiations to sell the entire company, which would have made those shares substantially more valuable had they come to fruition. The plaintiff sued, claiming breach of fiduciary duty, in that the shareholders should have been told of these negotiations.[1]

Judgment
Swinfen Eady J held the directors owed duties to the company and not shareholders individually.

It was strenuously urged that, though incorporation affected the relations of the shareholders to the external world, the company thereby becoming a distinct entity, the position of the shareholders inter se was not affected, and was the same as that of partners or shareholders in an unincorporated company. I am unable to adopt that view... There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiffs’ case wholly fails, and must be dismissed with costs.

Significance
Percival v Wright is still considered to be good law, and was followed by the House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65[citation needed].

However, it has been distinguished in at least two subsequent cases. In Coleman v Myers [1977] 2 NZLR 225[2] and Peskin v Anderson [2001] BCLC 372[3] the court described this as being the general rule, but one which may be subject to exceptions where the circumstances are such that a director may owe a greater duty to an individual shareholder, such as when that shareholder is known to be relying upon the director for guidance, or where the shareholder is a vulnerable person.

Question 2

Allen v Hyatt (1914) 30 TLR 444

Answer 2

In Allen v. Hyatt, (1914) 30 TLR 444 case, the Court held that the directors are trustees of the profit for the benefit of the shareholders. They cannot always act under the impression that they owe no duty to the individual shareholders. But it is of no doubt that the primary duty of the director is to the company.

Question 3

Peskin v Anderson [2001] 1 BCLC 372

Answer 3

Peskin v Anderson [2000] EWCA Civ 326 is a UK company law case concerning directors’ duties under English law.

Facts
Former members of the Royal Automobile Club (RAC) sued the directors for failing to disclose that they had plans to demutualise. They claimed that they could have received £35,000 had they stayed in the club, but had given up their membership. They claimed that the directors had breached a duty owed to them as shareholders to inform them of the upcoming demutualisation plan.

The RAC applied to have the claims struck out as having no prospect of success as directors did not owe a duty to individual shareholders. The RAC succeeded in having the claims struck out at first instance before Neuberger J, and the claimants appealed to the Court of Appeal.

Judgment
The Court of Appeal dismissed the appeal. The only judgment was given by Mummery LJ.
Although there were several grounds in the appeal, the main proposition for which the judgment is traditionally cited is that directors do not owe a general duty to shareholders, although they may owe a specific duty to a shareholder if there has been an assumption of responsibility. In this case there was no suggestion of such an assumption of responsibility, and so the claims were struck out.

Counsel for the claimants accepted that the fiduciary duties owed by the directors to RAC do not necessarily extend to the individual members, and that, in general, directors do not, solely by virtue of the office of director, owe fiduciary duties to the shareholders, either collectively or individually. The court cited with approval the headnote in Percival v Wright [1902] 2 Ch 421 that:

The directors of a company are not trustees for individual shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the company's undertaking.

In his judgment Mummery LJ noted that the apparently unqualified width of the ruling had, over the course of the previous century, been subjected to increasing judicial, academic and professional critical comment. But that, as a general rule, it was right that directors should not be over-exposed to the risk of multiple legal actions by dissenting minority shareholders.

The existence of fiduciary duties owed by the directors to the company do not however necessarily preclude, in special circumstances, the co-existence of additional duties owed by the directors to individual shareholders. In such cases individual shareholders may bring a direct action (as distinct from a derivative action) against the directors for breach of such duty. The court relied upon Stein v Blake [1998] 1 All ER 724 (at 727D and 729G per Millett LJ) for the principle that a duality of duties may exist. In addition to requiring special circumstances to give rise to such a duty, for a shareholder to have a valid claim breach of such a duty must have caused loss to the shareholder directly (eg. by being induced by a director to part with his shares in the company at an undervalue), as distinct from loss sustained by him by a diminution in the value of his shares (eg. by reason of the misappropriation by a director of the company’s assets).

It was affirmed that the fiduciary duties owed to the company arise from the legal relationship between the directors and the company directed and controlled by them. However any fiduciary duties owed to the shareholders do not arise from that legal relationship. They are dependent on establishing a special factual relationship between the directors and the shareholders in any particular case. Events may take place which bring the directors of the company into direct and close contact with the shareholders in a manner capable of generating fiduciary obligations, such as a duty of disclosure of material facts to the shareholders, or an obligation to use confidential information and valuable commercial and financial opportunities, which have been acquired by the directors in that office, for the benefit of the shareholders.

The court referred to examples from other common law jurisdictions where special circumstances had been held to exist which justified the imposition of fiduciary duties on directors to individual shareholders. In the Court of Appeal of New Zealand in Coleman v Myers [1977] 2 NZLR 225 and in the Court of Appeal of New South Wales in Brunninghausen v Glavanics [1999] 46 NSWLR 538 fiduciary duties of directors to shareholders were established in the specially strong context of the familial relationships of the directors and shareholders and their relative personal positions of influence in the company concerned.

But on the facts of the case before them, no such special relationship was claimed, and the actions failed.

Review
The Court of Appeal’s decision in Peskin v Anderson has generally been treated as authoritative in relation to the principle to which it relates. It has not been doubted in either subsequent judicial decisions or in academic commentary. In Gower and Davies - Principles of Modern Company Law the editors state: “This principle has now been fully accepted in English law as a result of the recent decision in Peskin v Anderson”.[

Question 4

Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258

Answer 4

Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 is a leading United Kingdom company law case relating to directors’ liability. The case is the principal authority for the proposition that a company will not be able to make any claim against a director for breach of duty where the acts of the director have been ratified by the members of the company.

Facts
The plaintiff company (Multinational Gas and Petrochemical Co) was a joint venture company formed between three shareholders to engage in trading, storing and shipping liquified natural gas. Originally the company was to have been incorporated in the United Kingdom, but after taking tax advice it was incorporated in Liberia instead, and a separate English company - Multinational Gas and Petrochemical Services Ltd (referred to as “Services”) in the judgment - was incorporated to act as broker and agent. The board of directors of the plaintiff company was composed of appointees from the three shareholders.

Although the business was initially successful, it later collapsed with its liabilities exceeding the value of its assets by over GBP113 million. A liquidator was appointed, and began examining ways in which the company might seek to recover against third parties for the benefit of the creditors. The liquidator brought proceedings against Services alleging negligence in relation to the provision of financial information to the company. In the same action it also brought proceedings against each of its directors alleging negligence in failing to appreciate the obvious deficiency in information provided by services, and making highly speculative and negligent decisions which could not reasonably be regarded as coming within the “business judgment rule”.

Judgment
Although the case is remembered primarily for the statements with respect to company law (referred to in both arguments and the judgment as the “company law point”), the actual decision that the Court of Appeal was required to make related to a procedural point on leave to serve proceedings out of the jurisdiction under RSC Order 11 (now repealed). Because none of the directors were resident in the United Kingdom, and none of the acts complained of by the directors had occurred within the jurisdiction (all board meetings had occurred overseas for tax reasons), it was necessary to obtain the leave of the court to serve out. In order to do so, the plaintiff company needed to satisfy the court either that the acts complained of occurred within the jurisdiction (which the court disposed of rapidly), or that the defendants were a necessary and proper party to an action which was properly commenced against a defendant within the jurisdiction (Services). On this latter point most of the argument was focused.

Services itself was insolvent and only had nominal assets. It was largely accepted (and may even have been conceded by counsel, it having been decided by Peter Gibson J at first instance) that the predominant reason for bringing a claim against Services at all was to use it as an “anchor defendant” to launch proceedings against the defendant directors. Lord Justice Lawton was content to dismiss the appeal and refuse to leave serve out on this basis alone,[1] but went on to consider the “company law point”. In summary the company law point was whether the cause of action against the directors by the plaintiff company was bound to fail because the relevant acts had all been unanimously approved by the company’s shareholders. If it was bound to fail on this basis, then it would not be treated as having been properly brought.[2]

Both Lawton LJ and Dillon LJ were satisfied that because the relevant acts which were complained of had been ratified by the shareholders of the plaintiff company, that they became the acts of the company itself, and accordingly the company could not later complain about them and bring an action in respect of them.[3] Lord Justice May dissented on this point.[4]

The Court of Appeal unanimously affirmed earlier case law that the shareholders themselves owed no duty of care either to the company in whom they held shares, or to the creditors of that company.

Vicarious liability
The plaintiff has also argued that because the directors were nominated by the various shareholders, if the directors were liable then it followed that the shareholders should be vicariously liable. This point was not addressed at all by the Court of Appeal (even by May LJ who was prepared to accept that the directors might be properly liable in the assumed facts).

Significance
The case has been cited with approval on several occasions, including in Prest v Petrodel Resources Ltd[5] and Re D’Jan of London Ltd.[6] In Re D’Jan of London Ltd Hoffman LJ (sitting as an additional judge of first instance) clarified that it was not sufficient that the members of the company would have ratified the director’s improper acts - it was also necessary that they must have done so.

Shortly after the case was decided, the Insolvency Act 1986 was brought into force. Had that statute been in force at the relevant time the “company law point” would likely not have arisen, as the liquidator would have been able to bring proceedings against the directors in his own name for wrongful trading.

Question 5

Re Smith & Fawcett Ltd [1942] Ch 304

Answer 5

Re Smith and Fawcett Ltd. [1942] Ch 304 is a UK company law case, concerning the meaning of “the interests of the company”. It is relevant for the provisions of company law now embodied in Companies Act 2006, section 172.

Facts
Article 10 of the company’s constitution said that directors could refuse to register share transfers. Mr. Fawcett, one of the two directors and shareholders, had died. Mr. Smith co-opted another director and refused to register a transfer of shares to the late Mr. Fawcett’s executors. Half the shares were bought, and the other half offered to the executors.

Judgment
Lord Greene MR said:
The principles to be applied in cases where the articles of a company confer a discretion on directors. are, for present purposes, free from doubt. They must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose. The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company.

Question 6

Fulham Football Club Ltd v Cabra Estates plc [1994] 1 BCLC 363

Answer 6

Judgement for the case Fulham Football Club Ltd v Cabra Estates plc
Football club had football ground on lease. In return for substantial payment, directors of club agreed not to oppose any future planning applications which owners of the ground might make. Sought to get out of contract by alleging it was unlawful fetter of their duty to act in best interests of club in future. Held:

· Performance of a contract is not breach of s.173 if director exercised independent judgment when entering into the contract
· Thus provided D believed contract was for benefit of company at time he entered it, cannot claim later on that contract stops him acting for benefit of company
· Here, directors entered agreement which substantially benefitted company
Ø Thus cannot be said that they improperly fettered their future discretion

Question 7

Extrasure Travel Insurances Ltd v Scattergood [2002] All ER (D) 307 (Jul) (Ch D)

Answer 7

“Scattergood was the director of E and I. E and C were both subsidiaries of I. A creditor pressured C for the return of a debt and Scattergood transferred cash from E to I and then I to C in order to repay the debt. Extrasure brought an action against Scattergood claiming that the transfer was not in its best interest and was made for an improper purpose. E contended that the director breached his fiduciary duties even if he honestly, but unreasonably and mistakenly, believed that he was pursuing a company’s best interest.

The Court held that Scattergood was in breach of his duties. He did not gave any actual consideration as to whether the transfer was in E’s interest. The transfer was made to assist C and not to preserve the survival of E. It was made for an improper purpose and no ratification was given.

