| Percival v Wright
Fiduciary duty held not breached
No general fiduciary duty to the shareholders
| The directors offered to buy the shares held by the company’s members without disclosing that at the time of the purchase they were negotiating with an outsider for the sale of the company at a higher price. The duty was owed to the company and, in any case, there was no unfair dealing by the
directors. The shareholders had initially approached the directors asking them to purchase their shares.
BUT
fiduciary duties, carrying a duty of disclosure,
can be owed to shareholders
|
| Greenhalgh v Arderne Cinemas Ltd
the meaning of ‘the company as a whole’
| It is not enough for directors to act in the short-term interests of the company alone, but that regard must be taken of the long-term interests of the company. In other words, the duty is not confined to the existing body of shareholders, but extends to future shareholders.
|
| Industrial Development Consultants Ltd v Cooley
Director accepted benefit from 3d party
| Roskill J held that Cooley was accountable to the company for all of the profits he received under the contract. Cooley had a duty to pass to the claimants information which came to him while he was managing director. It was irrelevant that Cooley had been approached in his personal capacity and that the Gas Board would not have contracted with IDC. Roskill J concluded: “if the D is not required to account he will have made a large profit as a result of having deliberately put himself into a position in which his duty to the plaintiffs who were employing him and his personal interests conflicted”.
|
| Re Smith & Fawcett Ltd
Proper purposes doctrine
S 172
| Lord Greene MR stated that directors must not exercise their powers for any ‘collateral purpose’.
Directors must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company.
|
| Extrasure Travel Insurances Ltd v Scattergood
Illustrates power being exercised for an improper purpose
| The issue of whether directors have used a power for a proper purpose arises in relation to their authority to issue shares. If shares are allotted in exchange for cash where the company is in
need of additional capital the duty will not be broken.
|
| Hogg v Cramphorn
| But where directors issue shares in order to dilute the voting rights of an existing majority shareholder because he or she is blocking a resolution supporting, for example, a takeover bid, then the duty will be breached
|
| Piercy v S Mills & Co Ltd
| The court set aside a share issue on the basis that this was done ‘simply and solely for the purpose of retaining control in the hands of the existing directors’.
|
| Howard Smith Ltd v Ampol Petroleum Ltd
The court must examine the substantial purpose for
which a power is exercised and must reach a conclusion as to whether that purpose
was proper or not (per Lord Wilberforce)
| The directors allotted shares to a company which had made a takeover bid. The effect of the share issue was to reduce the majority holding of two other shareholders, who had made a rival bid, from 55 to 36 per cent. The two shareholders sought a declaration that the share allotment was
invalid as being an improper exercise of power. The directors argued, however, that the allotment was made primarily in order to obtain much needed capital for the company. It was held that the directors had improperly exercised their powers: it must be unconstitutional for directors to use their fiduciary powers over the shares in
the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company’s constitution which is separate from and set against their powers.
|
| Harlowe’s Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co
| The power to issue shares may be exercised for reasons other than the raising of capital provided ‘those reasons relate to a purpose benefiting the company as a whole; as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends
|
| Teck Corporation Ltd v Millar
| The British Columbia Supreme Court held that an allotment of shares designed to defeat a takeover was proper even though it was made against the wishes of the existing shareholder and deprived him of control.
Berger J stressed that, provided the
directors act in good faith, they are entitled to consider the reputation, experience and policies of anyone seeking to take over the company and to use their power to protect the company if they decide, on reasonable grounds, that a takeover will cause substantial damage to the company.
|
| Item Software (UK) Ltd v Fassihi
| Arden LJ, having noted that ‘the fundamental duty [of a director]… is the duty to act in what he in good faith considers to be the best interests of his company’, concluded that this duty of loyalty is the
‘time-honoured’ rule (citing Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd)
|
| Regentcrest plc v Cohen
Subjective test
| The determination of good faith is partly subjective in that the court will not substitute its own view about a director’s conduct in place of the board’s own judgment.
Jonathan Parker J observed ‘the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue, therefore, relates to the director’s state of mind’
|
| Charterbridge Corporation Ltd v Lloyd’s Bank Ltd
Objective test of the directors’ conduct
| Pennycuick J stated that the test for determining whether the duty under 172 has been discharged ‘must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.’
