DIRECTOR DUTIES - PART II

SECTION 175 (DUTY TO AVOID CONFLICT OF INTEREST)

Section 175(1) - "a director of a company must avoid a situation in which he has or can have a direct or indirect interest that conflicts, or possibly may conflict
with the interest of the company."

Section 175 is a codification of the fiduciary equitable obligations to avoid conflict.

- JJ Harrison (2002) - It was held that the proceeds / profits made from a breach of fiduciary duty is held by the director as a constructive trustee.
- Bray v. Ford (1896)
Lord Herschell stated “it is an inflexible rule of equity that a person in a fiduciary position is not allowed to put himself in a position where his interests and
duty conflict."

- Bristol & West Building Society (1998)

Lord Millet stated that the directors owe a "single-minded loyalty" towards the company. As a fiduciary he must not make an unauthorized profit and he must
not place himself in a position where his duty and interest may conflict.

Examples of Conflict of Interest includes:

Operating in same line of business

Diverting Corporate Opportunities (whether in same line of business or not) Competing Directorships

Operating in same line of business

Regal Hastings v. Gulliver (1942)

The company (Regal) owned a Cinema. The directors wished to buy two further Cinemas so that all the three Cinemas can be sold at a profitable value. Regal
formed a subsidiary for acquiring additional cinemas. The landlord was not ready to grant the lease to the subsidiary unless the subsidiary paid up capital was
at least £5000. At that time Regal could not inject more than £2000. The directors, therefore, decided to inject the remainder £3000 in the subsidiary. Later,
the whole business was sold off and the directors made a handsome profit. Later, the directors were sued for breach of fiduciary duty and the company
claimed for accounts of profits.

Lord Russell held the directors liable as they fiduciary is not allowed to make a profit from exercising his fiduciary obligations. This is not dependent on the
commission of fraud or mala fide intentions - it is simply based on making of profit.

Corporate Opportunities

It will be a breach of fiduciary duty by a director to appropriate for his own benefit and economic opportunity which is considered to belong rightly to the
company which he

serves.

This is because the opportunity is considered as the asset of the company which cannot be misappropriated by the directors.

- Cook v. Deeks (1916)

The directors diverted certain railway construction contracts which were offered to the company for their own personal benefit. Lord Buckmaster held them
liable on the ground that their action was fraudulent, even though the shareholders had later ratified the actions of directors.

- IDC v. Cooley (1972)

The managing director failed to obtain a lucrative contract from the Gas Board for the company. The Gas Board later approached the MD and stated that they
wished to contract with him in his personal capacity. The MD did not disclose this offer to the company but resigned giving the excuse of ill-health. Later, he
contracted with the Gas Board.

Could held (Roskill, J) that he was liable to the company for all the profits received under the contract. The information which came to the MD while he was
with the company was of concern to the company and was relevant for them to know. He had a duty to pass that information to the company. It was irrelevant
that he was approached in his personal capacity and that the Gas Board would have never contracted with IDC.

- Peso Silver Mines v. Cropper (1966) (SC of Canada) only persuasive authority and other common law jurisdictions have taken lenient
approach in this but not UK
Peso was offered the opportunity to buy 126 mining claims, some of which were located adjacent to the company's existing mining territories. The Board
bona fide declined the offer because of the financial state of the company, the risks involved and value of these mining claims. Later, three of the company's
directors along with the company's geologists formed a syndicate (partnership) and purchased these claims, which turned out to be successful / profitable.
The company later claimed that the profits are held on constructive trust by directors.

The court held that there is no violation of director duties as the initial decision of the directors to reject the opportunity was made in good faith and for
sound commercial reasons in the interest of the company.

- Bhullar v. Bhullar (2003)

Silvercrest (a company) acquired White Hall Mill (a property0 the directors of Silvercrest were also the directors of Bhullar Brothers Ltd. The objects of Bhullar
Brothers Ltd. included acquisitions of investment property. Bhullar already owned property in the vicinity of the White Hall and there was evidence that the
acquisition of White Hall would have been commercially worthwhile for Bhullar Brothers Ltd. Before the purchase by Silvercrest the directors resolved to
divide the company's business and refrain it from acquiring further properties.