1) Identify Power in question
2) Identify Purpose
3) Identify Purpose Exercised
4) Assess if it was proper

Question 8

Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244

Answer 8

Judgement for the case Item Software v Fassihi
D was director of C. C was in a distribution agreement with Isograph. When C tried to renegotiate its terms with Isograph on more favourable terms, D approached Isograph with idea of establishing new company to take over distribution agreement; however at same time, D encouraged C to take aggressive stance in negotiations. Negotiations fell through, and Isograph entered new agreement with D. When C heard this, alleged D had not complied with duty to act bona fide in interests of company (pre-2006 law) by failing to disclose his misconduct to C. Held:

· Fiduciary duty to act bona fide in interests of company require D to disclose his own or others’ misconduct to company.
· Policy reasons support this extension of duty of loyalty:
Ø Is economically efficient, as it means that company does not have to expend resources investigating directors’ conduct
Ø Helps shareholders monitor activities of directors
Ø Helps directors comply with their duty of oversight (e.g. Re Barings)
Ø All directors’ duties are essentially extension of duty of directors not to benefit themselves at expense of corporation
– Thus not unnatural to extend duty of loyalty in this way

Facts
· D had breached rule against diversion of corporate opportunity.
· Thus on facts, is no way D could have complied with his duty top act in best interests of company without telling C of his plans to steal the contract from them.

Question 9

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

Answer 9

Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3 is a leading UK company law case, concerning the duty of directors to act only for “proper purposes”. This duty has been codified into the Companies Act 2006 section 171, and arises particularly in cases involving takeover bids.

Facts
RW Miller was embroiled in a hostile takeover bid, by a large petrol company called Ampol. Ampol already controlled (with an associated company) 55% of the shares. The directors did not want Ampol to buy the shares of RW Miller as Howard Smith had bettered terms for take over by offering employment to the directors even in the future. So the directors of RW Miller issued $10m of new shares. They said it was to finance the completion of two tankers. The shares were given to Howard Smith Ltd who were going to take over RW Miller, and that blocked Ampol’s rival bid. Without the issue, Howard Smith Ltd had no hope of succeeding in taking over the company. But with the new issue, Ampol could not complete its acquisition. Ampol commenced proceedings in the Supreme Court of NSW.

Street CJ in Eq said that the argument of the directors that the tanker purchase was the dominant purpose was ‘unreal and unconvincing’.[1]: at p. 878  The issue of shares to Howard Smith was held to be invalid. Howard Smith sought and obtained conditional leave to appeal to the Privy Council.[1] 1

Judgment
The Privy Council dismissed the appeal.

Lord Wilberforce held that the issue of shares was within power but that it was exercised for an improper purpose. ‘To define in advance [what that means is] impossible.’ It must be adjudged ‘in the light of modern conditions’, and referred back to Hogg v Cramphorn Ltd.[2] His judgment continued.

The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self-interest—i.e. by a desire to retain their control of the company or their positions on the board—the matter is concluded in their favour and that the court will not inquire into the validity of their reasons for making the issue...

It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self-interest of the directors, or at least the purpose of the directors to preserve their own control of the management.

Further it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected... just as trustees who buy trust property are not permitted to assert that they paid a good price.

But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made...

It would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.[3]

Question 10

Teck Corporation Ltd v Millar [1972] 33 DLR (3d) 288

Answer 10

Teck Corp Ltd v Millar, (1972), 33 DLR (3d) 288 (BCSC) is an important Canadian corporate law decision on a corporate director’s fiduciary duty in the context of a takeover bid. Justice Thomas R. Berger of the British Columbia Supreme Court held that a director may resist a hostile take-over so long as they are acting in good faith, and they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the shareholders collective. The case was viewed as a shift away from the standard set in the English case of Hogg v. Cramphorn Ltd. (1963). Recent scholarship has made the following observation:

[94] The decision in Teck v Millar, a seminal case on directors' duties, is consistent with the duty to protect shareholder interests from harm. Teck Corporation, a senior mining company, had acquired a majority of voting shares in Afton Mines Ltd., a junior mining company that owned an interest in a valuable copper deposit. In doing so, Teck sought to ensure procurement of a contract with Afton to develop the copper property. Before Teck could exercise its majority voting control to replace the board of directors with its own nominees, the Afton board signed a contract with another company that effectively ended Teck’s control position in Afton. In evaluating the evidence, Justice Berger was satisfied that Teck, the majority shareholder, "would cause substantial damage to the interests of Afton and its shareholders." In determining that the directors had not breached their fiduciary duty to the corporation, shareholder interests were distinguished from control interests. Drawing this distinction is key, "because once Teck's interest in acquiring control is put to one side, its interest, like that of the other shareholders, was in seeing Afton make the best deal available." Accordingly, the directors had made a decision that, despite affecting the control interests of the majority shareholder, had protected the shareholder interests of all shareholders (including Teck's) from harm. This concern for the collective interests of shareholders, rather than strict adherence to majority rule, is consistent with the tripartite fiduciary duty.[1]

Question 11

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, [1967] 2 AC 134n

Answer 11

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, is a leading case in UK company law regarding the rule against directors and officers from taking personal advantage of a corporate opportunity in violation of their duty of loyalty to the company. The Court held that a director is in breach of his duties if he takes advantage of an opportunity that the corporation would otherwise be interested in but was unable to take advantage. However the breach could have been resolved by ratification by the shareholders, which those involved neglected to do.

Facts
Regal owned a cinema in Hastings. They took out leases on two more, through a new subsidiary, to make the whole lot an attractive sale package. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the beneficiaries brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. They had not gained fully informed consent from the shareholders.

Judgment
The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. They therefore had to account for their profits to the company. The governing principle was succinctly stated by Lord Russell of Killowen,

“The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

Lord Wright said (at 157),

"The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Reporting
Curiously, even though it was a House of Lords decision, and is now regarded as one of the seminal cases on directors’ duties, the decision was not reported in the official law reports until nearly 26 years after the decision was handed down. During the intervening period, it was only reported in the All England Law Reports.
The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. They therefore had to account for their profits to the company. The governing principle was succinctly stated by Lord Russell of Killowen,

“The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

Lord Wright said (at 157),

"The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Question 12

Cook v Deeks [1916] 1 AC 554

Answer 12

Cook v Deeks [1916] UKPC 10 is a Canadian company law case, relevant also for UK company law, concerning the illegitimate diversion of a corporate opportunity. It was decided by the Judicial Committee of the Privy Council, at that time the court of last resort within the British Empire, on appeal from the Appellate Division of the Supreme Court of Ontario, Canada.

Because decisions of the Judicial Committee have persuasive value in the United Kingdom, even when decided under the law of another member of the Commonwealth,[1] this decision has been followed in the United Kingdom courts. In UK company law, the case would now be seen as falling within the Companies Act 2006 section 175, with a failure to have ratification of breach by independent shareholders under section 239.

Facts
The Toronto Construction Co. had four directors, Mr GM Deeks, Mr GS Deeks, Mr Hinds, and Mr Cook. It helped in construction of railways in Canada. The first three directors wanted to exclude Mr Cook from the business. Each held a quarter of the company’s shares. GM Deeks, GS Deeks, and Hinds took a contract with the Canadian Pacific Railway Company (for building a line at the Guelph Junction and Hamilton branch) in their own names. They then passed a shareholder resolution declaring that the company had no interest in the contract. Mr Cook claimed that the contract did belong to the Toronto Construction Co and the shareholder resolution ratifying their actions should not be valid because the three directors used their votes to carry it.

Decision
The Privy Council advised that the three directors had breached their duty of loyalty to the company, that the shareholder ratification was a fraud on Mr Cook as a minority shareholder, and invalid. Giving the advice, The Lord Chancellor, Lord Buckmaster held the result was that the profits made on the contractual opportunity were to be held on trust for the Toronto Construction Co.

Lord Buckmaster said that the three had,

deliberately designed to exclude and used their influence and position to exclude, the company whose interest it was their first duty to protect... the benefit of such contract... must be regarded as held on behalf of the company... [It was] quite certain that directors holding a majority of votes would not be able to make a present to themselves. This would be to allow a majority to oppress the minority... Such use of voting power has never been sanctioned by the court.

it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority....if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts

Question 13

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443

Answer 13

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 is a UK company law case on the corporate opportunities doctrine, and the duty of loyalty from the law of trusts.

It is also applicable for fiduciary duty of an agent under agency law which states that an agent has a fiduciary relationship with his principal. This is a position which is similar to that of a trustee.

Facts
Mr Cooley was an architect employed as managing director of Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial Development Consultants found out and sued him for breach of his duty of loyalty.

Judgment
Roskill J. held that even though there was no chance of IDC getting the contract, if they had been told they would not have released him. So he was held accountable for the benefits he received. He rejected the argument that because he made it clear in his discussions with the Gas Board that he was speaking in a private capacity, Mr. Cooley was under no fiduciary duty. He had ‘one capacity and one capacity only in which he was carrying on business at that time. That capacity was as managing director of the plaintiffs.’ All information which came to him should have been passed on.

Roskill J, quoted, Parker v. MacKenna (1874) 10 Ch.App. 96, James L.J. said, at p. 124:

“I do not think it is necessary, but it appears to me very important, that we should concur in laying down again and again the general principle that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.”

Throughout the last century, and also in the present century, courts of the highest authority have always strictly applied this rule.

Question 14

Bhullar v Bhullar [2003] EWCA Civ 424

Answer 14

Bhullar v Bhullar [2003] EWCA Civ 424, 2 BCLC 241 is a leading UK company law case on the principle that directors must avoid any possibility of a conflict of interest, particular relating to corporate opportunities. It was not decided under, but is relevant to, section 175 of the Companies Act 2006.

Facts
Bhullar Bros Ltd was owned by families of two brothers. Each side owned 50% of ordinary shares. The directors were Mr Mohan Bhullar, his son Tim, Mr Sohan Bhullar and his sons Inderjit and Jatinderjit. The company had a grocery store at 44 Springwood Street, Huddersfield. It also owned an investment property called Springbank Works, Leeds Road, which was leased to a bowling alley business called UK Superbowl Ltd. In 1998 the families began to fall out.[1] Mohan and Tim told the board they wished for the company to buy no further investment properties. Negotiations began to split up the company, but they were unsuccessful. In 1999, Inderjit went bowling at the UK Superbowl Ltd alley. He noticed that the carpark next door (called White Hall Mill) was on sale.[2] He set up a company called Silvercrest Ltd (owned by him and Jatinderjit) and bought, but did not tell Bhullar Bros Ltd. But Mohan and Tim found out and brought an unfair prejudice claim (now s 994 Companies Act 2006) on the basis that Inderjit and Jatinderjit had breached their fiduciary duty of loyalty to the company.

Judgment

Jonathan Parker LJ held that there was a clear breach of the rule that directors must avoid a conflict of interest.

41. Like the defendant in Industrial Development Consultants Ltd v Cooley,[3] the appellants in the instant case had, at the material time, one capacity and one capacity only in which they were carrying on business, namely as directors of the Company. In that capacity, they were in a fiduciary relationship with the Company. At the material time, the Company was still trading, albeit that negotiations (ultimately unsuccessful) for a division of its assets and business were on foot. As Inderjit accepted in cross-examination, it would have been "worthwhile" for the company to have acquired the Property. Although the reasons why it would have been "worthwhile" were not explored in evidence, it seems obvious that the opportunity to acquire the Property would have been commercially attractive to the Company, given its proximity to Springbank Works. Whether the Company could or would have taken that opportunity, had it been made aware of it, is not to the point: the existence of the opportunity was information which it was relevant for the Company to know, and it follows that the appellants were under a duty to communicate it to the Company. The anxiety which the appellants plainly felt as to the propriety of purchasing the Property through Silvercrest without first disclosing their intentions to their co-directors – anxiety which led Inderjit to seek legal advice from the Company's solicitor – is, in my view, eloquent of the existence of a possible conflict of duty and interest. 42. I therefore agree with the judge when he said (in paragraph 272 of his judgment) that "reasonable men looking at the facts would think there was a real sensible possibility of conflict".

Brooke LJ and Schiemann LJ concurred.

Question 15

Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200

Answer 15

Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200 is a 2007 UK company law case, concerning the fiduciary duty of directors to avoid conflicts of interest. It follows some considerable unrest in the courts about the strictness of the law relating to taking corporate opportunities.