Test: ‘could an honest and intelligent man, in the position of the directors, in all the circumstances, reasonably have believed that the decision was for the benefit of the company’?
In the case of insolvent companies the test is to be applied with the benefit of the creditors substituted for the benefit of the company.
|
| Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (No 2)
| Held that D was not acting in what he honestly and genuinely considered to be in the best interests of the company but rather was acting exclusively to further his own personal interests.
|
| West Mercia Safetywear Ltd v Dodd
(followed Kinsela)
| Held that shareholders cannot absolve directors from a breach of duty to creditors so as to bar the liquidator’s claim.
“Where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets.”
|
| Winkworth v Edward Baron Development Co Ltd
| Lord Templeman explained that directors owe a fiduciary duty to the company and its creditors, present and future, to ensure that its affairs are properly administered and to keep the company’s ‘property inviolate and available for the repayment of its debts’
|
| Yukong Line Ltd of Korea v Rendsburg Investment Corpn of Liberia (No 2)
Locus standi
| Creditors have no standing, individually or collectively, to bring an action in respect of any such duty. Toulson J held that a director of an insolvent company who, in breach of duty to the company, transferred assets beyond the reach
of its creditors owed no corresponding fiduciary duty to an individual creditor of the company. The appropriate means of redress was for the liquidator to bring an action for misfeasance (s.212 Insolvency Act 1986).
|
| Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd
| Held that a resolution of the board of directors passed without proper consideration being given by certain directors to the interests of creditors would be open to challenge if the company had been insolvent at the date of the resolution.
|
| Fulham Football Club Ltd v Cabra Estates plc
| It was held that:
· the agreement with the landlords was part of a contract that conferred significant benefits on the company
· the directors, in giving their undertaking to Cabra, had not improperly fettered the future exercise of their discretion.
In fact, it was not a case of directors fettering their discretion because they had exercised it at the time they gave their undertaking.
The Court drew a distinction between:
· directors fettering their discretion, which is a clear breach of duty
· directors exercising their discretion in a manner which restricts their future conduct; this is not a breach of duty.
|
| Re D’Jan of London Ltd
(D signed the proposal without reading it)
Objective-subjective test
Example of application of s.1157
| Hoffmann LJ, applying s.214(4) of the Insolvency
Act 1986, held the director negligent and prima facie liable to the company for losses caused as a result of its insurers repudiating a fire policy for non-disclosure. The director had signed the inaccurate proposal form without first reading it.
The effect of s.174 is that a director’s actions will be measured against the conduct expected of a reasonably diligent person. This is therefore an objective test. However, subjective considerations will also apply according to the level of any special skills the particular director may possess.
Hoffmann LJ thought that it was the kind of mistake that could be made by any busy man. In granting the director partial relief from liability, the court noted that he held 99 of the company’s shares (his wife held the other). Therefore the economic reality was that the interests the director had put at risk were those of himself and his wife. The judge observed that it ‘may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy the court that he acted reasonably. Nevertheless, the section clearly
contemplates that he may do so. It follows that conduct may be reasonable for the purposes of s.1157, despite amounting to lack of reasonable care at common law.’
|
| Re Landhurst Leasing plc;
Re City Equitable Fire Insurance
A director cannot take a passive role in the management of the company
| Inactivity on the part of directors is no longer acceptable. Therefore little weight is given to any contention to the effect that the director was unaware of a state of affairs because he had trusted others to manage the company.
Subjective test for fraudulent directors – can trust others to manage company, no expectations from directors (Re City Equitable)
|
| Re Brian D Pierson (Contractors) Ltd
This is also the case in small private owner-managed companies (quasi-partners).
| The office of director has certain minimum responsibilities and functions, which are not simply discharged by leaving all management functions, and consideration of the company’s affairs to another director without question, even in the case of a family company… One cannot be a ‘sleeping’ director; the function of ‘directing’ on its own requires some consideration of the company’s affairs to be exercised.
|
| Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v Griffiths
| The collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising or controlling them.
|
| Dorchester Finance Co Ltd v Stebbing
| Non-executive directors (NEDs) held liable for signing blank cheques and leaving them with Stebbings, the executive director
|
| JJ Harrison (Properties) Ltd v Harrison
| Confirmed that a director holds the proceeds made from a breach of fiduciary duty as a constructive trustee.
