UK: Breach Of Directors’ Duties

Towers v Premier Waste Management Limited [2011] EWCA Civ 923 serves as an important reminder to directors of the fiduciary duties owed to their companies (particularly the duty to avoid conflicts of interest) and the dangers of failing to spot situations in which they arise.

Background

Mr Towers, formerly a director of Premier Waste Management Limited (the Company), enjoyed a free, undisclosed and unapproved loan of some dilapidated excavation equipment from a customer of the Company for his own personal use. The arrangement for Mr Towers to borrow the equipment was made by the Company's operations manager. Mr Towers had no direct dealing with the customer.

Despite only being used for a few months the equipment remained on Mr Towers premises for several years. Whilst the equipment was on his property, it was repaired at the cost of the Company, although this cost was later reimbursed by the customer, on the basis that he was getting back his equipment in a better condition than when he had loaned it.

The dispute arose when the customer claimed a hire charge from the Company for the period the equipment had been loaned to Mr Towers. Once the claim had been settled the Company sought to recover sums from Mr Towers on the basis that he had breached his fiduciary duties as a director of the Company.

The Claim and the Appeal

Both the High Court and the Court of Appeal held that Mr Towers had breached his duties to the Company. Mr Towers was ordered to pay the Company a sum equivalent to the cost of hiring the equipment in the open market, together with the costs of the action. Mr Towers subsequent appeal against the decision was rejected.

What the judgment said

In failing to seek Company approval for the loan Mr Towers was found to have breached his directors' duties of loyalty to the company (by disloyally depriving the Company of the opportunity to utilise the equipment), the duty to avoid conflicts of interest (including the duty not to make a secret profit) and the duty not to accept benefits from third parties.

The breach of duties was held to have occurred despite the fact that:

  1. the value to Mr Towers of utilising the equipment was negligible;
  2. there was no evidence that the Company suffered a loss or would have taken the opportunity to utilise the equipment had the resource not been diverted by Mr Towers; and
  3. there was no corrupt motive on the part of Mr Towers.

Further, the courts refused to excuse Mr Towers under section 1157 of the Companies Act 2006, which gives a court the discretion to relieve an officer (or auditor) of a company for negligence, default, breach of duty or trust if it appears to the court that that person acted honestly and reasonably in the circumstances and that they ought fairly to be excused.

It was held that in the circumstances "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."

Legal implications

The case indicates that the historically strict approach to the enforcement of directors' duties, enshrined in case law, will continue to influence courts when they are determining whether a breach of duty has occurred and will inform their interpretation and implementation of the newly codified directors' duties contained in the Companies Act 2006.

Practical advice arising from the case

When seeking to fulfil their role, directors must be alive not only to duties enshrined in the Companies Act 2006 but also to principles developed historically through case law. A breach of duty, no matter how seemingly trivial should be disclosed. Where there is any doubt regarding the happening of a breach specialist legal advice should be sought.

As Lord Justice Mummery emphasised in his judgment in the Court of Appeal; "A secret profit may be large or small; it matters not which. The vice is the fact that it is secret, undisclosed. If it was so innocent or insignificant it ought to have been and could have been disclosed."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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