Facts

Mr Foster and Mr Bryant were directors of the plaintiff, a surveying company, and pretty much all their work came from a company called Alliance. Mrs Bryant also worked for the company, until Mr Foster said she was going to be made redundant. Unsurprisingly, this made Mr Bryant unhappy. He resigned.

Alliance still wanted both of them to keep working. It said that Mr Bryant should still give his services. Mr Foster argued that Mr Bryant’s services should be contracted out through their company still, not a separate one. But he lost the argument. Mr Bryant, fully funded by Alliance, set up a new company. However this was all done a few days before the resignation had actually taken effect.

In the light of the preceding events, the company sued Mr Bryant, alleging that he had breached his fiduciary duty during the period between resigning, and his resignation taking contractual effect. FBS Ltd (i.e. Mr Foster) sued Mr Bryant for breach of his fiduciary duty of loyalty, and the diversion of corporate opportunities to himself.

Judgment

Upholding the judge, the Court of Appeal found there was no breach of fiduciary duty in this case.

Rix LJ delivered the principal judgment, starting with the Canadian Supreme Court case, Canadian Aero Service Ltd v O’Malley. Here, defendant directors had resigned so that they could take the benefits for themselves of a project that they had been negotiating on behalf of the company. Laskin J had held that the defendants were “faithless fiduciaries”, their duties survived resignation, their resignation had been influenced by wanting to get the opportunity, and that they were in breach of trust. However, he stressed that he was “not to be taken as laying down any rule of liability to be read as if it were a statute”, but rather the standards of loyalty, good faith and the no-conflict rule should be looked at with reference to all the circumstances.

"Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness [sic] and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge."

Rix LJ felt that Laskin J was right to see the strict equitable rule as nevertheless merit based. He also referred to three further cases, in the spirit of an article by Prof. John Lowry from 2000, which supported a more ‘nuanced’ approach.[1] First, in Island Export Finance v Umunna[2] Hutchinson J (who relied on Laskin J’s judgment) extensively, took the view that the proposition that liability arises from the mere fact that the defendant’s position as a director led him to a post-resignation opportunity, was too widely stated. In Balston Ltd v Headlines Filters Ltd[3] Falconer J, following the views expressed by Hutchinson J, stated,

“In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of any preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director.”

Thirdly, in Framlington Group Plc v Anderson[4] Blackburne J held that in the absence of special circumstances, like a prohibition in a service contract, a director commits no breach of duty merely because, while a director, he takes…

"...steps so that, on ceasing to be a director... he can immediately set up business in competition with that company or join a competitor of it. Nor is he obliged to disclose to that company that he is taking those steps.”

Rix LJ draws the conclusion from these three cases, and the authorities cited by the trial judges in their judgments, that although the general equitable principle which places an embargo on conflicts of duty is beyond doubt, the extent of a director’s duty may depend upon the particular circumstances of the case. Furthermore, drawing on Lawrence Collins J’s reasoning in CMS Dolphin Ltd v Simonet, where the claimant company successfully claimed that Simonet, its former managing director, was in breach of fiduciary duty by diverting a maturing business opportunity to a new company established by him following his resignation, Rix LJ stressed that there should be “some relevant connection or link between the resignation and the obtaining of the business”. In so doing, he placed emphasis upon the need to demonstrate both lack of good faith with which the future exploitation was planned while still a director, and the need to show that the resignation was an integral part of the dishonest plan. Thus, in cases where liability for post-resignation breach of duty had been found, there was a causal connection between the resignation and the subsequent diversion of the opportunity to the director’s new enterprise. That said, Rix LJ recognised the difficulty of accurately summarising the circumstances in which retiring directors may or may not be held to have breached their fiduciary duties given that the issue is “fact sensitive”. It was clear, however, that the defendant’s resignation was innocent of any disloyalty or conflict of interest.

Moses LJ, while recognising that the resolution of issues of breach of fiduciary duty are fact specific, felt “almost” nostalgic for the days when there were inflexible rules of equity which were inexorably enforced by judges “who would have shuddered at the reiteration of the noun-adjective”. Buxton LJ, also endorsing Rix LJ’s judgment, stressed that the facts were particularly unusual and the Court was right to adopt a realistic approach to the alleged breach of duty. It is, he said,

“unreal to contend that, faced with Mrs Watts proposal, [the defendant] should have gone out of his way to seek to deter her from it.”

Question 16

Guinness plc v Saunders [1990] 2 AC 663

Answer 16

Guinness plc v Saunders [1989] UKHL 2 is a UK company law case, regarding the power of the company to pay directors. It required that whatever rules exist for payment in the company’s articles, they must be strictly observed.

Facts
Guinness plc appointed a committee of three directors in January 1986, Ernest Saunders (the chairman), Olivier Roux and Tom Ward (who was an American attorney), to handle the company’s affairs during a takeover bid for Distillers Company. Guinness was successful in its bid, though only after (among other things) Ward had been paid £5.2m. Ward claimed that this “fee” was agreed among the committee of three directors. Guinness plc’s articles of association gave power to fix directors’ remuneration to the whole board, which could then delegate any of its powers. It was not apparent that such power had ever been delegated.

Ward argued that the company’s articles should be construed so that the committee could be vested with power to pay remuneration to its members. The new owners of Guinness plc argued that there had been no such power and the £5.2m had to be paid back.

Judgment

The House of Lords held that the power to pay remuneration under the articles of the company should be strictly followed.

Lord Templeman gave the leading judgment. He stated the following.[1]

Mr Ward admits receipt of £5.2 m from Guinness and pleads an agreement by Guinness that he should be paid this sum for his advice and services in connection with the bid. Mr Ward admits that payment was not authorised by the board of directors of Guinness.

The articles of association of Guinness provide:

    'Remuneration of directors.

        90. The board shall fix the annual remuneration of the directors provided that without the consent of the company in general meeting such remuneration (excluding any special remuneration payable under article 91 and article 92) shall not exceed the sum of £100,000 per annum. . . .

        91. The board may, in addition to the remuneration authorised in article 90, grant special remuneration to any director who serves on any committee or who devotes special attention to the business of the company or who otherwise performs services which in the opinion of the board are outside the scope of the ordinary duties of a director. Such special remuneration may be made payable to such director in addition to or in substitution for his ordinary remuneration as a director, and may be made payable by a lump sum or by way of salary, or commission or participation in profits, or by any or all of those modes or otherwise as the board may determine.'

Articles 90 and 91 of the articles of association of Guinness depart from the Table A articles recommended by statute, which reserve to a company in general meeting the right to determine the remuneration of the directors of the company. But by article 90 the annual remuneration which the directors may award themselves is limited and by article 91 special remuneration for an individual director can only be authorised by the board. A committee, which may consist of only two or, as in the present case, three members, however honest and conscientious, cannot assess impartially the value of its work or the value of the contribution of its individual members. A director may, as a condition of accepting appointment to a committee, or after he has accepted appointment, seek the agreement of the board to authorise payment for special work envisaged or carried out. The shareholders of Guinness run the risk that the board may be too generous to an individual director at the expense of the shareholders but the shareholders have, by article 91, chosen to run this risk and can protect themselves by the number, quality and impartiality of the members of the board who will consider whether an individual director deserves special reward. Under article 91 the shareholders of Guinness do not run the risk that a committee may value its own work and the contribution of its own members. Article 91 authorises the board, and only the board, to grant special remuneration to a director who serves on a committee.

It was submitted that article 2 alters the plain meaning of article 91. In article 2 there are a number of definitions each of which is expressed to apply 'if not inconsistent with the subject or context.' The expression 'the board' is defined as

    'The directors of the company for the time being (or a quorum of such directors assembled at a meeting of directors duly convened) or any committee authorised by the board to act on its behalf.'

The result of applying the article 2 definition to article 91, it is said, is that a committee may grant special remuneration to any director who serves on a committee or devotes special attention to the business of the company or who otherwise performs services which in the opinion of the committee are outside the scope of the ordinary duties of a director. In my opinion the subject and context of article 91 are inconsistent with the expression 'the board' in article 91 meaning anything except the board. Article 91 draws a contrast between the board and a committee of the board. The board is expressly authorised to grant special remuneration to any director who serves on any committee. It cannot have been intended that any committee should be able to grant special remuneration to any director, whether a member of the committee or not. The board must compare the work of an individual director with the ordinary duties of a director. The board must decide whether special remuneration shall be paid in addition to or in substitution for the annual remuneration determined by the board under article 90. These decisions could only be made by the board surveying the work and remuneration of each and every director. Article 91 also provides for the board to decide whether special remuneration should take the form of participation in profits; the article could not intend that a committee should be able to determine whether profits should accrue to the shareholders' funds or be paid out to an individual director. The remuneration of directors concerns all the members of the board and all the shareholders of Guinness. Article 2 does not operate to produce a result which is inconsistent with the language, the subject and the context of article 91. Only the board possessed power to award £5.2m. to Mr. Ward.

Lord Templeman then ruled that none of the other articles gave the committee the power to pay directors, Ward was not entitled to pay as any kind of professional as a solicitor. Mr Saunders, even though he was chairman, had no actual or ostensible authority to agree that Ward should be paid. Finally, because the articles had an express procedure for pay, there could be no claim for quantum meruit by the court.

Lord Keith, Lord Brandon and Lord Griffiths concurred.

Lord Goff gave a concurring opinion. He noted that a Boardman v Phipps type quantum meruit can be made only ‘where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.’ His judgment went as follows.[2]

I believe that I am not the only person concerned with these proceedings who has been startled by the size of that sum, which Mr. Ward has claimed to have been paid to him under a contract binding on Guinness. But, for present purposes, the amount is irrelevant. For since Guinness is seeking a judgment without a trial in proceedings in which Mr. Ward is protesting his good faith, he must be treated as, ex hypothesi, an innocent man, who has acted throughout in complete good faith, under what he believed to be a contract binding on Guinness, and indeed as one who claims to have rendered valuable services to Guinness, performed with great skill, which have contributed significantly, perhaps crucially, to the success of Guinness's bid for the shares in Distillers, thereby very substantially enriching the shareholders of Guinness. It is on this basis that Guinness's claim to be entitled to judgment against Mr. Ward has to be considered. It has also to be borne in mind that Mr. Ward claims that, if by any chance he is not entitled to the sum of £5.2m. under a contract binding on Guinness, then he is entitled to some recompense for the services which ex hypothesi he has rendered to Guinness, either by way of an equitable allowance, or on a quantum meruit, or under section 727 of the Act of 1985.

What course has the action taken? Before the Vice-Chancellor, judgment was given against Mr. Ward on admissions, on the basis that he had received the money in breach of his fiduciary duty as a director of Guinness, by reason of his failure to disclose his interest in the agreement under which he performed the services, as required by section 317(1) of the Companies Act 1985. In the Court of Appeal [1988] 1 WLR 863, Mr. Ward's appeal against that decision was dismissed. It was said of him, at pp 870-871, that he had 'succeeded in getting his hands on the company's money,' and that the company had never ceased to own the money which he had been paid. Accordingly Mr. Ward was constructive trustee of the money which he had received, and must pay it back. If he wished to make a claim for remuneration in respect of the services which he claimed to have rendered to Guinness, he must bring a separate action.