Chadwick LJ: It follows from the principle that directors who dispose of the company’s property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He is described as a constructive trustee.
|
| Bray v Ford
The fundamental objective of the duty to avoid conflicts of interest is aimed at curbing any temptation directors may succumb to when faced with the opportunity of preferring their own interests over and above those of the company’s.
| “It is an inflexible rule of a court of equity that a person in a fiduciary position is not, unless otherwise expressly provided, allowed to put himself in a position where his interest and duty conflict”
|
| Bristol and West Building Society v Mothew
| The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his beneficiary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict.
|
| Regal (Hastings) Ltd v Gulliver
classic decision on this aspect of the fiduciary obligation
Directors acted in good faith
| When the purchasers of Regal installed a new board of directors, the company successfully brought an action against its former directors claiming that they should account for the profit they had made on the sale of their shares in the
subsidiary.
Lord Russell of Killowen stated that the opportunity and special knowledge to obtain the shares had come to the directors qua fiduciaries ‘and having obtained these shares by reason of the fact that they were directors of Regal, and in the course of the execution of that office, are accountable for the profits which they have made out of them.’ Lord Russell went on to add that:
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 such questions or considerations as whether profit would or should otherwise have gone to the plaintiff… The liability arises from the mere fact of a profit having, in the stated circumstances,
been made.
|
| Cook v Deeks
A corporate opportunity is viewed as an asset of the company which may not therefore be misappropriated by the directors. Director in breach becomes a constructive trustee ‘of the fruits of his abuse of the company’s property’ (per Lawrence Collins J)
Directors were fraudulent
| Three of the four directors diverted to their own personal benefit certain railway construction
contracts which were offered to the company. Notwithstanding that their conduct was ratified by the company, the directors were held accountable. Lord Buckmaster said that the directors, ‘while entrusted with the conduct of the affairs of the company [had] deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect.’
|
| Industrial Development Consultants Ltd v Cooley
Case on taking corporate opportunities
| The defendant, who was managing director of Industrial Development Consultants Ltd (IDC), a design and construction company, failed to obtain for the company a lucrative contract to undertake work for the Eastern Gas Board. The Gas Board subsequently approached Cooley indicating that they wished to deal with him personally and would not, in any case, contract with IDC. Cooley did not disclose the offer to the company. However, he
promptly resigned his office so that he could take up the contract after deceiving the company into thinking he was suffering from ill health.
Roskill J held that he was accountable to the company for all of the profits he received under the contract. Information which came to Cooley while he was managing director and which was of concern to the plaintiffs and relevant for the plaintiffs to know, was information which it was his duty to pass on to the plaintiffs. It was
irrelevant to the issue of liability that Cooley had been approached in his personal capacity and that the Gas Board would not have contracted with IDC.
Roskill J concluded that:
if the defendant is not required to account he will have made a large profit as a result of having deliberately put himself into a position in which his duty to the plaintiffs who were employing him and his personal interests conflicted.
|
| Bhullar v Bhullar
Taking corporate opportunity was a breach
| Strict approach towards the liability of directors who benefit from the corporate opportunity notwithstanding the fact that the company itself could not have benefited from it
|
| Balston v Headline Filters
| Director was making preparatory actions. Held: no breach of fiduciary duty can make a competitive business after resignation. Depends on the motives of the resignation (motives – Foster Bryant Surveying Ltd v Bryant)
|
| Peso Silver Mines v Cropper
Canadian case
| The board bona fide declined the offer because:
· of the then financial state of the company
· there was some doubt over the value of the claims.
Later, the company’s geologist formed a syndicate with the defendant and two other Peso directors to purchase and work the claims. When the company was taken over, the new board (as in Regal (Hastings)) brought an action claiming that the defendant held his shares on constructive trust for the company. The claim was unsuccessful. It
was held that the decision of the directors to reject the opportunity had been made in good faith and for sound commercial reasons in the interests of the company.
|
| CMS Dolphin Ltd v Simonet
| A director may utilise confidential information or ‘know-how’ acquired while working for the company after he departs but not ‘trade secrets’.