Courts held that even though the Bhullar board had resolved not to buy further to disclose and forward the opportunities to the company.

It seems that any opportunity within the company's line of business is off limits to the director unless the company's permission to proceed is first obtained.

This strict approach was reaffirmed by the CoA in O'Donnell v. Shanahan (2009), where Rimer, LJ stated the rationale of the "no conflict and no profit rules"
is to underpin the fiduciary duty of undivided loyalty to his beneficiary. If an opportunity comes to him in his capacity as a fiduciary his principal is entitled to
know about it. The director cannot be left to make the decision as to whether he is allowed to help himself to its benefits.

Competing Dictatorships

Initially it was thought that there was a duty to avoid conflict between personal interest and duty as a company's director. Therefore, a director was allowed
to hold offices in two competing companies - Chitty, J in London & Mashonaland (1891).1

However, the modern courts have taken a stricter stance for competing directorship and in Bristol & West Building Society, Millet J held that double
employment is clearly an example of conflict of interest.

Sedley, J in Plus Group stated that it is questionable whether London & Mashonaland still stands as good law.

Section 175(7) - now, clearly states that competing directorships would be a breach of s. 175.

Post Resignation Breaches

The duty under s.175 continues even after resignation.

Such duty, whether breached or not, after resignation will depend on the facts of the case.

Shephards Investment v Walters (2006)

Etherton J:
What the cases show, and the parties before me agree, is that the precise point at which preparations for the establishment of a competing business by a
director become unlawful will turn on the actual facts of any particular case.... It is obvious, for example, that merely making a decision to set up a competing
business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the
company. The consulting of lawyers and other professionals may, depending on all the circumstances, equally be consistent with a director's fiduciary duties.
At the other end of the spectrum, it is plain that soliciting customers of the company or the actual carrying on of trade by a competing business would be in
breach of the duties of the director. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in
every case.

Foster Bryant Surveying Ltd v Bryant

There should be "some relevant connection or link between the resignation and the obtaining of the business". The court placed emphasis upon the need to
demonstrate both lack of good faith with which the future exploitation was planned while still a director, and the need to show that the resignation was an
integral part of the dishonest plan.

Situations where duty was breached (Post Resignation)

It would be a breach if

the director uses the trade secrets (such as company databases, customer lists, supplier's agreements and business and sales strategy) of the company in
establishing the competing business. (Item Software v Fassihi)

the director takes a corporate opportunity which was offered to the company while he was a director (Cook v. Deeks)

Situations where duty was not breached (Post resignation)

- director setting up a business in competition of the company after resignation.
- A director may utilise confidential information or 'know-how' acquired while working for the company after they depart but not 'trade secrets' (Dranez
Anstalt v Hayek [2002] and CMS Dolphin Ltd v Simonet [2001]
- They may also use the 'general fund of skill and knowledge' they have developed in the role of director (Thermascan Ltd v Norman [2011])
- director makes an intent for setting up a competing business and may also take preliminary steps in this regard, provided he does not engage in actual
competitive activity during his directorship.

Balston v. Headline filters (1990)

The Director had procured a lease in order to startup a business after his resignation. At that time, he had not decided the nature of the business activity
which he will be conducting at the premises. After resignation, he started a business which competed with the company. The Court held that there is no
breach of the director's fiduciary duties as he had not diverted any opportunity of the company.

Framlington Group v Anderson

The directors will not be under any breach if they take steps, while being a director, that after ceasing to be a director, he can immediately establish a business
in competition with the Company.

Authorization of Breach

As seen above the case law developed on avoidance of conflict is very strict and fetters entrepreneurial activity by existing directors.

Company Law Review recommended that law should only prevent the exploitation of business opportunities where there is a clear case of exploitation.

Private Ltd. Company

Section 175(5)(a), therefore, allows that in a private limited company the independent directors (the directors other than those who have a conflict) can
authorize a conflict provided that the constitution does not expressly prohibit them to do so.