The matter then came before your Lordships' House, by leave of the House. Mr. Ward's submissions were presented to the Appellate Committee, in an argument conspicuous for its moderation as well as for its skill, by junior counsel, Mr. Crow. It gradually became clear that Mr. Crow's criticisms of the decisions of the courts below were well founded, and that (quite apart from very serious difficulties arising upon the construction of section 317) they were inconsistent with Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, a decision of an exceptional Court of Appeal consisting of Lord Denning MR, Lord Wilberforce and Lord Pearson. The decision in that case proceeded on the basis that the statutory duty of disclosure (then embodied in section 199 of the Companies Act 1948) did not of itself affect the validity of a contract. The section had however to be read with provisions in the articles imposing a duty of disclosure upon directors of the company. If a director enters into, or is interested in, a contract with the company, but fails to declare his interest, the effect is that, under the ordinary principles of law and equity, the contract may be voidable at the instance of the company, and in certain cases a director may be called upon to account for profits made from the transaction: see per Lord Wilberforce, at p 589, and Lord Pearson, at p 594. Perhaps the matter is put most clearly by Lord Pearson, who said:

    'It is not contended that section 199 in itself affects the contract. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance. But it has to be read in conjunction with article 99. The first sentence of that article is obscure. If a director makes or is interested in a contract with the company, but fails duly to declare his interest, what happens to the contract? Is it void, or is it voidable at the option of the company, or is it still binding on both parties, or what? The article supplies no answer to these questions. I think the answer must be supplied by the general law, and the answer is that the contract is voidable at the option of the company, so that the company has a choice whether to affirm or avoid the contract, but the contract must be either totally affirmed or totally avoided and the right of avoidance will be lost if such time elapses or such events occur as to prevent rescission of the contract . . .'

On this basis I cannot see that a breach of section 317, which is not for present purposes significantly different from section 199 of the Act of 1948, had itself any effect upon the contract between Mr. Ward and Guinness. As a matter of general law, to the extent that there was failure by Mr. Ward to comply with his duty of disclosure under the relevant article of Guinness (article 100(A)), the contract (if any) between him and Guinness was no doubt voidable under the ordinary principles of the general law to which Lord Pearson refers. But it has long been the law that, as a condition of rescission of a voidable contract, the parties must be put in statu quo; for this purpose a court of equity can do what is practically just, even though it cannot restore the parties precisely to the state they were in before the contract. The most familiar statement of the law is perhaps that of Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, when he said, at p. 1278:

    'It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo... It is a doctrine which has often been acted upon both at law and in equity.'

However on that basis Guinness could not simply claim to be entitled to the £5.2m. received by Mr. Ward. The contract had to be rescinded, and as a condition of the rescission Mr. Ward had to be placed in statu quo. No doubt this could be done by a court of equity making a just allowance for the services he had rendered; but no such allowance has been considered, let alone made, in the present case.

Faced with these problems, Mr. Oliver was driven, in the last resort, to submit that Hely-Hutchinson v Brayhead Ltd was wrongly decided. I have to confess that I would hesitate long before holding that a decision of such a court was erroneous. Careful study of the decision, with the assistance of counsel, merely served to reinforce my natural expectation that the case was rightly decided.

This being so, it followed that the decisions of the courts below in the present case, founded as they were upon a breach of section 317 by Mr. Ward, were erroneous. In ordinary circumstances, this conclusion would have led to the appeal being allowed. But Mr. Oliver then sought to justify the judgment on other grounds. It was first suggested by him quite simply that Mr. Ward, having received the money as constructive trustee, must pay it back. This appears to have formed, in part at least, the basis of the decision of the Court of Appeal. But the insuperable difficulty in the way of this proposition is again that the money was on this approach paid not under a void, but under a voidable, contract. Under such a contract, the property in the money would have vested in Mr. Ward (who, I repeat, was ex hypothesi acting in good faith); and Guinness cannot short circuit an unrescinded contract simply by alleging a constructive trust.

The next suggestion was that it was unnecessary to have regard to section 317 at all. There was a simpler solution to the problem. The committee which Mr. Ward claimed to have agreed to his remuneration, thereby binding the company, had no power to do so, either under article 91 or under article 100(D) of the articles of association. It followed that the contract upon which Mr. Ward relied was void for want of authority, and that Guinness was therefore entitled to recover from Mr. Ward the money paid under it on the ground of total failure of consideration, or alternatively on the basis that he had received the money as constructive trustee. On this basis, it was suggested, summary judgment should be entered against Mr. Ward for the full sum.

Having had the benefit of the assistance of counsel, I have reached the conclusion that article 91 does not empower a committee of the board of Guinness to authorise special remuneration for services rendered by directors of the company. It is true that the articles of Guinness are conspicuous neither for their clarity nor for their consistency. In particular there is no sensible basis upon which it is possible to reconcile article 91 with article 110 without doing violence to the language of one or other article. But I am satisfied that I should accept Guinness's argument on this point.

But what about article 100(D)? Plainly, on its express words, it is outside the ambit of article 91. For under it a director who acts for the company in a professional capacity is to be remunerated as if he were not a director.

Mr. Crow told your Lordships that Mr. Ward claims that he was acting in a professional capacity, in that he was acting as a business consultant. Your Lordships' House has to consider whether that submission should be rejected without hearing any evidence upon it. I have been troubled whether it would be proper to do so. There is a tendency among elderly professional men to restrict the meaning of the word 'profession' to the older professions, such as the church, medicine and the law. But, in the course of this century, the meaning of the word has expanded, and I suspect that it is still expanding at an accelerating rate. For my part, I would be unwilling to hold, without evidence, what are the modern professions today. Even so, as is demonstrated in the speech of my noble and learned friend, Lord Templeman, there are the most formidable difficulties which would in any event have to be surmounted if business consultancy as such were to be recognised as a profession; and, especially as the expression 'business consultant' is capable of more than one meaning, I am satisfied that a bare assertion of the proposition cannot of itself be enough to justify a trial on this point in the present case.

The matter may be more appropriately approached in another way. Mr. Ward's profession was undoubtedly that of an American attorney, he being the senior partner in a law firm in Washington D.C.; and I can find no allegation in the pleadings that he was acting as a professional business consultant. Let it be supposed that he was not an American attorney but an English solicitor. It is well known that English solicitors may develop the most formidable negotiating skills, which they may deploy in the course of their profession as solicitors. No doubt the same is true of many experienced American attorneys. Had an English solicitor, who was also a non-executive director of Guinness, acted as Mr. Ward claims to have done, there might be circumstances in which he could claim to have acted in his professional capacity as a solicitor in this country. But it appears that Mr. Ward was not acting, in the context of a purely English take-over bid, in the course of his profession as an American attorney. He appears to have been simply deploying, as a non-executive director of Guinness, an incidental (though no doubt important) skill which he had acquired in the exercise of his profession. On this basis, on his pleaded case, Mr. Ward could not have been acting in the course of his profession and article 100(D) has no application in the present case.

But the matter does not stop there. Let it be accepted that the contract under which Mr. Ward claims to have rendered valuable services to Guinness was for the above reasons void for want of authority. I understand it to be suggested that articles 90 and 91 provide (article 100 apart) not only a code of the circumstances in which a director of Guinness may receive recompense for services to the company, but an exclusive code. This is said to derive from the equitable doctrine whereby directors, though not trustees, are held to act in a fiduciary capacity, and as such are not entitled to receive remuneration for services rendered to the company except as provided under the articles of association, which are treated as equivalent to a trust deed constituting a trust. It was suggested that, if Mr. Ward wishes to receive remuneration for the services he has rendered, his proper course is now to approach the board of directors and invite them to award him remuneration by the exercise of the power vested in them by article 91.

The leading authorities on the doctrine have been rehearsed in the opinion of my noble and learned friend, Lord Templeman. These indeed demonstrate that the directors of a company, like other fiduciaries, must not put themselves in a position where there is a conflict between their personal interests and their duties as fiduciaries, and are for that reason precluded from contracting with the company for their services except in circumstances authorised by the articles of association. Similarly, just as trustees are not entitled, in the absence of an appropriate provision in the trust deed, to remuneration for their services as trustees, so directors are not entitled to remuneration for their services as directors except as provided by the articles of association.

Plainly, it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim. But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered. That such an allowance may be made to a trustee for work performed by him for the benefit of the trust, even though he was not in the circumstances entitled to remuneration under the terms of the trust deed, is now well established. In Phipps v Boardman [1964] 1 WLR 993, the solicitor to a trust and one of the beneficiaries were held accountable to another beneficiary for a proportion of the profits made by them from the sale of shares bought by them with the aid of information gained by the solicitor when acting for the trust. Wilberforce J. directed that, when accounting for such profits, not merely should a deduction be made for expenditure which was necessary to enable the profit to be realised, but also a liberal allowance or credit should be made for their work and skill. His reasoning was, at p 1018:

    'Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J., in In re Macadam [1946] Ch. 73, 82, gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.'

Wilberforce J's decision, including his decision to make such an allowance, was later to be affirmed by the House of Lords: sub nom. Boardman v Phipps [1967] 2 AC 46.

It will be observed that the decision to make the allowance was founded upon the simple proposition that 'it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.' Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr. Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.

The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.

Not only was the equity underlying Mr. Boardman's claim in Phipps v Boardman clear and, indeed, overwhelming; but the exercise of the jurisdiction to award an allowance in the unusual circumstances of that case could not provide any encouragement to trustees to put themselves in a position where their duties as trustees conflicted with their interests. The present case is, however, very different. Whether any such an allowance might ever be granted by a court of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exercised in such a case, which may be said to involve interference by the court in the administration of a company's affairs when the company is not being wound up. In any event, however, like my noble and learned friend, Lord Templeman, I cannot see any possibility of such jurisdiction being exercised in the present case. I proceed, of course, on the basis that Mr. Ward acted throughout in complete good faith. But the simple fact remains that, by agreeing to provide his services in return for a substantial fee the size of which was dependent upon the amount of a successful bid by Guinness, Mr. Ward was most plainly putting himself in a position in which his interests were in stark conflict with his duty as a director. Furthermore, for such services as he rendered, it is still open to the board of Guinness (if it thinks fit, having had a full opportunity to investigate the circumstances of the case) to award Mr. Ward appropriate remuneration. In all the circumstances of the case, I cannot think that this is a case in which a court of equity (assuming that it has jurisdiction to do so in the case of a director of a company) would order the repayment of the £5.2m. by Mr. Ward to Guinness subject to a condition that an equitable allowance be made to Mr. Ward for his services.

Finally, I cannot see any prospect of success in a claim by Mr. Ward to relief under section 727 of the Act of 1985. Given that Guinness's claim must be one for the recovery of money paid to Mr. Ward under a void contract and received by him as a constructive trustee, there is no question of his being able to claim relief from liability for breach of duty, as might have been the case if Guinness's claim had been founded upon breach by Mr. Ward of his duty of disclosure.

I have been very conscious, throughout this case, that Guinness is seeking summary judgment for the sum claimed by it, without any trial on the merits. Even so, I have come to the conclusion that Mr. Ward has no arguable defence to Guinness's claim. The simple fact emerges, at the end of the day, that there was, in law, no binding contract under which Mr. Ward was entitled to receive the money and that, as a fiduciary, he must now restore that money to Guinness. For these reasons, I would dismiss the appeal.

Question 17

Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (No.2) [1995] BCC 1000

Answer 17

In Re Neptune (Vehicle Washing Equipment) Ltd: Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald: ChD 2 Mar 1995

A sole company director must still have company meetings before entering into a contract even if only he will be present. When a director’s claim to the validity of a contract or arrangement depends upon his disclosure of it at a meeting, he must show that he has in letter and spirit complied with the section and any article to like effect.

Question 18

Re D’Jan of London Ltd [1993] BCC 646

Answer 18

Re D’Jan of London Ltd [1994] 1 BCLC 561 is a leading English company law case, concerning a director’s duty of care and skill, whose main precedent is now codified under s 174 of the Companies Act 2006. The case was decided under the older Companies Act 1985.

Facts
Without reading it, Mr D’Jan signed a change to an insurance policy which was erroneously filled out by his insurance broker, a Mr Tarik Shenyuz. He did not read it before he signed, and it contained a mistake, which was that the answer ‘no’ was given to the question of whether in the past he had ‘been director of any company which went into liquidation’. This meant the insurance company, Guardian Royal Exchange Assurance plc, could refuse to pay up when a fire at the company’s Cornwall premises destroyed £174,000 of stock. The company had gone into insolvent liquidation by the time Mr D’Jan realised that the form had been incorrectly completed. The liquidators sued Mr D’Jan to recoup the lost funds on behalf of the company’s creditors (who together were owed £500,000). They alleged both negligence and misfeasance under s 212 of the Insolvency Act 1986.