Lawrence Collins J subjected the issue of remedies
for diverting a corporate opportunity to detailed analysis. He held that S was a constructive trustee of the profits referable to exploiting the corporate opportunity and, in general, it made no difference whether the opportunity is first taken up by the
wrongdoer or by a ‘corporate vehicle’ established by him for that purpose.
“I do not consider that the liability of the directors in Cook v Deeks would have been in any way different if they had procured their new company to enter the contract directly, rather than (as they did) enter into it themselves and then transfer the benefit of the contract to a new company.”
|
| London and Mashonaland Co Ltd v New Mashonaland Exploration Co Ltd
| No breach of duty arose where a director held office with two or more competing companies. C could not prove that any confidential information had been disclosed to the defendant company.
|
| In Plus Group Ltd v Pyke
no breach in nominal position of the director
| · Directors can hold competing directorships (followed Mashonaland);
· Each case must be examined to see whether a fiduciary relationship exists in relation to the matter of which complaint is made (followed Phillips v Boardman);
· At the time of the contract Pyke was not using any C’s property or confidential info
Held:
Pyke not liable
|
| Aberdeen Rly Co v Blaikie Bros
rationale of the self-dealing rule
| Lord Cranworth LC, ‘no-one, having fiduciary duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect’, went on to stress that: his duty to the company imposed on him the obligation of obtaining these iron chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed.
|
| Tito v Waddell
| The self-dealing rule is that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction. Equity is astute to prevent a trustee from abusing his position or profiting from his trust: the shepherd must not become a wolf.
|
| Boulting v Association of Cinematograph Television and Allied Technicians
| It is frequently very much better in the interests of the company that they should be advised by someone on some transaction, although he may be interested on the other side of the fence. Directors may sometimes be placed in such a position that though their interest and duty conflict, they can properly and honestly give their services to both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands what are his rights in the
matter, there is no reason why he should not relax the rule, and it may commercially be very much to his advantage to do so.
|
| Runchiman v Walter Runchiman plc
| Held that informal disclosure to all members of the board would suffice
|
| MacPherson v European Strategic Bureau Ltd
| Each of the shareholders and the directors knew the precise nature of other’s interest so that there was, in effect, unanimous approval of the agreement. The court held that: no amount of formal disclosure by each other to the other would have increased the other’s relevant knowledge.
|
| Gwembe Valley Development Co Ltd v Koshy
| NB: the board has to be given precise information about the transaction in question
|
| Murad v Al-Saraj
| Trust law recognises what in company law is now sometimes called the ‘agency’ problem. There
is a separation of beneficial ownership and control and the shareholders (who may be numerous and only have small numbers of shares) or beneficial owners cannot easily monitor the actions of those who manage their business or property on a day to day basis. Therefore, in the interests of efficiency and to provide an incentive to fiduciaries to resist the temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an extensive liability to account (Arden LJ).
|
| Coleman Taymar Ltd v Oakes
| Robert Reid QC, stated that a company is entitled to elect whether to claim damages (equitable compensation) or an account of profits against a director who, in breach of duty, makes a secret profit.
|
| Boardman v Phillips
equity is willing to impose a constructive trust on property obtained by a fiduciary by virtue of his office
| Even though the profit may arise out of the use of position as opposed to the use of trust property, the judges more typically resort to the language of the ‘constructive trust’ as the means for fashioning a remedy
|
| British Racing Drivers’ Club Ltd v Hextall Erskine & Co
policy underlying the requirement of shareholder approval of these specified transactions explained by Carnwath J
| The possibility of conflicts of interests in these circumstances is such that there is a danger that the judgment of directors may be distorted and so it ensures that ‘the matter will be widely ventilated, and a more objective decision reached.’
|
| North-West Transportation Co Ltd v Beatty
| Held that the director could vote, qua shareholder, in favour of the resolution ratifying his breach of duty.
Follows the recommendation of the CLRSG which took the view that the question of the validity of a decision by the members of the company to ratify a wrong on the company by the directors (whether or not a fraud) should depend on whether the necessary majority had been reached without the need to rely upon the votes of the wrongdoers, or of those who were substantially under their influence, or who had a personal interest in the condoning of the wrong.
|
| Re Welfab Engineers Ltd
Applying section 1157
| Held that the directors had not acted in breach of duty in accepting the lower offer but, even if they had, it was a case in which relief would be granted under s.1157. Hoffmann J took the view that the directors were motivated by an honest and reasonable desire to save the business and the jobs of the company’s employees.
|
| Re Duckwari plc (No 2)
| The point was made obiter that a director who intends to profit by way of a direct or indirect personal interest in a substantial property
transaction could not be said to have acted reasonably and therefore would be denied
relief under s.1157.
