Учебный год 22-23 / Critical Company Law

164 Critical company law

from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit.

Thus a director would only be accountable to the company for any personal profiting if he had failed to make an appropriately full disclosure, given, of course, that his company’s articles included Article 85 or a similar provision.

As a separate operation of law, s 317 of the 1985 Act requires a director to disclose such an interest promptly. Statutory provisions requiring a director to disclose any interest in company contracts were first introduced in s 81 of the Companies Act 1928.26 Failure to make such a disclosure would result in a fine,27 but this penalty would not cancel out the operation of the common-law rule in Aberdeen.28 So in Guinness plc v Saunders,29 a director was required to return the £5.2 m he had received from Guinness for services and advice on a take-over because (inter alia) he had not disclosed the agreement to the board. Lord Templeman stated that it was contrary to the position of a trustee to profit from his position outside of that allowed under the trust document. Section 317 created a criminal o ence of failing to disclose an interest. In contrast, principles under Aberdeen were equitable principles, where the remedy was to recreate fairness.

This no-conflict rule arose in the trustee principles of the nineteenth century so that disclosure will not relieve a director from liability if the equitable principle of good faith has not been met. Thus in Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (No 2),30 a company brought an action against its former sole director who, at a board meeting of the company attended by the defendant and the company secretary, had resolved as sole director that his own service contract should be terminated and had resolved that the sum of £100,892 should be paid to him by way of recompense for the termination of his contract of employment. The defendant argued that he had made su cient declaration in line with the company’s articles but the court held that:

The company’s articles excluded the strict equitable rule against selfdealing but that did not entail that the director was relieved from his

26Section 317(1) and (2). Section 317 has now been replaced by s 184 of the 2006 Act.

27Section 317(7).

28Section 317(9).

29[1988] 2 All ER 940.

30[1996] Ch 274.

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other obligations to the company, including his duty to act bona fide in the company’s interests.31

Even if he had disclosed his interest, which would have been to himself, in the court’s words, a statutory pause for thought, it would not have relieved him of his duty to act with bona fides. The monetary award to himself was a breach of that duty.

Indeed, the duty to act in good faith had been found to underpin all a director’s actions, so the court concluded in Movitex v Bulfield,32 in which an apparent conflict arose between Article 85 and s 320 of the 1985 Act. This section provided that the company’s articles could not exclude a director’s liability ‘which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company’.33 On the face of it, Article 85 appeared to do that which s 320 prohibited by excluding liability for a breach of the duty to avoid conflicts of interests albeit following disclosure. The court concluded, however, that there would only be a conflict if the articles provided for modification of the duty to act bona fide and for the benefit of the company. Conflicts of interests could be modified, although not excluded, in the articles.

Corporate opportunities

Self-profiting from a corporate opportunity involves a director personally benefiting from company property such as business contacts and business information obtained from the company while under a fiduciary obligation to that company.

The early case of Cook v Deeks 34 is instructive, placing as it does great emphasis on a director’s trustee-like relationship to company assets. In this case three of the four directors in the Toronto Construction Company Limited used their majority votes to pass a resolution to the e ect that the company had no interest in a contract with the Canadian Pacific Railway Company. They then secured the contract for a new company which they had formed for this purpose. The plainti director, Mr Cook, claimed that they had diverted a business opportunity away from the company and therefore they should be made to account for the profits made from the contract to the company. The court agreed, finding that ‘the contract in question was entered into under such circumstances that the directors could not retain the benefit

31Ibid.

32Movitex v Bulfield [1988] BCLC 104.

33Companies Act 1985, s 320(1).

34Cook v Deeks and others [1916] 1 AC 554.

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for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company’.35

A reasonable enough conclusion. Yet the context of these transactions lends a di erent complexion to the decision and informs us of the distinctly fiduciary nature of a director’s duty. It was, in fact, the defendants, GS Deeks and GM Deeks, together with a third, Mr Hird, who had a long-lasting and successful history of working with the railway company. Indeed, they had formed the Toronto Construction Company to undertake a particular contract for the railway. By the time the contract in question was put out to tender, however, the relationship between these defendants and Mr Cook, the plainti , had become extremely di cult and the latter clearly desired to sever relations permanently. In 1907, disagreements had already resulted in the dissolution of a number of partnerships they were involved in and the defendants could have separated from the plainti by using their majority votes to a ect a voluntary liquidation of the company. Instead they chose to tender for the contract under the auspices of the company, hide negotiations from Mr Cook and use their majority to pass the questioned resolution. As individuals, it was the Deeks and Hird who actually undertook the business with the railway, not Mr Cook. Their lordships agreed with the trial judge’s statement that Mr Cook was ‘a business associate who they deemed and I think rightly deemed, unsatisfactory from a business point of view’.36 So from a personal and business standpoint the defendant’s severance from Mr Cook was entirely understandable, yet it was their failure to openly sever their relationship with the company that gave rise to the onerous penalty visited upon them. Once the company was formed, and the defendants became directors, their relationship with the entity became that of fiduciaries, requiring utmost honesty, and a commitment to put the interests of the company above their own self-interests. This applied notwithstanding that they were majority shareholders because shareholders, majority or otherwise, are not the company and the law on directors’ duties resists all attempts to conflate shareholders with the company:

Men who assume the complete control of a company’s business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and while ostensibly acting for the company, divert in their own favour business which should properly belong to the company.37

So while it was clearly the case that the defendants were continuing a business relationship (within which they had worked for many years, without

35Ibid, p 565.

36Ibid, p 4.

37Cook v Deeks, p 563.

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any useful assistance from the plainti ), they could not personally benefit from it. They had committed themselves to subordinating their self-interest to the interest of the company and while the company continued to exist, their actions amounted to self-dealing and a breach of their fiduciary duty.

Until quite recently the cases made it clear that the motives of the directors in breach were not a relevant consideration for the court. The act of selfdealing constituted a breach and the director’s motives never mended the breach. This point was made clear in Regal (Hastings) Ltd v Gulliver.38 In this case, the appellant company owned a cinema and its directors wanted to acquire the lease of two other cinemas in order to sell the whole undertaking as a small chain. They formed a subsidiary company in order to acquire and hold these leases but the landlord would not let to the subsidiary unless it either had more paid-up capital or alternatively the directors gave a personal guarantee for the rents. Regal was unable to purchase more than 2,000 £1 shares and so the directors (who did not want to give personal guarantees), the chairman and the solicitor purchased additional shares thereby capitalising the subsidiary to the landlord’s satisfaction. In this, the judges agreed that the directors had acted with bona fides, intending to act in the interests of Regal. The four directors took 500 shares each, the chairman (Gulliver) found outside subscribers for 500 and the solicitor (Garton) took the final 500. Three weeks after these transactions the directors decided not to purchase the cinemas but instead sold all the shares in the two companies. The purchasers then issued a writ requiring the directors, the chairman and the solicitor to account to the company for the profit they had made from the sale, some £2 16s 1d per share.

The House of Lords made clear that a director’s accountability for selfdealing did not rest upon the bona fides of his actions. They concurred with Lord Russell in the Court of Appeal that the liability which arises from a fiduciary position did not depend on fraud or an absence of bona fides. However, they reversed the decision of the court of first instance and the Court of Appeal, which found the directors not accountable to the company for profits made. Lord Porter stated that the correct legal proposition in respect of a director profiting from his fiduciary position is that ‘one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does, he must account for the profit so made.’39 Lord Porter went further, ruling that liability of this kind ‘does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is director’.40 The act in itself is su cient. No fraud,

38[1942] 1 All ER 378.

39Ibid, p 395.

40Ibid.

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lapse of duty or even negligence is required. Finally Lord Porter added that the fact that the company could not have enjoyed the opportunity which enriched the fiduciary, for other reasons, does not alter a director’s accountability in this context. The profit belongs to the company, ‘even though the property by means of which he made it was not and could not have been acquired on its behalf ’.41

This latter proposition is followed in many later cases. In Industrial Development Consultants Ltd v Cooley,42 a director was held to account to the company for the profit he gained from a contract with a business relationship he formed while a director of a company, IDC, even though IDC probably would not have gained that contract. As managing director of IDC, Mr Cooley, an architect, was involved in negotiations with the Eastern Gas Board for the construction of four depots. These negotiations collapsed as the Board did not want to contract with IDC, and really required the skills of an architect. The following year Mr Cooley entered into correspondence with the Board over a period of months. In June the new deputy of the Board strongly intimated to Mr Cooley that they wished him to take on the project independently from his company. A few days later, Mr Cooley sought to sever his employment with IDC by feigning serious ill health and was released from his position on 1 August. On 6 August he contracted with the Gas Board. There are similarities with Regal (Hastings), in that in both cases the company was, for di erent reasons, unable to benefit from the transaction in question. In IDC much emphasis was placed upon Lord Cranbrook’s famous speech in Aberdeen in which he said:

And it is a rule of universal application, that no one, having such 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.43

IDC may have had a later opportunity to gain the contract, so Mr Cooley’s usurpation of the contract may have conflicted with IDC’s interests. The possibility of an actual conflict gives rise to the breach of duty and the court would not find that there was absolutely no possibility that IDC would have gained the contract. Regal (Hastings) also di ers from this case in that at the point when the contract in dispute was made, Mr Cooley was no longer managing director of IDC, whereas Regal’s directors purchased the shares while still employed as such. Under English law, a fiduciary will cease to owe a duty to the principal once the contractual relationship is severed. However,

41Ibid.