Judgment
Hoffmann LJ, sitting as a judge of first instance, held that failing even to read the form was negligent, even though it may be common practice, but that Mr D’Jan’s liability should be reduced because as majority shareholder and debtor it was primarily his own money that he risked, rather than other people’s. The duty of care owed by directors in section 214 Insolvency Act 1986 was an accurate statement of the common law duty also (now codified in Companies Act 2006 section 174). Because Mr D’Jan held 99 and his wife 1 out of the 100, Mr D’Jan pleaded that in accordance with the principle of the Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd,[1] that shareholders all acting by consensus bind the company’s actions, his actions were ratified by the company and he should not be liable. Hoffmann LJ held that actual ratification is required, not just a likelihood that shareholders would ratify. However owning 99 shares was relevant to the court’s exercise of discretion to relieve directors for breaches of duty under section 727 of the Companies Act 1985 (now section 1157 of the Companies Act 2006) because it ‘may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else’s.’ His judgment went as follows.

Both Mr D'Jan and Mr Shenyuz are highly intelligent men who gave their evidence with confidence and the conflict is not easy to resolve. But I prefer the evidence of Mr D'Jan. He did not strike me as a man who would fill in his own forms. I think he would have wanted Mr Shenyuz to earn his commission by attending to these matters and I accept that he signed in the expectation that Mr Shenyuz would have completed the form correctly.

Nevertheless I think that in failing even to read the form, Mr D'Jan was negligent. Mr Russen said that the standard of care which directors owe to their companies is not very exacting and signing forms without reading them is something a busy director might reasonably do. I accept that in real life, this often happens. But that does not mean that it is not negligent. People often take risks in circumstances in which it was not necessary or reasonable to do so. If the risk materialises, they may have to pay a penalty. I do not say that a director must always read the whole of every document which he signs. If he signs an agreement running to 60 pages of turgid legal prose on the assurance of his solicitor that it accurately reflects the board's instructions, he may well be excused from reading it all himself. But this was an extremely simple document asking a few questions which Mr D'Jan was the best person to answer. By signing the form, he accepted that he was the person who should take responsibility for its contents. In my view, the duty of care owed by a director at common law is accurately stated in sec. 214(4) of the Insolvency Act 1986. It is the conduct of:

    “… a reasonably diligent person having both-

        (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
        (b) the general knowledge, skill and experience that that director has.”

Both on the objective test and, having seen Mr D'Jan, on the subjective test, I think that he did not show reasonable diligence when he signed the form. He was therefore in breach of his duty to the company.

Mr Russen said that nevertheless the company could not complain of the breach of duty because it is a principle of company law that an act authorised by all the shareholders is in law the act of the company: see Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. Mr D'Jan held 99 of the 100 issued ordinary shares and Mrs D'Jan held the other. Mr D'Jan must be taken to have authorised the wrong answer in the proposal because he signed it himself. As for Mrs D'Jan, she had never been known to object to anything which her husband did in the management of the company. If she had known about the way he signed the form and it was too late to put the matter right, the chances are that she would also have approved. She could hardly have brought a derivative action to sue her husband for negligence because he could have procured the passing of a resolution absolving himself from liability.

The difficulty is that unlike the Multinational case, in which the action alleged to be negligent was specifically mandated by the shareholders, neither Mr nor Mrs D'Jan gave any thought to the way in which the proposal had been filled in. Mr D'Jan did not realise that he had given a wrong answer until the insurance company repudiated. By that time the company was in liquidation. In my judgment the Multinational principle requires that the shareholders should have, whether formally or informally, mandated or ratified the act in question. It is not enough that they probably would have ratified if they had known or thought about it before the liquidation removed their power to do so.

It follows that Mr D'Jan is in principle liable to compensate the company for his breach of duty. But sec. 727 of the Companies Act 1985 gives the court a discretionary power to relieve a director wholly or in part from liability for breaches of duty, including negligence, if the court considers that he acted honestly and reasonably and ought fairly to be excused. It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of sec. 727 despite amounting to lack of reasonable care at common law.

In my judgment, although Mr D'Jan's 99 per cent holding of shares is not sufficient to sustain a Multinational defence, it is relevant to the exercise of the discretion under sec. 727 . It may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else's. And although for the purposes of the law of negligence the company is a separate entity to which Mr D'Jan owes a duty of care which cannot vary according to the number of shares he owns, I think that the economic realities of the case can be taken into account in exercising the discretion under sec. 727. His breach of duty in failing to read the form before signing was not gross. It was the kind of thing which could happen to any busy man, although, as I have said, this is not enough to excuse it. But I think it is also relevant that in 1986, with the company solvent and indeed prosperous, the only persons whose interests he was foreseeably putting at risk by not reading the form were himself and his wife. Mr D'Jan certainly acted honestly. For the purposes of sec. 727 I think he acted reasonably and I think he ought fairly to be excused for some, though not all, of the liability which he would otherwise have incurred. Mr D'Jan has proved as an unsecured creditor in the sum of £102,913. He has been paid an interim dividend of 40p in the pound and the liquidator has paid a further dividend of 20p but withheld payment to Mr D'Jan pending the resolution of these proceedings. In my view, having been responsible for the additional shortfall in respect of unsecured creditors, I do not think that he should be allowed any further participation in competition with ordinary trade creditors. On the other hand, I do not think it would be fair to ask him to return what he has received or make a further contribution out of his own pocket to the company's assets. I therefore declare that Mr D'Jan is liable to compensate the company for the loss caused by his breach of duty in an amount not exceeding any unpaid dividends to which he would otherwise be entitled as an unsecured creditor.

Question 19

Re Duckwari plc [1997] 2 BCLC 713

Answer 19

Duckwari Plc v Offerventure Ltd and Another: In Re Duckwari Plc (no 2): CA 8 May 1998

A company director entering into an unapproved contract with his own company was liable to the company for the loss as at the time that loss was realised, not at the time of the breach. Where directors had entered into contracts with their company in contravention of the Act, the damages were to be assessed at the date necessary to make sure that shareholders were properly compensated. The transactions to which section 320 applies are not limited to arrangements purporting to have contractual effect, and included understandings having no contractual effect. Nourse LJ said that the application of section 727 should not be restricted unless it is necessary to do so.
Nourse, Pill, Thorpe LJJ
Gazette 20-May-1998, Times 18-May-1998, Gazette 03-Jun-1998, [1998] EWCA Civ 803, [1999] Ch 253, [1998] 2 BCLC 315
Companies Act 1985 320 322(3) 727
England and Wales
Citing:
Appeal from – In Re Duckwari Plc ChD 23-Jul-1996
The company had purchased property, but it suffered a fall in value.
Held: The fall was irrecoverable despite the fact that it had been purchased from a director, because it had been made at full value. . .
See also – Duckwari Plc v Offerventure Ltd and Brian Stanley Cooper; In Re Duckwari Plc (No 2) CA 19-Nov-1998
The company made a claim to recover the borrowing costs incurred to buy property in breach of s320 (no shareholder approval). The acquisition of the property had been unprofitable, and the company was held to be entitled to recover from the . .

Question 20

Re Duckwari plc (No.2) [1999] Ch 268

Answer 20

Duckwari Plc v Offerventure Ltd and Brian Stanley Cooper; In Re Duckwari Plc (No 2): CA 19 Nov 1998

The company made a claim to recover the borrowing costs incurred to buy property in breach of s320 (no shareholder approval). The acquisition of the property had been unprofitable, and the company was held to be entitled to recover from the defendant directors the loss resulting form the acquisition.
Held: The indemnity given to a company by its directors in respect of the purchase of property from a director, did not extend beyond the losses actually suffered to the borrowing costs of the acquisition.
Times 07-Jan-1999, Gazette 27-Jan-1999, [1998] EWCA Civ 1795, [1999] Ch 268
Bailii
Companies Act 1985 320 322
England and Wales
Citing:
See also – Duckwari Plc v Offerventure Ltd and Another: In Re Duckwari Plc (no 2) CA 8-May-1998
A company director entering into an unapproved contract with his own company was liable to the company for the loss as at the time that loss was realised, not at the time of the breach. Where directors had entered into contracts with their company . .

Cited by:
See also – Duckwari Plc v Offerventure Ltd and Another: In Re Duckwari Plc (no 2) CA 8-May-1998
A company director entering into an unapproved contract with his own company was liable to the company for the loss as at the time that loss was realised, not at the time of the breach. Where directors had entered into contracts with their company . .
Cited – Murray v Leisureplay Plc QBD 5-Aug-2004
The claimant sought payment of three years’ salary after termination of his service contract. He said that an agreement had been made by the company to purchase a ‘financial institution’, which would trigger the additional payments. The defendants . .

These lists may be incomplete.

Question 21

Re Duckwari plc (No.3) [1999] 1 BCLC 168

Answer 21

Judgement for the case Re Duckwari
D was director of Company A and Duckwari. Company A bought property for £500,000; D offered to pass this property on to Duckwari in return for 50% of profits resulting from this development. Offer was accepted by Duckwari, but not approved by its members. After Duckwari had purchased property, was crash in housing market and property was sold at a great loss (£175,000). D was sued under old version of s.190. Held:

· D and the other directors of Duckwari were liable to indemnify Duckwari for whole of its loss
Ø i.e. the entire difference between £500,000 and £175,000
Ø thus were liable even for the losses caused by crash in housing market
· This because liability of C is strict
Ø Is that of a trustee

Question 22

GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch)