Held that irrespective of whether the transaction is or can be avoided, the director or connected person and any other director who authorised the transaction will be liable to account to the company for any profit or loss sustained as a result of the breach of s.190 CA 2006
|
| Allen v Hyatt
Agency
| The directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly
to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. It was held that the directors had made themselves agents for the shareholders in the sale of the
shares and must therefore account to them for the profit they had made on the sale.
|
| Peskin v Anderson
Followed Percival v Wright
| Held that directors did not owe any general fiduciary duty to the members who had terminated their membership of their own motion when no specific proposal was in contemplation.
|
| Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd
| Dillon LJ: “directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders”
|
| Guinness plc v Saunders
| · The contract itself is valid until avoided by the company
· The court will only treat the company as entitled to avoid the contract if it can do what is practically just to restore the parties to the position which existed before
· The compliance with s 317 requires disclosure to a duty convened and constituted board meeting
· Even if all the members of the board had known of a contract this would not validate payments made thereunder
|
| Crown Dilmun v Sutton
| On the facts of the case the first defendant had breached his fiduciary duty to the claimant companies in failing to disclose an investment opportunity he acquired whilst acting as their director and employee, and consequently was liable to account for the benefit of the agreement. The second defendant, an investment company, was reckless as to whether the first defendant was acting in breach of his duty and was also liable to account.
Mr Justice Peter Smith described the responsibilities of a fiduciary: "not to make any decision to take opportunities which came his way whilst [in a fiduciary position]" and "not to take opportunities which arose that might put him in conflict with his duties to the [principal]" and "a duty to exploit every opportunity that he became aware of for the [principal's] benefit". He noted "the only exception is if they permit him to take such opportunities after.......full and frank disclosure and they have given..... consent."
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| O’Donnell v Shanahan
| Allied Business & Financial Consultants Ltd was a small company, with its office above the Charles Dickens pub. 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 - 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 CA 1985 s 459, now CA 2006 s 994). She requested that her shares be bought out at a fair value.
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 v Benham was distinguishable as a case of partnership, where the business relationship had been circumscribed by contract.
|
| British Midland Tool v Midland International Tooling
| Four former employees had set out to create a business in competition with the claimant. They had agreed to use unlawful means to do so. Held: A director who decided to set up a competing business and took preparatory steps could rely upon the public interest in favouring competitive business as an answer to allegations of breach of fiduciary duty. He must end to his fiduciary obligation by resigning his directorship. Until he has done so, preparatory steps taken in pursuance of an irrevocable intention to compete would generally amount to a breach of his fiduciary obligations as director Hart J said: ‘The claimant undoubtedly suffered some damage in the present case as a result of the secession of the Tamworth Four together with a large part of the workforce. There is also no doubt, in our judgment, that such damage was not only foreseeable but actually foreseen. By virtue of that fact they may be said, for the purpose of the tort, to have intended that damage.’
|
| Foster Bryant Surveying v Bryant
Concerned 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.
| The Court of Appeal has considered a claim made on the basis that a director could have fiduciary duties towards the company after resignation as a director, but before the resignation took effect. (Foster Bryant Surveying Ltd v Bryant and another [2007])
Mr Foster and Mr Bryant were the only directors of Foster Bryant Surveying Ltd. Mr Bryant's wife was an employee of the company. Foster Bryant's most important client was Alliance Leisure, which provided most of its work. Late in 2004 Foster Bryant lost two client accounts which Mr Bryant had developed. In November 2004 Mr Foster terminated Mrs Bryant's employment and in response Mr Bryant resigned as a director and employee of Foster Bryant, but agreed to continue working until the end of January 2005.