42[1972] 2 All ER 162.

43Aberdeen Ry v Blaikie Bros (1854) 1 Macq 461, p 471.

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Mr Cooley’s resignation was deemed to be irrelevant because it was his actions in negotiating with the Gas Board before his resignation which constituted the breach. The breach was that ‘he embarked on a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plainti s’.44 The fact that he had severed his contractual relationship by ‘foul’ means was noted as an indicator of dishonesty but was not the principal reason for holding him accountable. Thus, in this case, like Regal (Hastings), it was not the bona fides of the directors’ action that was definitive in holding them accountable, although it was more of a factual feature in IDC.

The importance of the bona fides of a director’s act of resignation in determining whether the fiduciary duty ceased with the resignation was found to be of greater importance in a similar appeal case in Canada, heard after IDC.45 In this case two senior executives resigned from their position in the company, Canadian Aero Service Ltd. They then acquired for their new company a business opportunity which they had been maturing on behalf of Canadian Aero Service. The court held them accountable to Canadian Aero Service because as fiduciaries they could not pursue a business opportunity which their principal was actively maturing. This applied even after they had resigned if that resignation ‘may be fairly said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company’.46 Resignation would have allowed them to pursue a contract in competition with their old fiduciary if their reasons for resigning were bona fide.

The importance of the bona fides of a director’s reasons for resignation when he subsequently and successfully competed with his old principal was fully endorsed in the later case of Island Export Finance Ltd v Umunna.47 The company director was held not to be in breach of his fiduciary duty when he personally benefited from a contract with a party with whom the plainti , IEF, had previously contracted, and with whom he originally had contact by dint of his employment with IEF. At the time that the director, Mr Umunna, profited from this contract (undertaken with the Cameroon Postal Authority), he had already resigned from his position with IEF. However, previous authorities such as IDC v Cooley and Canadian Aero Service v O’Malley held that resignation would not sever the fiduciary relationship between director and company if the resignation was prompted by the desire to exploit a corporate opportunity which emerged while he was working for the company.

44Ibid, p 472.

45Canadian Aero Service v O’Malley (1971) 23 DLR (3d) 632.

46Ibid.

47IEF v Umunna [1986] BCLC 460.

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Mr Umunna had worked for IEF Ltd as a managing director for a number of years but the court felt that this was in name only as the major decisions were made by the controlling shareholder, Mr Lewis. The business of IEF was based in the Cameroons, where Mr Lewis had a number of business interests. Mr Lewis seems to have been instrumental in achieving a business association between IEF and the Cameroon Postal Authority.

Throughout Mr Umunna’s time with IEF he had expressed dissatisfaction with a number of business decisions made by Mr Lewis and in particular with the way he, Mr Umunna, had been treated. Mr Umunna eventually resigned his position and later approached the postal authority with a proposal for the supply of new post boxes which they accepted. IEF claimed that Mr Umunna should account to the company for any profits he made from this latter transaction, arguing that he had intended to develop and exploit an independent business relationship with the postal authority while he was a fiduciary of IEF. The courts agreed that Mr Umunna probably did consider future contracts; in their words, ‘if he had been asked at that date whether he contemplated that he might obtain orders for postal caller boxes from the Cameroons, I have no doubt that he would have replied that he did’.48 However, merely contemplating this did not constitute a breach because in the court’s view the resignation itself was prompted by his dissatisfaction with his treatment. The judge stated that he rejected ‘the suggestion that the exploitation of the opportunity was his primary or indeed an important motive in his resignation’, although he did think that Mr Umunna desired to ‘branch out on his own by seeking through Benosi, to open up West African business for himself ’.49

Another key factor in this decision was that IEF were not actively pursuing any repeat orders with the Cameroons, nor were they important players in this particular market, although in a general sense they did consider approaching the Cameroons in respect of future propositions. In summary, there was no breach of duty because first Mr Umunna’s resignation was not prompted by a desire to exploit this business opportunity and second because IEF was not ‘maturing a business opportunity’ with the Cameroons.

This ruling is quite a departure from that of Regal (Hastings). In Regal (Hastings) not only was the company not maturing a business opportunity but it had no financial ability to make the disputed transactions, unlike IEF, who did contemplate future transactions but not ones that were su ciently well formed at the relevant periods. Furthermore, the directors in Regal (Hastings) appeared to act entirely in the interests of the company, whereas Mr Umunna’s actions were more self-interested albeit prompted by the dif- ficult position in which Mr Lewis had placed him. In IEF, the judge moved

48[1986] BCLC 477.

