UK: Directors Duties: A Refresher

Last Updated: 1 June 2012
Article by Richard Thomas and Anna Puzitskaya

When the Companies Act 2006 came into force, company directors were deluged with advice, solicited and unsolicited, about the directors duties provisions. It does no harm to be reminded from time to time that there can be consequences for a director if he fails in his duties.

Case facts

One such reminder is the Appeal Court case of Towers v Premier Waste Management Ltd [2011] EWCA Civ 923. The basic facts were straightforward. In 2003 Mr Towers, who was then a director of Premier Waste Management, borrowed an excavator and a dumper for his own personal use from a Mr Ford who was a customer of the Company. This was arranged by Mr Towers through a manager in his division of the Company. Mr Towers did not tell his board about the arrangement. He used the equipment for approximately 6 months in 2003 but only returned it in 2008 after Mr Ford had invoiced Premier Waste Management for £45,825 hire charges.

Premier Waste Management brought proceedings against Mr Ford for a declaration that it was not liable to pay the hire charges and against Mr Towers for the profit received by him from the arrangement. The Appeal Court had to decide only on the dispute between Mr Towers and Premier Waste Management. The amount involved was extremely modest and we can only assume that the parties considered that there were matters of principle at stake.

The decision

As the event in question pre-dated the 2006 Act, the Appeal Court had to decide the issue on the basis of the common law principle that a director has a fiduciary duty to his company. That fiduciary duty remains but the 2006 Act now also imposes specific statutory duties which have very similar effect.

The Court held the applicable directors duties were that of loyalty and the duty to observe the no conflict principle. This embraces a duty on the director not to make a secret profit for himself. In accepting the loan of the equipment from Mr Ford without disclosing it to his board of directors, Mr Towers had disloyally deprived Premier Waste Management of the ability to consider whether the Company objected to the diversion of an opportunity offered by one of its customers away from itself to the director personally.

The Appeal Court upheld the decision of the lower court that Mr Towers was in breach of his fiduciary duty and was liable to account to the Company for the value of the benefit obtained from the loan of the equipment. It made no difference that Premier Waste Management had not, in fact, suffered a loss, that there had been no improper motive, that the value of the benefit was small or that Mr Ford received no benefit or advantage from making the loan of the equipment. Mr Towers should have disclosed it to his board of directors beforehand but did not do so.

If this case had been brought under the provisions of the Companies Act 2006, the result would, in all probability, had been the same. Section 172 requires a director to act in a way which he considers in good faith will be most likely to promote the success of his company for the benefit of its members as a whole. Section 175 requires a director to avoid a situation in which he has or can have an interest which directly or indirectly conflicts with the interests of his company or possibly may conflict. This duty applies to all conflicts of interest and it does not matter that the Company might not be able to take advantage of the opportunity. Section 176 imposes a duty on a director not to accept a benefit from a third party which is given to him because he is a director or because of anything he does in his capacity as a director. This duty is not breached, however, if the acceptance of the benefit cannot reasonably be regarded as giving rise to a conflict of interest.

Lessons learned

It is possible that his board of directors might have authorised the arrangement if Mr Towers had disclosed the intended loan of the equipment to them. For situations arising on or after 1 October 2008, the requirements of section 175 of the 2006 Companies Act concerning authorisation of conflicts of interest are a little complicated. For a private company incorporated before 1 October 2008, the board may authorise a conflict of interest provided that either the Articles of Association include a provision enabling this or they do not invalidate this and there has been a shareholder resolution permitting the board to give authorisation under section 175. For a private company incorporated on or after 1 October 2008, the board may authorise a conflict of interest provided that the Articles of Association do not invalidate this. In the case of a public limited company, the board may authorise a conflict of interest if the Articles of Association includes a provision which enables this. An authorisation by the board cannot be retrospective.

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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