Mr Bryant told Alliance that he and his wife were leaving and since Alliance was concerned about a project with Foster Bryant, it suggested that Mr Bryant should work directly for Alliance and Mr Bryant accepted. Mr Foster then issued a claim against Mr Bryant for breach of a fiduciary duty. When the matter reached the Court of Appeal, while accepting that Mr Bryant could owe fiduciary duties to Foster Bryant (in this case no conflict of interest and no profit from office), the court ruled that he was not in breach of them, holding that:
• the business opportunity was initiated by the client to effect a solution to the problem of the impending departure of Mr Bryant and his wife;
• in accepting the offer from Alliance, Mr Foster was only putting into operation plans for competition with Foster Bryant after his resignation had become fully effective;
• it was unrealistic in a commercial sense to contend that Mr Bryant should have tried to persuade Alliance to stay on and keep all its business with Foster Bryant;
• after Mr Bryant had been excluded following his resignation from his position as a director, it could be argued that the only fiduciary duties he had were to remain open and honest in his dealings with the company and not to exploit its property.
|
| Thermascan v Norman
| The case centred around the statutory duty set out in the Companies Act 2006 s.175(1), which relates to the duty a director of a company has to avoid conflicts of interest.
Mr Norman was a director of Thermascan Ltd. He resigned his position in 2008 and went to work with another company. However, this position only lasted a few months before Mr Norman was made redundant . Following this, he then set up his own company, Hotspot-Thermography Ltd.
The post-termination restrictive covenants in his contract with Thermascan had come to an end by this time, so Thermascan applied for a court order under the Companies Act 2006 to prevent Mr Norman from canvassing or soliciting their clients.
In coming to its decision, the court had to balance the legitimate right of Thermascan to prevent Mr Norman exploiting contracts that were negotiated while he was a director of the company with his right to exercise the skills, knowledge and experience he had acquired in his former position.
Significantly, the court ruled that the provisions in question in the Companies Act 2006 did not change the pre-existing laws relating to this situation.
The final ruling determined that, while Mr Norman had some limited fiduciary duties to Thermascan even after having resigned as a director, there was no outright prohibition on him soliciting or canvassing business from Thermascan clients.
|
| ASIC v Healey
| The case does not stand for the proposition that directors cannot rely on the opinion of others in performing their duties. Directors can rely on the work of and opinions of management and external advisors, provided this is reasonable in the
circumstances. Reliance is not reasonable if the director ought to know that such work or opinions are not accurate in the context of the company’s affairs, and in those circumstances the director is required to question the information before
them.
Centro re-affirms that directors are to possess sufficient skill to read and understand the company’s financial statements to form an opinion of solvency, and spells out the somewhat obvious fact that this requires some knowledge of basic accounting concepts and practices. The case suggests that the director should read and question these statements with the knowledge he or she has (or should have) by virtue of his or her position as a director.
|
| Lexi Holdings v Liqman
Directors must not turn a blind eye to things that should put them on alert as to risks of fraud or misappropriation. To do so is to fail in the duties that owe to their company.
It should be noted that the case was an appeal from case that commenced in November 2006. Since then directors' duties have been codified pursuant to the Companies Act 2006. As the duties have to some degree been expanded it is now more important than ever for directors to be aware of those duties.
| This Court of Appeal case makes it clear that directors' duties extend to being pro-active where there are grounds to be suspicious of the activities of a fellow director.
The facts were that a director of the company misappropriated £60m of company funds. The administrator of the then insolvent company sought to recover money from that director and his two sisters, who were also directors of the company.
At first instance the two sisters escaped liability except to the (relatively small) extent that misappropriated money had been paid to them. The Court of Appeal overturned this and gave judgment to the administrators to the tune of approximately £40m against each sister on the basis that they had breached the duties they owed to the company and failed to prevent a loss to the company that could have been prevented.
The Judge at first instance appears to have been swayed by the fact that the brother was controlling and a bully. The Court of Appeal did not consider this relevant. What was relevant was the sisters' knowledge of their brother's previous convictions for fraud and that aspects of his business dealings required convincing explanations.
As directors they had a duty to be on guard and pursue adequate explanations in response to "searching questions". Had they done so then the brother could not have satisfied them that his actions were genuine. They should then have sought advice and informed the company's auditors and other directors. Had they done so then the court concluded that a major part of the misappropriation could have been prevented.
As a result the sisters were found liable for just such a major part of the misappropriation.
|