Answer 22

https://www.ilauk.com/docs/ilabull400.pdf

Law Debenture sponsor of the Insolvency Lawyers’ Association 1
Case: GHLM Trading Limited v Maroo and others [2012] EWHC 61 (Ch) (Newey J, 23
January 2012)
Synopsis: The High Court considered a number of claims brought by a company against
its directors and found that the burden of proof in relation to the propriety of credit entries
in a director’s loan account was on the director. Also where a director caused his company
to enter into a contract in pursuit of his own interests and not those of the company, its
members or creditors as a class, and the counterparty had notice of that, the contract was
void. The duty of a director to disclose his own wrongdoing was also considered.
Topics covered: Directors’ duties; Clawback claims (Misfeasance and
Preference); Ultra vires / validity of deeds
The Facts
Mr and Mrs Maroo (the First and Second Defendants) became directors of GHLM Limited
(the Claimant) in 2003. All the issued shares were initially held by Mrs Maroo. The Third
Defendant was Brocade International Limited (Brocade), of which Mr and Mrs Maroo were
directors and Mrs Maroo the sole shareholder. The shares in the Claimant were sold to Mr
Binani who also made substantial loans to the Claimant. The business did not prosper and
Mr Binani lost faith in Mr Maroo (the main decision maker). The Maroos refused to resign
and took steps to sell stock to Brocade, the price to be set off against sums said to be
owed by the Claimant to Brocade. In 2009 Mr and Mrs Maroo were definitively removed as
directors. The Claimant’s business had been wound down and it no longer traded. It was
not the subject of any formal insolvency procedure.
The material claims included: (1) a claim in relation to the balance on the directors’ loan
account, on the basis that credit entries were not justified; (2) a claim for the Maroos
remuneration to be repaid because they had failed to disclose their own wrongdoing; and
(3) a claim that the contract for the sale of stock was made when the Claimant was
insolvent and was void so Brocade had to account for the sums it received from selling the
stock.
The Decision
On the claim in respect of the directors’ loan account the judge held that to a substantial
extent the credit entries had not been justified and therefore £773,935 of credits should be
disregarded.
In relation to Brocade, the contract for the sale of stock was void so Brocade was ordered
to account for the sums it received from the sale of such stock but on the basis that it could
resurrect whatever claim it had against the Claimant.
The claim to recover remuneration because of wrongful non-disclosure was dismissed.
GHLM Trading Limited - Directors’ Duties
Technical Bulletin No: 400
Law Debenture sponsor of the Insolvency Lawyers’ Association 2
Comment
This was a claim brought by the company; it had not gone into liquidation or administration
so the office-holder remedies were not available although certain observations were made
about them. The case includes an analysis of directors’ duties which will be of interest to
Members when considering whether a breach of duty has occurred for the purposes of
s212 IA 1986 or otherwise.
1. Burden of proof
In relation to the burden of justifying credit entries on the directors’ loan account, the judge
considered that, just as a director had to show that the use of company money that has
been shown to be received by him was proper, so where debit entries have been made to
a director’s loan account, it was incumbent on him to justify the credit entries [149].
2. Duty to consider interests of creditors
In relation to the sale to Brocade, the judge examined the authorities for the proposition
that the duties of directors needed to be considered not simply in relation to the company
or its members but where appropriate its creditors as a class. He found that the Claimant
was insolvent, or at any rate of doubtful insolvency or on the verge of insolvency, at the
time of the Brocade transaction so that the Maroos needed to have regard to the interests
of the creditors as a whole but did not do so. There was therefore a breach of duty.
Insolvency was judged on the basis of cash flow but there appears to have been no
argument on this point. The consequence of this breach and the fact that Brocade had
notice of it was that the contract was void [171].
3. Inter-relation of preference and misfeasance
The judge considered the relevance of s 239 IA 1986 and explained that a claim for
breach of duty could still arise even if the conditions of s239 had not been met and,
conversely, even if there was a transaction that was vulnerable under s239 the director
responsible for it would not necessarily have committed a breach of duty (he noted that the
suggestion that directors simply have a duty not to allow s239 to be breached had been
rejected as “too sweeping” in Re Brian D Pierson (Contractors) Limited [2001] 1 BCLC
275) [168]. This will have an impact where, in addition to a preference claim, an office
holder seeks to pursue a claim for breach of duty in procuring the preference. The breach
of duty needs to be specifically alleged and proved. It does not automatically follow from
there being a preference. The applicability of s239 may have a bearing on the remedy
available, although the judge seemed to be of the view that, were the contract voidable
rather than void, rescission might still be granted in the light of O’Sullivan v Management
Agency and Music Limited [1985] 1 QB 428.
If, as in this case, the claim concerns a breach of duty in respect of matters outside s239
vulnerability, the judge concluded that the company needed to show that: (a) it had
suffered loss and so should be awarded compensation; (b) the director had profited and so
a profit-based award should be made; or (c) the transaction was not binding on the
company (as was the case here) [169].
4. Can a void contract be a “transaction”?
Law Debenture sponsor of the Insolvency Lawyers’ Association 3
A question might arise as to whether a void contract is capable of falling within ss238/239.
Any problem that this poses might be overcome by pleading a claim for a preference or
transaction at an undervalue and also including an alternative claim based on the judge’s
analysis in this case. Members will also bear in mind the wide definition of “transaction” in
s436 which enables the court, in an appropriate case, to view the relevant transaction as
something wider than a contract, encompassing (e.g.) an “arrangement” or series of
events.
5. Duty to disclose own wrongdoing?
The judge also made some interesting points about the duty of a director to disclose his
own wrongdoing. He noted that he was bound by somewhat controversial authority. He
proceeded on the basis that a director can have a positive duty of disclosure, including a
duty to disclose his own wrongdoing. The test for whether disclosure was required was
whether the director himself had concluded that disclosure was in his company’s interests
or would have done so had he been acting in good faith. If so, disclosure to fellow board
members should normally suffice but it was possible to conceive of a director being bound
to disclose a matter to someone else (such as the shareholder in this case). It was
necessary to look at the specific facts of each case. Here the claim was dismissed as it
had not been specifically pleaded and the Claimant had not established what would have
happened had the disclosure been made [203 -206]. This is another useful reminder to
Members that where issues of good faith are being raised these should be specifically
pleaded in order to enable directors to raise any relevant defences (see also Atkinson v
Corcoran and others [2011] EWHC 3484 (Ch) (Bean J, 21 December 2011) [32] and In the
matter of Bluebrook Ltd; re IMO (UK) Ltd [2009] EWHC 2114 (Ch) (Mann J, 11 August
2009 [55]).
Overall, the judgment is plainly thought-provoking but its consequences may need to be
assessed further.
Law Debenture sponsor of the Insolvency Lawyers Association

Question 23

Lexi Holdings plc (in admin) v Luqman [2009] EWCA Civ 117

Answer 23

CLIENT ALERT
“It Wasn’t Me!” – The Expanding Duties of Non Executive / Independent Directors
September 21, 2009
The Court of Appeal decision of Lexi Holdings Plc v Luqman & Ors [2009] EWCA Civ 117(“Lexi”) has forced non executive directors
(“NEDs”) across the country to sit up straight at board room tables. The judgment has endorsed the increasingly held view that a
failure to act on the part of NEDs, particularly in the day to day management, may be a breach of their fiduciary and common
law duties. In the past, courts were reluctant to hold directors liable for breach of their duty of care when the matter related to
the wrongdoing of other directors because it was difficult to prove that their omissions resulted in losses to the company.
However, following the Court of Appeal decision in Lexi, NEDs will be unable to excuse themselves of such inactivity by the time
old saying of “It wasn’t me” also known in the legal world as the “Shaggy defence 1”.
Summary of the facts of the case
The case involved the misappropriation of £59,607,498 by the managing director Shaid Luqman (“Shaid”) of Lexi Holdings Plc
(“the Company”) between 7 October 2002 and 15 November 2006 with the Company filing for administration in late 2006. The
administrators issued proceedings to recover the money against Shaid, as well as a number of other directors, including his
sisters Monuza Luqman (“M”) and Zaurian Luqman (“Z”) who had received payments from the misappropriated funds. Shaid was
debarred from defending the action for serious breaches of a number of court orders including an asset disclosure order,
freezing order and a failure to deliver up his Pakistani passport to the Company’s lawyers. As a result, the Company was able to
obtain judgment against Shaid for the full misappropriated amount plus interest. As against the NEDs, M and Z, the court at first
instance concluded that they were only liable for some of the money. The court held that their inactivity did not directly cause
any loss to the Company on the grounds that had they scrutinised and questioned certain accounting entries they would “have
been fobbed off by lies” from Shaid. Accordingly, they were only liable for that part of the misappropriated funds that had been
paid directly to them.
The Court of Appeal, however, saw things very differently, holding that M and Z failed to make appropriate enquiries, and had
not succeeded in discharging their duties as directors. Shaid’s ability to deceive his fellow directors did not excuse this conduct.
M and Z had also failed to inform the other directors, and the banks lending money to the Company that Shaid had been
previously convicted of dishonesty offences including five counts of obtaining or attempting to obtain money by deception.
Further, M and Z had a duty to inform the Company’s auditors and their fellow directors. If they had done so, the auditors were
unlikely to have produced unqualified accounts which were relied upon by the banks that increased the Company’s borrowing
facilities. As a consequence, M and Z were held to have breached their duties as directors, and were ordered to repay
approximately £42 million and £37 million respectively.
The decision is an excellent example of how NEDs can breach their fiduciary duties:
· Failure to ensure that they have appropriately supervised the day to day affairs of the Company. This will include
supervision of the actions of other directors. Tasks may be delegated but it still remains the business of all directors.
2
· Failure to exercise judgment. NEDs should not be manipulated by actions of one individual. Even partial delegation of
responsibility can be extremely detrimental and costly. In Lexi, the two NEDs should have requested explanations for a
number of suspicious accounting entries and for details in relation to a fictitious director loan account in the names of
the executive director, Shaid, and one other NED. The Court of Appeal held that had they properly carried out their
duties as directors and questioned the actions of Shaid, the losses to the Company would not have been as extensive.
· Failure to inform auditors, banks and other directors of special knowledge they possess for example: prior dishonesty
offences. In Lexi, the two NEDs were held to have prior knowledge of Shaid’s convictions and should have informed
auditors that he had previously been imprisoned for offences which included obtaining or attempting to obtain money
by deception.
· Failure to seek appropriate advice from external professional advisors.
Conclusion
Regulatory authorities, particularly in the UK/Europe and the US are increasingly focused on holding an individual as opposed to
a company accountable for losses and failures. While NEDs/independent directors could have been forgiven a few years ago for
acting and behaving with limited knowledge, that is insufficient these days - in fact the holding in this case arguably extends
their duty of care to that of a full time director. Most D&O policies exclude cover for an NED unless specific allegations are made
against them and while the “Higgs” report in the UK mandated D&O cover for NEDs, the availability in the market has been
subject to a number of caveats. This case can only be good for D&O Insurers, but may result in a lower number of NEDs taking up
a position particularly with the FSA reviewing and approving executive positions going forward.

Question 24

O’Donnell v Shanahan [2009] EWCA Civ 751.

Answer 24

O’Donnell v Shanahan [2009] EWCA Civ 751 is a UK company law case concerning the strict prohibition on any possibility of a conflict of interest between a company director’s duty to promote her company’s success and her own gain.

Facts
Allied Business & Financial Consultants Ltd was a small company, with its office above the Charles Dickens pub at 160 Union Street in Southwark. The directors were former Bank of Ireland employees, who had set up the company in 1988, and included Ms O’Donnell and Mr Shanahan who were both directors. Ms O’Donnell had fallen out with the other members allegedly after (among other things) Mr Shanahan had diverted a property investment opportunity - to buy an interest in the fifth floor of Aria House, above the Playhouse Theatre, 23 Craven Street, near Embankment - to one of his own companies. Ms O’Donnell contended that this diversion was a breach of Mr Shanahan’s duty as a director to act without any possibility of a conflict of interest, and because Allied Business Ltd could possibly have taken the opportunity, she was in her interests as a member unfairly prejudiced (under Companies Act 1985, section 459, now Companies Act 2006, s 994). She requested that her shares be bought out at a fair value.

Judgment

High Court

Richard Sheldon QC held, based on the old case of Aas v Benham [1891] 2 Ch 244 that the particular opportunity taken up by Mr Shanahan’s company fell outside the scope of Allied’s business. Therefore, there was no conflict of interest, and no breach of the no profit rule.

Court of Appeal
Waller LJ, Rimer LJ and Aikens LJ reversed the High Court and allowed the unfair prejudice petition to proceed. In this particular case it was clear that Mr Shanahan had acted without the company’s fully informed consent. The opportunity had come to Mr Shanahan in his capacity as a director of Allied Business Ltd, and so must in principle be accountable for any profit. Aas was distinguishable as a case of partnership, where the business relationship had been circumscribed by contract.

Question 25

Sample examination question

Arthur, Beatrice and Charles are the directors of Dynamic Development plc, a
company whose main objects are to engage in the business of computer software
development and ‘any other business which, in the opinion of the directors, is in
the interests of the company’.
In November 2016 the company was approached by Fred, a computer games
software designer, who wished to sell one-half of his interest in certain products
which he has designed but not yet launched on the market. At a meeting attended
by all three directors and Fred the possibility of such a joint venture was discussed
but rejected by the company on the grounds that, given the volatile nature of
consumer demand and the fast-changing nature of the computer games market,
the venture was too risky. In January 2017 Fred approached Arthur, Beatrice and
Charles with a view to obtaining their personal involvement in the venture. Arthur
declined but Beatrice and Charles accepted Fred’s invitation. They incorporated
a new company, Zenco Ltd, with Beatrice and Charles each holding one-half of
the issued share capital in the company; they were also its two directors. This
arrangement was not disclosed to Dynamic Development plc.
In April 2017 Dynamic Development plc was taken over by Pro-Computers plc and
Arthur, Beatrice and Charles were replaced by nominees of Pro-Computers. The
new board has now learned of the Zenco Ltd project and that the initial investment
made by Beatrice and Charles has tripled to £250,000.
Advise Dynamic Development plc.

