Directors' Duties 2 Cases

Company Law Supervision VI – Cases

DIRECTORS’ DUTIES 2

Section 175

Re Bhullar Brothers [2003]

Two brothers, along with their sons, were directors of a family company of grocery stores and investment property. Two halves of family fell out, and began to divide up assets of company. However sons of one of brothers became aware that land adjoining a bowling alley owned by company was for sale; this discovery was completely fortuitous (had seen a ‘for sale’ sign whilst bowling). Sons wanted to buy land; asked their solicitor whether there were any legal difficulties, and he said no. Bought land in their own names, and other half of family brought claim. Held:

Parker LJ

No need to show that company would have made use of information:

here, information was relevant to company

i.e. purchase of land would have been commercially attractive

thus sons were under duty to communicate information to company

Thus is irrelevant that company would almost certainly not have taken the opportunity.

Thus was breach of fiduciary duty by sons.

As they had used information that was in interests of company to make personal profit

Relevant Factors

1. At time sons purchased property, they were only carrying on business in their capacity as directors of company capacity alone

• And not in any personal capacity

2. At time of purchase, company was still trading (albeit with negotiations for its break-up)

3. Sons had asked solicitor whether there were any legal reasons they could not purchase land for their own benefit

• Thus is clear they felt there might be a conflict of interests

• This seems to be key factor in decision.

Multiple Directorships

Mashonaland [1891]

Is no automatic breach of fiduciary duty where a director is involved in business of another company which competes with company of which he is director.

Bell v Lever Brothers [1932]

Plus Group v Pyke [2003]

D was a director of a company (C), in which him and another person owned 50% of shares. After dispute with other director, D was excluded from running of C. A former client of C made it be known they no longer wished to work with C, and D set up a rival company which started doing work for that former client. Case was pre-section 175, thus C alleged D had breached his fiduciary duties not to act in conflict with interests of C. Held:

1. Is BREACH where company for whom D works has made it clear it will no longer work for company of which D is a director

• i.e. fact that C has taken an opportunity which would not have been available to company of which he is director irrelevant

2. Is NO BREACH where D works for a competing company after he has been effectively excluded from the company of which he is director

• i.e. here, D’s fiduciary duty to C is practically non-existent

• D has no say in how company of which he is a director is run

3. Thus on facts was no breach of fiduciary duty by D.

Sedley LJ

Competing Directorships

1. Was uneasy at idea that someone can be director of two competing companies.

   i.e. Mashonaland requires reconsideration in light of modern standards.

2. Judgments as to whether director has conflict of interests are fact-specific

Brooke LJ

Nature of Liability

Is breach of “no-profit rule” where director uses information, property or opportunities which belong to his company.

Here, director is under duty to pay over to company any money earned from opportunity.

i.e. liability of director seems to be personal, not proprietary

Foster Bryant v Bryant [2007]

D was director of surveying company. The other director (and majority shareholder) sacked D’s wife from company; as result D resigned his directorship. However before D’s resignation took effect, company who had previously contracted with surveying company approached D to ask him to work for them. D agreed. Held:

When is Resigning Director Liable?

Director who has resigned his directorship may be liable under where after his resignation he exploits property of former company.

Property of former company may be either:

1. business opportunity

2. or information/trade secrets of former company

   Business opportunity may constitute either:

1. existing work carried out by company

• i.e. where D solicits customers of former company

• this is an ‘intangible asset’ of former company

2. or a ‘maturing business opportunity’

• i.e. an developing opportunity which D came across in his position of director, and which was thus property of company

  Whether D is liable for use of maturing business opportunity depends on:

  Ripeness of opportunity

  How long after resignation D takes up opportunity

  Circumstances of termination of D’s directorship

Motive

Clear that D was forced out of company by behaviour of other director.

However here, given that C was still a director at time of taking up opportunity he still had duty not to put himself in position of conflict whilst he remained director.

This is case even though it was former company’s customers which approach him (and not vice-versa)

Had D made any profit out of contract with other company, would have been liable to account for profits.

Shepherd Investments Ltd [2006]

Directors of a company set up a competing company whilst they were still directors, and the later resigned their directorships. Former company sued for breach of fiduciary duty. Held:

A director who intends to resign to start competing business must declare this intention as soon as it becomes ‘irrevocable’

And that other members of board who know of this directors’ intention are also under duty of disclosure

This clear from Item Software [2004]

Thus directors were under duty to disclose their intention to set up competing business

As they did not, liable for account of profits

Queensland Mines v Hudson [1978]

C, a company, obtained various mining exploration licences; however company did not have enough money to exploit them, so board consented to D (C’s managing director), taking over exploitation of the licences. D made a profit, and C sued for breach of fiduciary duty. Held:

D had obtained opportunity...

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