Public Limited Company

Section 175(5)(b) allows that independent directors can authorize a conflict in a public limited company provided that such is permitted expressly under the
company's constitution.

Self-Dealing

Self-Dealing is not covered under s. 175.

Dealing of a director in his personal capacity with the company.

Earlier Position: Aberdeen Railway (1854)

The company contracted with the business of a director to supply iron chairs. The court held that a fiduciary shall not be allowed to enter into engagements
in which he has or can have a personal interest that can conflict or possibly may conflict with the interest of the company. Cranworth, L held that “his duty to
the company imposed on him the obligation to obtain the iron chairs at the lowest possible price. His personal interest would lead him in an entirely opposite
direction. This is the very evil against which the risk is directed."

Current Position: Self Dealing is not part of conflict of interest

Section 175(3) makes it clear that duty to avoid conflict of interest set out in Section 175(1) does not apply to a conflict of interest arising in relation to a
transaction or arrangement with company. Self-dealing is removed from the realm of directors' fiduciary duties to avoid this conflict and is replaced with the
statutory obligation to disclose an interest under Section 177.

SECTION 176 (DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTY)

Section 176 prohibits the directors from accepting benefits conferred by reason of:

(a) him being a director, or

(b) him doing or not doing anything as a director.2

This duty will not be violated if acceptance of benefits cannot reasonably be regarded as likely to give rise to a conflict of interest. The term 'benefit' is
undefined in the act, however, the Hansard (parliamentary recordings) that ordinary dictionary meaning should be given (which includes non-financial
benefits as well). Unlike Section 175 breach of this duty cannot be avoided by prior authorization.

SECTION 177 (DUTY TO DISCLOSE INTEREST IN A TRANSACTION)

It requires a director to declare / disclose any interest, whether direct or indirect that he has in a proposed transaction. The duty is only to disclose the interest
before entering into the transaction.

Boulting (1963)
Upjohn, LJ "directors may sometimes be placed in a position that though their interest and duty conflict, they can honestly and properly give their services to
both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands
what are his rights in the matter, there is no reason why he should not relax the rule and it may commercially be very much to his advantage to do so.

Informal disclosure to the board is sufficient. (Lee v. Panavision (1992)), Runciman (1992), Macpherson (1999). However, precise information must be given.
(Gwembe Valley (2000))

CERTAIN SPECIFIC DUTIES

In certain transactions the chances of conflict are so high that a members' approval is required to be taken before undertaking such transactions. These
transactions are:

(a) Section 188 of CA 2006 - long term service contract of director (more than 2 years)

(b) Section 190 - Section 196 of CA 2006 - Substantial property transactions

(c) Section 197- Section 214 of CA 2006 - loans and quasi-loans

(d) Section 215 – Section 222 of CA 2006 – payment* for loss of office

Section 190-Section 196 of CA 2006

Requires that SPT (substantial property transaction) which involves acquisitions or disposal of substantial non-cash asset be approved by shareholders.

SPT is where the assets value exceeds £100,000 or 10% of the company's net value (whichever is lower).

The company will not be liable where the approval is not forthcoming.

SPT will not be valid without prior shareholder approval and no obligation of the company will arise under such transaction and the contract will be voidable
at the option of the company.

Re Duckwari (1997)
The company purchased an asset worth £495,000 from a person connected with a director. Four years later, it was found that the asset was worth £90,000.
The director was held liable to account for any profits made as a result of the breach.

Loans and Quasi Loans: Section 197 - Section 214 of CA 2006

Directors had been giving loans to themselves on highly favourable terms (in reality, it was a disguised remuneration or gift).

CA 1980 following the serious of DTI (Department of Trade and Investment) investigations severely tightened the law governing loans to directors.

CA 2006 - Section 194 - Section 214 requires a prior approval of the company's members (and in some cases even from the members of the holding company)
for giving a loan to director / shadow director/connected person or giving a guarantee on their behalf.

Exceptions for this is contained in Section 204 to Section 209.

* Given by the company to the director.

A loan without the shareholders' approval will be voidable at the instance of the company.