Answer 25

Advice on answering this question
You will need to begin with describing the restatement of the duties of directors in
Part 10 CA 2006 with particular reference to s.175 (duty to avoid conflicts of interests),
s.172 (duty to promote the success of the company), s.188 (remedies) and s.179
(cumulative effect of the restated duties).
The objective of the no-conflict duty was explained by Lord Herschell in Bray v Ford and
by Millett LJ in Bristol and West Building Society v Mothew. You should also state what
the consequences are of a breach of duty (i.e. the director’s liability to account for any
profits obtained (see s.178)). As Millett LJ points out, the core liability has several facets:
a director must not make a profit out of his trust and a director ‘must not place himself
in a position where his duty and his interest may conflict’.
The question requires a detailed analysis of s.175 and particularly Regal (Hastings)
Ltd v Gulliver, IDC v Cooley and Bhullar v Bhullar. In particular you should refer to the
reasoning of Lord Russell in Regal (Hastings) in which he reviews the basis of the
directors’ liability to account. With respect to the January 2017 approach by Fred you
should note that in Cooley the judge stressed that it was irrelevant to the issue of
liability that the defendant director had been approached in his personal capacity.
Reference will also, however, need to be made to Peso Silver Mines v Cropper where,
on the particular facts of the case, liability was avoided because it was held that the
company had bona fide declined the offer to buy the mining claims. You need to
discuss whether the decision by Dynamic Development plc not to join with Fred was
reached in accordance with s.172 (duty to promote the success of the company) or
was it made in order to facilitate the defendant directors pursuing the opportunity
themselves. Here you will discuss Cook v Deeks, and Bhullar v Bhullar. The fact that
Arthur was a party to the board’s decision to reject Fred’s offer, together with the fact
that he declined Fred’s personal invitation might point to the board’s decision being
made in accordance with s.172. On the information you are given it is difficult to reach
a firm conclusion in this regard, but it is an issue that must be addressed. You will also
need to discuss s.175(5)(b) as the company is a plc.
You must reach a conclusion on the issue of liability. This shows the examiner that you
have thought about the issues. One final point in this regard: you should mention that
the claim is being brought by Dynamic Development plc because breach of fiduciary
duty is a wrong against the company (see Chapter 11 of the module guide) and the
proper claimant rule therefore applies (see now Part 11 of the CA 2006).
Finally, discuss s.1157 CA 2006. It is a belt and braces provision so that inevitably
defendant directors will argue for relief from liability. Note that the court may relieve
the defendants in whole or in part.

Question 26

Additional Ressources

Answer 26

Directors’ Duties
Picture
One of the three most contested issues in company law (next to shareholder remedies and insolvency)
Directors as fiduciaries:

Directors are in a very important position. 
The law imposes obligations on important people because they can take advantage of others.
They owe loyalty to other people. 
The 'agency problem': placing obligations on agents of companies so they cannot 'rip off' the principle (the company and its shareholders).
Directors' duties are codified in the CA 2006 but only to consolidate that which is already established by common law (s.170(4))

To whom are duties owed?

Section 170(1) states that the duties of the directors are owed to the company.
Is 'the company' just the company as a separate entity or to the company as a whole?
To the company as  whole (Percival v Wright 1902): not to individual shareholders (Peskin v Anderson) and not to creditors.
You can't look through case law and establish that 'the company' is its shareholders.
Company as a whole: general body of shareholders, present and future (Gething v Kilner 1972).

Directors’ duties to creditors:

Directors have an indirect duty to creditors (direct duty is to the company).
When the company is in distress they must take into account the interests of creditors.
In certain circumstances, the duties the directors owe are owed in such a way that they must take into account the interests of creditors. S 172(3) doesn't tell us what these circumstances are.
The case law is not clear.
When the company is insolvent, directors HAVE to take into account the interests of creditors.
'Financial difficulty' is not clear
One argument is that if a director can reasonably expect insolvency could occur as a result of their actions, they must take into account creditors' interests

Duties to others:

Contractarians believe that the only people whose interests should be taken into account are the shareholders, and the main aim is maximising their wealth.
Communitarians take a public view of company law and consider stakeholders' interests, believing that they are social institutions that have a public impact.

Shadow directors:

Duties apply to shadow directors
Ultraframe UK Ltd v Fielding 2005: shadow directors don't owe fiduciary duties to the company, but they do have a duty of care.
Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia (No2): shadows owe fiduciary duties...

Fiduciary duties:

Based on loyalty and trust
Acting properly with the company
Acting in good faith
No mention of them in s 170 but in 178(2) there is an implication that all of them from s 171-177 apart from 174 on the duty of care regard fiduciary duties.
This mandates that a director subordinates his or her interests to that of the company.
The notion of fiduciary duty is a product of the law of equity
It ensures that a person in a discretionary position is trusted to serve the interests of another person
If the duties were not there, directors would act in their own interests
Self-dealing: acting for himself/herself (fiduciary duty)
Shirking: not doing their jobs properly (duty of care)
Directors are almost like trustees (but they are not!) as they are both fiduciaries - directors can take risks, but trustees cannot

Duty to act within powers s.171:

Section 171: they have a duty to act in accordance with the company's constitution.
The powers that have been granted to the directors must be exercised for the purpose for which they were granted.
Directors must act in good faith, but they must also use their powers for a proper purpose
When the courts look at whether the directors have exercised their powers for the proper purpose, they use a subjective test and objective considerations: they look at what the directors thought, and also whether the evidence suggests that it wasn't for a proper purpose
The burden of proof is on the claimant, not on the director

Power to issue shares:

There are cases where shares have been issued to prevent others taking control rather than to raise capital.
Hogg v Cramphorn Ltd: company was threatened with a takeover. The directors established a trust for the company's employees and lent money to the trust so they could buy shares with the company. More shares: less interest. Court looked at whether the power was used properly. Even though they thought it was the best thing for the company, their primary purpose was to stop the takeover rather than to raise capital.
Howard Smith v Ampol Petroleum: Two companies that were trying to take over a company. Company didn't want Ampol to takeover, they'd rather Howard Smith, so issued shares. 
Court said you have to look at the basis for power. Then they look at whether it was bona fide (in good faith), then what the purpose was. If the dominant (primary) purpose is improper, the directors are acting outside their power. If substantial purpose is proper then they are okay.
Extrasure Travel Insurances Ltd v Scattergood 2003: Got to identify the power whose exercise is in question; got to identify the purpose for which the power was delegated to the directors; must then identify the substantial purpose for which the power was in fact exercised and decide whether that purpose was proper.

Duty to promote the success of the company (s. 172)

A director of a company must act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:
The likely consequences of any decision in the long term;
The interests of the company's employees;
The need to foster the company's business relationships with suppliers, customers and others;
The impact of the company's operations on the community and environment;
The desirability of the company maintaining a reputation for high standards of business conduct; and 
The need to act fairly between the members of the company.
"Have regard" - not follow completely.
'Enlightened shareholder value': most controversial issue in the Companies Act 2006.
Continuation of the requirement to act in the company's best interests.
Re West Coast Capital (LIOS) Ltd 2008
Cobden Investments Ltd v RWM Langport Ltd 2008
Shepherd v Williamson 2010
Not a lot of guidance from the law.
There is a lot of director discretion: provided the directors act in good faith, their discretion is broad.
Good faith is the only limitation. 
Prima facie, it is difficult to say that a director is not acting in good faith.
The duty to act bona fide in the best interests of the company was assessed on the basis of a subjective test (Re Smith and Fawcett Ltd 1942). 
Charterbridge Corp Ltd v Lloyds Bank Ltd 1979: Applicable. Take what directors say at face value. The onus is on C to say D couldn't have been acting in good faith. C must produce evidence to suggest that D couldn't have been acting in good faith because of what D knew or did.
Extrasure v Scattergood 2003: 'the fact that D's alleged belief was unreasonable may provide evidence that it was not in fact honestly held at the time...'
Difficult to know what the 'success of the company' actually is.
'Members as a whole': courts have held that is means present and future shareholders.
'Have regard to...' No explanation in the provision of what this means.
Does it mean directors are merely to take interests into account insofar as it promotes benefits to shareholders?
The duty of care and skill has not been strictly applied historically 
Directors must be diligent in exercising their functions as directors.
Re City Equitable Fire Insurance Co Ltd: A director need not exhibit in the performance of his/her duties greater skills than may reasonably be expected from a person of his/her knowledge and experience - SUBJECTIVE TEST.
A director isn't bound to give continuous attention to the affairs of his/her company.
Norman v Theodore Goddard 1991

Duties of care and skill s. 174:

Objective and subjective test
'A director of a company must exercise reasonably care, skill and diligence.'
This means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge skill and experience that may reasonably expected of a... director;... and the general knowledge, skill and experience that the director has.
Re Barings PLC (No 5):
(1) Duty to acquire and maintain a sufficient knowledge and understanding of the company's business and affairs so they can discharge their duties. (2) Directors have to supervise people they delegate authority to. (3) Every case is different: you can't apply standards to every director in every company.
Skill: a director isn't bound to bring any special skills. This changes if someone is appointed to a specific/specialist role.
Non-executive directors are judged on their experience and what the reasonable person would have done.
Diligence: directors have to attend meetings unless they have a good reason not to. They should have an active interest. They should try to find out what is going on.

Duty to avoid conflicts of interest s.175:

Directors are not to profit from their positions unless expressly permitted to do so.
Directors have a duty to avoid conflicts between their personal interests and the interests of the company.
This is because they are in a position where they could exploit circumstances to their own benefit.
This is codified in s175(1): "A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company."
Aberdeen Railway Co v Blaikie Bros: X was a director in A Ltd. He was also a partner in partnership B. He arranged for a contract where A Ltd bought shares from partnership B. A Ltd entered into the contract through X's agency. A Ltd sought to invalidate the contract. The Court agreed with A Ltd. X had acted improperly in entering into the agreement. If conflict is disclosed, it is okay. There was no disclosed conflict so the contract was voided. 
Courts will not consider whether the contract is a fair one. 
At common law it was not necessary to disclose where the conflict is trivial (Movitex Ltd v Bulfield). 
The test as to whether something constitutes a conflict is whether a reasonable person looking at the facts would think that there was a real, sensible possibility of conflict (Bhullar v Bhullar 2003). 
S175(2) deals with the no-profit side.
This applies in particular to the exploitation of any property, information or opportunity. It is immaterial whether the company could take advantage of either.
Cook v Deeks: Company (X Ltd) had 4 directors (A, B, C and D), who were also shareholders. They built railways. A, B and C were negotiating with a party wishing to build a railway. To do this they set up another company (Y). D was not happy. A, B and C were the majority shareholders and approved what they had done. D went to the courts. The directors A, B and C were liable to X Ltd. Wrongly subjected to the contract. Blatant exploitation of a company opportunity. The court said it was equitable fraud. 
Regal (Hastings) Ltd v Gulliver: R Ltd owned a cinema. R wanted to acquire two other cinemas and sell all three as a package to a buyer. The problem was, they had to buy the leasehold interests. R set up a subsidiary company to own all shares in X Ltd. To buy the cinemas, they needed  £5k. The company could only put together £2k. The directors said they would put in £500 each to buy them. Instead of selling the cinemas, they sold the company, X Ltd. The new owners (Z) realised that they sold the shares to them. Z brought an action against the directors who put in money because when they put money in, they got a profit back. The directors argued that it was unfair, but they were liable. They had to account to the company for the profits they had made. Courts said it didn't matter that R Ltd couldn't do the deal without the money. 
CMS Dolphin Ltd v Simonet 2002: If an ex-director takes advantage when information or opportunity arose during term of office the no-profit provision still applies.
Industrial Development Consultants Ltd v Cooley: C was an agent (and director) acting on behalf of IDC. Tried to make a contract with X for architectural work. X went directly to C and asked if he could do the job himself. C entered a contract with X after leaving IDC because of 'stress'. IDC said C breached duty. Court held C liable for breach of duty - he got the contract because of his position as the managing director of IDC. IDC had wanted the work - the contract fell through because of X. 
S175(3)(4): This duty does no apply to a conflict of interest in relation to a transaction or arrangement with the company.
(4) This duty is not infringed - (a) If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or (b) if the matter has been authorised by the directors. 
Unless the constitution specifically states that in a private company the directors cannot give authorisation, they can approve a conflict.
In a public company, you can't approve unless it specifically states that they can.
Approval can be obtained under s 175(6)(7): A quorum is a minimum number of people that have to be in a meeting to decide something. The directors in question (or any other interested director) can't make up the numbers, and their votes don't count. 

