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Directors’ conflict of interest duties – always disclose

19/10/2011

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United Kingdom

Directors’ conflict of interest duties – always disclose

A recent Court of Appeal decision emphasises that directors’ duties on conflicts of interest are applied very strictly. The director should always disclose the conflict to the company and obtain authorisation.

Breaches of duty

The case involved Mr Towers, a former director of Premier Waste Management Ltd (“PWM”). While a director, Mr Towers entered into an arrangement to borrow earth-moving equipment from Mr Ford, a customer of PWM. This equipment was used for renovations on Mr Towers’ own property. Mr Towers did not say anything about this to PWM’s board.

PWM did become involved subsequently, but only somewhat unintentionally through the unapproved actions of an employee of PWM who set up the arrangement for Mr Towers.

Once it became aware of the situation, PWM started investigating and took action against Mr Towers for breach of duty, and in particular for failing to avoid a conflict between his personal interests and those of the company.

The judgments

Mr Towers could not see what all the fuss was about. In his eyes this was entirely a personal matter, he had not been dishonest, the loan was of an insignificant amount and there was no loss to PWM. He denied being able to influence subsequent transactions between PWM and Mr Ford.

The courts did not agree with Mr Towers, and commented adversely on his inability to appreciate the trust and confidence imposed on him by the position of director. It was held that:

  • the “no conflict” duty prevented Mr Towers from depriving PWM of the ability to consider whether or not to object to the diversion of an opportunity offered by one of its customers away from PWM to a director;
  • it was irrelevant that PWM would not have chosen to take the opportunity to hire the equipment;
  • it was also irrelevant that there was no corrupt motive, the amount of the loan was small and Mr Ford received no benefit; and
  • Mr Towers was not entitled to the benefit of a statutory provision relieving liability where a director has acted honestly and reasonably.

Mr Towers was ordered by the High Court to pay to PWM the sum of £5,200 (together with interest) based on evidence of what it would have cost him to hire the equipment in the open market for the period he used it. The appeal against this order was dismissed.

Lessons from the case

A company is entitled to the undivided loyalty of its directors, and Mr Towers should have disclosed the proposed arrangement to the company before it was entered into. It was then up to the company to say whether it was happy for its director and customer to deal in this way.

Under the Companies Act 2006, authorisation of a conflict of interest can often be given by the other directors, rather than at shareholder level. If the matter is truly innocuous, such authorisation should be readily forthcoming. However, this must not simply be assumed.

Instead, Mr Towers failed to recognise the strict nature of his duties to PWM. As the courts made very plain, it was not a question of motives, magnitude or losses.

Interesting points

A remarkable feature is that a case of such moderate value went as far as the Court of Appeal, but evidently the relationship between the parties had deteriorated to the point where a settlement could not be reached (whereas PWM and Mr Ford had managed to agree terms).

It is notable that the Court of Appeal applied the conflict of interest duties in the Companies Act 2006 even though the facts of the case had occurred before those provisions came into force, and strictly the common law tests still applied. It was explained that the statutory general duties of directors “extract and express the essence” of the common law rules and principles they have replaced.

This approach may ease concerns expressed at the time of the statutory codification of directors’ general duties that guidance from previous caselaw could not always be relied upon if the courts focused on small differences between the statutory wording and the terms used in the caselaw.

The statutory duty to avoid a conflict of interest situation does not apply “if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest”. However, this exception is likely to be construed narrowly and certainly would not apply on similar facts to this case.

The case discussed is Philip Towers v Premier Waste Management Ltd [2011] EWCA Civ 923

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