49Ibid, p 476.

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as the particular transaction in question was not one which the principal was maturing at the time of the director’s employment. Following IEF, as long he does not exploit the maturing opportunity, the ex-director may compete, and do so using business contacts which his old principal was interested in maintaining in a general way, and may deprive his old principal of future, even (generally) anticipated business.

So, in the recent case of CMS Dolphin Limited v Paul Maurice Simonet, Blue (GB) Limited,51 the managing director, Mr Simonet’s actions were tested according to their bona fides. He and Mr Ball had established an advertising agency. Mr Ball provided the finance while Mr Simonet did the work and brought in the clients. The two fell out, and Mr Simonet resigned, taking many of the sta and clients with him to his newly formed competitor agency, Blue (GB) Ltd.

The judgment makes clear that Mr Simonet was entitled, as a general principle, to benefit from associations and contacts made while a fiduciary. Accordingly, if he had resigned for reasons unconnected to gaining CMSD’s customers then he would not be in breach. English law allows a fiduciary to resign even if to do so would undermine the prospects of the company. Furthermore, after he has resigned, a fiduciary may, following IEF, use his ‘general fund of skill knowledge, or his personal connections, to compete’.52 The question of liability therefore lay in his intention in resigning, not in the act of resigning itself and the subsequent use of business connections. Considering the evidence of the behaviour of the parties, the court chose to disbelieve Mr Simonet’s ‘disingenuous’ account, according to which he had been frustrated and marginalised by Mr Ball. Rather, the court concluded that he put and intended to put his personal interests first and did not act in the best interests of the company.

In Plus Group Ltd v Pyke,53 a director was found not to be accountable for diverting a corporate opportunity because at the time of the alleged breach he was e ectively, although not formally, resigned from his position. In assessing whether there had been a breach, the court laid great emphasis on the factual details of the transactions and relationships, moving away from the strict liability approach of Regal (Hastings) which, if applied, would surely have told against the defendant director. The plainti had been owned and controlled equally by the defendant, Mr Pyke and Mr Plank, but at the time of the alleged breach, Mr Pyke had been e ectively excluded from the management for a significant period of time.

In approaching the company as a competitor, in a competitive market, these cases reflected the decision in the earlier Canadian case of Peso Silver

51[2001] 2 BCLC.

52[2001] WL 535670 (Ch D) para 95.

53[2002] 2 BCLC 201.

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Mines.54 In this case, a director was held not to be liable to account for profits made from a transaction of which he had become acquainted in his capacity as a fiduciary. The director, Mr Cropper, and the rest of the board had been presented with an o er to purchase speculative mining properties which were situated close to the plainti ’s property. The plainti held 20 square miles of mineral claims in Yukon (acquisitions which were said to have strained its finances), and had been advised by its engineers that it should focus its finances on these properties. The board decided to reject the o er, a decision which the court stated was ‘an honest and considered decision of the appellant’s board of directors as a whole and done in the best of faith and solely in the interest of the appellant’.55 O ers of these kinds were routinely presented to the board, at a rate of two or three a week. Later, the same mining rights were presented to Mr Cropper, with the suggestion that he join a group of investors, in order to hold these rights as a shareholder in a company which would be formed for that purpose. Mr Cropper agreed, and the company, called ‘Cross Bow’, was incorporated.

Mr Cropper remained director of Peso Silver Mines throughout these transactions but the following year, Peso had a new shareholder, Charter Oil Company Ltd, who required a new board, with five additional directors. Mr Cropper became Vice President under a new President, Mr Walker. These two men quickly disagreed, and it was in this spirit of bad feeling that a memorandum was sent to Mr Cropper from the Chairman requiring that ‘all o cers of Peso Silver Mines make full disclosure of their connection with any other mining companies’.56 Mr Cropper declared his interest in Cross Bow and this later resulted in a motion to dismiss him from his position in Peso because of his earlier refusal to hand over his interests in Cross Bow. Peso later took action against Mr Cropper to make him liable to account for profits made from Cross Bow.

The Canadian Appeal Court found in favour of Mr Cropper, rather surprisingly given that its decision was based almost entirely by concurring with the decision in Regal (Hastings). The court agreed with the appellant’s argument that liability neither depends on the bona fides of a fiduciary’s actions nor the fact that the principle could not have benefited from the disputed transactions. Liability, the appellants argued, arose solely because profit was made ‘by reason and in course of that fiduciary relationship’.57 However, the court took a very narrow reading of a statement in Lord Porter’s speech that liability arose not from breach of duty but ‘by reason of

54[1966] 58 DLR (2nd) 1.

55Ibid.

56Peso, para 17.

57Ibid, para 23.