Item Software v Fassihi [2004] EWCA Civ 1244

• Defendant was director of Claimant. Claimant was in a distribution agreement with Isograph.  When Claimant tried to renegotiate its terms with Isograph on more favourable terms, Defendant approached Isograph with idea of establishing new company to take over distribution agreement; however at same time, Defendant encouraged Claimant to take aggressive stance in negotiations.

• Negotiations fell through, and Isograph entered new agreement with Defendant.

• When Claimant heard this, alleged Defendant had not complied with duty to act bona fide in interests of company (pre-2006 law) by failing to disclose his misconduct to Claimant.

Held

• Fiduciary duty to act bona fide in interests of company require Defendant to disclose his own or others’ misconduct to company.

• Policy reasons support this extension of duty of loyalty:

  • Is economically efficient, as it means that company does not have to expend resources investigating directors’ conduct

  • Helps shareholders monitor activities of directors

  • Helps directors comply with their duty of oversight (e.g. Re Barings)

  • 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

• Defendant had breached rule against diversion of corporate opportunity.

• Thus on facts, is no way Defendant could have complied with his duty top act in best interests of company without telling Claimant of his plans to steal the contract from them.

RELATED CASES

• Shepherds Investments LTD v Walters

• Re Barings (No. 5)