Whether the company choses to avoid a loan or not, the director will be liable to account for any gains he made to the company and indemnify the company
for any loss it suffers.

REMEDIES
The company can seek the following remedies from a director for breach of his director duties:

(a) damages or compensation.

(b) restoration of company's accounts/assets

(c) account for profits made

(i) liability to account even arises where the director had acted honestly and that the company could not have obtained the benefit in any case
(Regal Hastings and IDC v. Cooley).
(ii) (Murad v. Alsaraj (2005)
Arden, LJ- stated that "equity imposes stringent liability on a fiduciary as a deterrent in the interest of efficiency and to provide an incentive to
fiduciaries to resist the temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an extensive liability to
account."
(iii) The liability to account by the director is by way of constructive trust.

JJ Harrison (2002)
Chadwick, LJ stated "any director who disposes of the company's property in breach of their fiduciary duties are treated as having committed a breach of
trust...he is also described as a constructive trustee.

This principle was reaffirmed in the case of CMS Dolphin case.

(d) injunctions

(e) recession of contract where the director failed to disclose the interest.

RELIEF FROM LIABILITY

Relief can be provided to the director for breach of director duty (i.e no liability for the breach) if:

(a) ratification is given by the Shareholders

(b) Courts relieve the liability of the directors under s. 1157 of CA 2006

RATIFICATION
Section 239 of CA 2006- provides that the shareholders can ratify any breach committed by the directors by ordinary resolution.

* If company loses asset, director needs to restore it.

Section 239(3) The ratification is effective only if the votes of director is in breach are disregarded. [Under old law the director in breach could also vote
Northwest (1887) - The law was changed following the CLRSGs recommendations].

However, the following should be noted:

1) First, any authorisation (and presumably any ratification too) will be effective only if the director has made full and frank disclosure to the shareholders
(prior to their voting) about the director's conduct: Cullen Investments Ltd v Brown [2015]. The shareholders must know fully what it is they are being asked
to authorise or ratify;

2) Second, CA 2006 tightened up the process for ratifications (it did not do so for authorisations and the reason for this inconsistency is unclear). Under
s.239(4), a ratification is effective only if it is passed without counting the votes in favour of the ratification by the wrongdoing director, or anyone connected
with them. Thus, s.239(4) seeks to ensure that ratifications, at least, must be passed in a somewhat disinterested way by not allowing the votes of the
wrongdoer, or anyone connected with them, to be counted;

3) The third qualification is a little more complex and uncertain. At common law, it was unclear whether all breaches of duty were capable of being
authorised/ratified by shareholders. Two points of view emerged:

a. Some academics, drawing on case law in support, argued that some breaches of duty (which were labelled 'fraudulent breaches') were simply beyond the
capacity of shareholders to authorise or ratify. This was true however disinterested the shareholder vote might be. Because the authorisation/ratification of
this class of breach would be ineffective, the company would always be free, later, to sue the director for breach. And a shareholder would also be able to
bring what was then known as a 'derivative action';
B. Other academics, again with some case law support, took a different line. They argued that even fraudulent breaches of duty could be authorised/ratified
but such breaches of duty would have to be authorised/ratified in a very disinterested

RELIEF UNDER SECTION 1157 OF CA 2006

Section 1157 confers a discretion on the courts to relieve the liability of an officer of the company, if:

(a) such officer acted honestly and reasonably; and

(b) having regard to all the circumstances, he ought fairly be excused.

Re D'Jan of London
The director had incorrectly filled an insurance form due to which coverage was not given by the insurer when the company's property caught fire. The
director's liability for breach of Section 174 was partly relieved. The rationale behind this was that 99% of the company's shares were owned by director
himself and the 1% remaining by his wife. The economic reality was that the director made a loss for himself. The judge observed that it seems odd that a
person found to have been called been guilty of negligence can never satisfy that he acted reasonably.

Re Duckwari (obiter dicta)

A director who intends to make a personal gain by way of direct or indirect, in a SPT can never be said to have acted reasonably.

Your own benefit is not reasonable even if honest.