Directors’ Duties

The Court of Appeal has upheld a first instance decision that a company director had breached his fiduciary duties to the company by accepting a free loan of equipment from a customer without formally disclosing the transaction or seeking board approval.

Background

Mr Towers was a director of Premier Waste Management Limited (the “Company”) between June 2001 and December 2007. In January 2003 Mr Towers accepted a personal loan of equipment from Mr Ford, a customer of the Company. The loan of equipment was made free of charge but was not disclosed to or approved by the Company.

The equipment was used by Mr Towers to dig a trench and carry soil around the site of a derelict farmhouse owned by Mr Towers and his wife. The equipment was used for a period of 6 months in 2003 but remained on Mr Towers’ property until May 2008. During the loan, due to the poor condition of the equipment, Mr Towers performed remedial works at his own expense. However, when the tracks broke on the excavator, a Company employee arranged for the purchase and fitting of new tracks via the Company (without Mr Towers’ knowledge). The Company was to be reimbursed and in December 2005 an invoice for £1,860 was paid by Mr Ford on the basis that the equipment he was getting back would be in a better condition than he had loaned.

In April 2008, after Mr Towers had left the Company, Mr Ford sent an invoice to the Company for £45,825 for hire of the (as yet unreturned) equipment. This was followed by a further invoice of £1,645 covering the period until Mr Towers returned the equipment. The Company issued proceedings against Mr Towers and Mr Ford in February 2009.

The Decision

At first instance the judge concluded that Mr Towers should account to the Company, for the 6 months that he used the equipment in 2003, at the same rate as Mr Ford had attempted to charge the Company.

At both first instance and on appeal, the submissions by Mr Towers that the matter of the loan was insignificant and could be dismissed or ignored, was rejected. The focus was not on the condition of the equipment or the value of the claim but on the legal principle of directors’ fiduciary duties.

A director's general duties to his company are codified in Chapter 2 of the Companies Act 2006 and are based on equitable principles derived from earlier cases. The relevant events in this case took place pre-codification, but Lord Justice Mummery thought it was “unrealistic” to ignore the statutory framework. Although the discussion centres on the pre-codification principle that a director has fiduciary duties of loyalty and to avoid conflicts between his own interests and those of the company, it is clear that the Court of Appeal's comments are equally applicable to the codified duties to promote the success of the company (section 172), to avoid situational conflicts (section 175) and not to accept benefits from third parties (section 176).

Citing Lord Cranworth in Aberdeen Railway v Blaikie 1 Macq 461:

“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 interest of those whom he is bound to protect.”

Mummery LJ went on to hold that a director’s liability for breach of fiduciary duty does not depend on proof of fault, or proof that a conflict of interest has in fact caused the company loss and nor does the liability depend on fraud or corruption; rather, where a director obtains an opportunity for himself he will be liable if he has prevented the company from taking advantage of the opportunity.

It is this duty that Mr Towers breached by “disloyally depriving the Company of the ability to consider whether or not it objected to the diversion of an opportunity offered by one of its customers away from itself to the director personally”.

Mr Towers also argued that his conduct should be excused by the Court exercising its statutory discretion under section 1157 of the Companies Act 2006 to relieve him from liability for any breach of duty. Whilst it might be thought that the Court would have some sympathy with this submission on the facts, Mummery LJ rejected this argument and stated that “the position simply was that Mr Towers owed fiduciary duties to the company and acted in breach of them in circumstances where there was no mitigating factor and no evidence of injustice or hardship which might be relevant to granting relief in his favour.”

Comment

The Court of Appeal’s decision serves as a reminder to all company directors of the strict basis of their fiduciary duties: neither the value of the benefit received, nor the fact that there is no actual loss by the company, are relevant in deciding whether there has been a breach. To ensure compliance directors must ensure that, where the opportunity or connection arises through their being directors, they notify the company of any personal transactions or loans and seek approval in advance (and under changes introduced by the 2006 Act it might be possible to secure approval from the non-conflicted directors rather than having to go to the shareholders) to avoid any disputes further down the track. The quantum in dispute was relatively small but the legal costs of litigating to the Court of Appeal would have been significant. This is another reminder to directors to check that their companies provide adequate directors’ and officers’ cover, which in certain circumstances will extend to claims brought by the company for whom they work or used to work.

Further reading: Towers v Premier Waste Management Limited [2011] EWCA Civ 923