Duty not to accept benefits from third parties s.176:

A director mustn't accept a benefit from a third party conferred by reason of his being a director, or by his doing (or not doing) another as a director.
This outlaws bribes.
A third party is a person other than the company.
The director won't be liable if the acceptance of the benefit can't be regarded as likely to give rise to a conflict of interest.
If a supplier gives a director a bottle of champagne or chocolates for work at Christmas, for example, this will not apply. 

Duty to declare interest in a proposed transaction or arrangement s.177:

If a company is to make a contract with another company and a director has an interest in the agreement, they must disclose this to his/her company. 
The declaration may (but need not) be made at a meeting of the directors or by notice in writing (s184) or general notice (s185).
If a declaration of interest under this section is inaccurate or incomplete, a further declaration must be made. 
Any changes must be made aware before the contract. 
If the director doesn't know of the agreement they don't need to disclose.
They are assumed to know of it if it is reasonable that they should've known.
A director also has to disclose direct or indirect interests.
Under s177(1) they now have to disclose the extent of their interest.
Lee Panavision Ltd v Lee Lighting Ltd 1992: D disclosed his interest informally to the directors but not in the board meeting (but this was held to be okay). 
Neptune (Vehicle Washing Equipment) Ltd: One director company. Director didn't disclose his interest because he was the only one in the room. He was held liable.
Now under statute, this isn't the case - if there are no other directors you don't need to.

Duty to act independently s.173:

Directors must not fetter their discretion
Codified what exists at common law
Gwyer v London Wharf (Limehouse) Ltd 2002: Directors must exercise their own independent judgment when reaching a decision
Thorby v Goldberg 1964; Fulham Football Club v Cabra Estates 1994: Directors can delegate functions to managers, but not their independent use of their powers
Someone wishes to do something and wants the right to do something. They make an arrangement with the company to do that. The director cannot do this personally. 
The duty is not breached if he/she restricts his/her discretion if the director acts according to the constitution or as a result of an agreement properly entered into by the company
Overarching principle: is it in the best interests of the company? 

Other duties s.178:

People didn't want the government to codify duties. This section allows the court to use its discretion (they are more flexible). 
The duties developed are no more than duties of loyalty
Item Software (UK) Ltd v Fassihi 2004: Duty to tell the company if they've done something wrong (and against the company's interests).
British Midland Tool Ltd v Midland International Tooling Ltd 2003: Directors are required to disclose to their companies attempts made by a competitor to 'poach' them from the company.

Remedies for breaches s.178:

Consequences of a breach and remedies flowing from the breach are applied from common law.
Companies could use (mandatory/prohibitory) injunctions or accounts of profits (director must account for profits; profits made from the breach are then turned over to the company) against the director (equitable remedies). Account of profits: JJ Harrison (Properties) Ltd v Harrison 2001.
Equitable compensation: 
A company can claim damages for any loss suffered by the company because of breach of duty of care
A third party can be held liable if it can be established that he or she had given knowing assistance
A third party has been said to be potentially liable if he/she was acting dishonestly, even if the third party received no benefit from the breach (Royal Brunei Airlines Bhd v Tan 1995).
If a director breaches his/her duty and as a result has passed a benefit to a third party, there is no need to establish dishonesty, even though dishonesty will often be present. The third person would need to be reasonably aware enough that something is not right (turning a blind eye). 
If the third party knew about the breach, he or she could be regarded as a constructive trustee 
Willing to lift the corporate veil to see who is running the company/pulling the strings if a director sets up his/her own company to take the benefit (Adams v Cape Industries 1990 - facade/sham) 
Ratification (giving approval): any decision by a company to ratify conduct by a director amounting to negligence/default/breach in relation to the company must be taken by the members, and without reliance on the votes in favour by the director or any connected person (family). 
Could ratify a conflict of interest and duty (North-West Transportation Ltd v Beatty 1887).
Could not ratify where director hasn't acted in good faith (Attwool v Merryweather 1867). 
Could not ratify where director has acted dishonestly or without regarding the interests of the company (Cook v Deeks 1916).

Question 27

Regentcrest plc v Cohen 2001

Answer 27

Introduction

The United Kingdom’s Insolvency Act of 1986 lays down a statutory mechanism for liquidators and trustees in bankruptcy for the reversal of transactions. Section 423 deals with transactions defrauding creditors. The general statutory duty of a director to promote the success of the company and its members is subject to the creditors’ interests. Directors of a company constitute the mind and will of the company, and also control what it does. A company is a mere legal entity that exists in the eyes of the law alone. Corporate law seeks to place a check on the powers that directors possess by imposing duties. These duties are attached to a corresponding right of enforcement possessed by the company’s stakeholders. Duties are of two kinds:

The dutyof care and skill and;
The fiduciary duty of loyalty and good faith.
While the former deals with the common law tort of negligence, the latter has equitable connotations pertaining to corporate stakeholders. The United Kingdom case of Regentcrest Plc. v. Cohen[1]revolved around a claim by a company in liquidation through its liquidators against a director of thecompany stating thathe had acted in breach of his fiduciary duty to the company by voting to allow thecompany to waive the clawback of sums that the company was entitled to from other directors at a time whenthe company was insolvent and was therefore, liable in damages to the company.

Factual Background

The claimant company, Regentcrest, was a property development company. In the year 1988, the company agreed to purchase the shares in another company, Greenground, which owned a development site. The vendors of the Greenground shares were two directors of Regentcrest, including a former shareholder and director.[2] The clawback provision of the agreement stated that additional remuneration was be payable if the value of the site had increased by the date of deemed practical completion of the development in 1990, but if the value had fallen, the vendors were liable to repay any shortfall. Regentcrest had two other directors, Roy and Don Richardson.[3]In 1990,Regentcrestfaced financial difficulties following which the Richardsons injected £5m of their own resources into the company. The development of the site had not taken place and the value of the site had fallen leading to a shortfall of £1.5m, for which the vendors were liable under the clawback claim to repay Regentcrest.[4]

In September 1990,Regentcrest agreed to waive any claim against its vendors under the clawback provision in return for the vendors’ future free services as directors. Subsequently, Regentcrest was compulsorily wound up inNovember. The liquidators of Regentcrest claimed damages against Don Richardson for breach of fiduciary duty asa director in voting in favour of the resolution to waive the clawback claim on the basis that he did not act inthe best interests of the company and with the knowledge that liquidation was inevitable, consented tothe waiver of the clawback provision to protect the vendors of the Greenground shares alone.

Issues

Whether Don Richardson was in breach of his fiduciary duty as a director of the company?[5]
Whether the vendors had the ability to meet a judgment on the clawback claim?[6]
Arguments

Arguments of the Appellants

As a director of Regentcrest, Don Richardson owed the company a fiduciary duty to acthonestly and with utmost good faith in addition to a duty to act in the interests of Regentcrest at all times. It was contended that the resolutions for the waiver of the clawback claim as well as the confirmatory resolution was passed to his knowledge and not in the best interests of Regentcrest.[7] By voting in favour of the resolutions, the appellants argued that he breached his fiduciary duty to Regentcrest and this move led to the loss of the opportunity to recover the clawback amount.

At the time of the passing of the resolution, the directors of the company knew that Regentcrest was insolvent and unable to continue its operations.[8] They were aware of the fact that there was no real prospect of the vendors or any of them carrying out duties for Regentcrest for three years and that the value of any such services could not possibly have amounted to adequateconsideration for the waiver. Moreover, they knew that the vendors had no claims against Regentcrest under the agreement and that the waiver had no commerciality from Regentcrest’s point of view, being calculatedto benefit the vendors and incapable of benefiting Regentcrest. Concerning the second resolution,reliance wasplaced on the fact that by 27th September1990, Herring Son & Daw had presented a winding-up petition, and the board of Regentcrest had decided not to resist that petition or to put further funds into Regentcrest.

Arguments of the Defendants

The defence admitted that as a director of Regentcrest, he owed fiduciary duties toRegentcrest to act honestly and in good faith, and in what he considered was Regentcrest’s best interests, but he does not admit any higher duty of utmost good faith. Richardson believed that the resolution was passed in the best interests of Regentcrest. He argued that at the time of the resolution, the directors believed that the company would continue trading.[9]Moreover, the defendants denied that the company was insolvent on 5th September1990. However, since then the Regentcrest was technically insolvent. According to Don Richardson, the waiver of the clawback provision was for commercial reasons in favour of the company. Furthermore, to prove that the directors had the company’s best interests in mind, it was alleged that the Richardsonbrothers had injected£5m into Regentcrest and that every effort was beingmade to enhance the financial position of Regentcrest. Due to the minimal prospects of recovery under the claim and keeping in mind the financial pressures on the vendors, the resolution was passed.[10]

The evidence shows that even after 5th September, the Richardson brothers were still prepared to support Regentcrest and were genuinely striving for its survival. Roy Richardson’s conduct in continuing thereafter to negotiate with the banks as well as procuringthe delisting of Regentcrest’s shares are indicative of the same. The argument that he was acting out a charade inorder to mask his true motives was not credible.

It was concluded that in September1990, the possibility of recovering more than 20% of the clawback claim, keeping in mind the associated risks and the vendors’ intention to contest the claim, was minimal. Moreover, the total sum recovered under a judgment would not have covered the costs of obtaining it. The value of the clawback claim was assessed at £50,000.

Summary of the decision and judgment

With good reason, the court normally would not interfere with a director’s good faith judgment in the best interests of the company. Under common law, if there is, prima facie, no reason to believe that a director had acted mala fide, even where this results in consequences which are not in the company’s favour, the court does not dictate how he should have acted. Thus, the law recognizes that the decision of what is the best interest of the company is best left to the director.

Analysis

The duty imposed on directors to act in good faith and in the interests of the company is subjective. When analyzing the actions of a director juxtaposed with his duties and interests, the question is not whether he would have acted differently if viewed objectively, rather, it considers the belief that the director had that his act or omission was in the best interests of his company. The Honourable Judge relied on the caseof Re Smith and Fawcett Ltd[11]where it was established that the duty to act bona fide was subjective.A director must exercise his discretion in utmost good faithaccording to his standards and not what a court may consider is in the interests of his company. To prove disloyalty and infidelity, mere incompetence would not suffice.[12]

The state of mind of the director is the indicator of good faith. Whether or not the act or omission results in substantial detriment to the company, the director has to establish that he genuinely believed his actions to be in the best interests of the company. In this case, we can observe the director’s state of mind by observing the actions and decisions he made after the resolution. The law concedes to the director to act according to what he believes and the parameters for this are not decided by the court. The commerciality of his decisions is measured according to subjective standards. However, the court mandates a director to always have the best interests of his company in mind while discharging his duties.

Conclusion

The law pertaining to a director’s duties and interests seem to be plagued with ambiguity. Often, the interests of the company, its directors, and members are not aligned and this leads to conflicts. Interests of employees and members are subjected to the director’s consideration, without any possible means of enforcement for employees. The director represents the decision-making organ of the company and the fiduciary duty entrusted to him is subjected to the duty of care he owes. Therefore, a director must act in good faith and promote the best interests of not only the company but its members as well. Corporate stakeholders’ interests are not adequately included under the law. A holistic approach has to be adopted to protect the interests of the company as well as its stakeholders and promote commercial well-being and harmony. This view was observed in Pantiles Investments Ltd.[13], where the Court took a more stringent approach with respect to the standards to be applied while analyzing the actions taken by a director.

https://thecompany.ninja/directors-fiduciary-duty-of-good-faith/