Director Duties: Wasted Opportunity

Director Duties: Wasted Opportunity?

Director Duties: Wasted Opportunity?

‘Director Duties: Wasted Opportunity?’ is a post about the no conflicts rule following the case of Davies v Ford & Ors [2020] EWHC 686 (Ch) (“Davies”).

Davies is a rather lugubrious tale on the one hand and yet on the other, it managed to exercise my attention sufficiently to extend a recent bout of insomnia, enabling me to trawl through all its 414 paragraphs about a waste management business and consideration of what could not be described as an exiguous dose of director’s duties.

At the cornerstone of this case is Section 175(3) of the Companies Act 2006:

“This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.”

In this post ‘Director Duties: Wasted Opportunity?’ I am only considering the discrete point that also sprouted in Bhullar & Ors v Bhullar & Anor [2003] EWCA Civ 424 about Director conflicts of interest and the arguably appealing defence when the ‘victim’ company might not be in a position to exploit an opportunity. It is an engaging point and although not on all fours with an earlier post about Director Duty to Creditors, the cardinal issue of ‘conflict’ percolates right through all of these cases.

The case was about Mr Davies who has pursued some of the former Directors of Greenbox Recycling Limited, being Mr Monks, Mr Ford and the successor to GBR, Greenbox Recycling Kent Limited (“GBRK”).

The dispute appears very much one between Mr Davies (who took an assignment of the rights from GBR) who was a majority shareholder in GBR and Mr Monks, who had been a Director of GBR. It appears that Mr Monks enabled GBRK (a waste management business) to trade at the same site where the waste management business of GBR had traded from.

Getting down to brass tacks: could Mr Monks as a Director of both GBR and GBRK, enable a similar type of waste management business to GBR appear as GBRK using the same site without having to ‘account’ to GBR? The other point is such an event arose in circumstances where Mr Monks appears to suggest that GBR might not have been in a position to exploit the business opportunities available.

The Court appears to have found that breaches of duty arose but left the matter of relief and such matters for instance as an equitable allowance to be resolved at a later date.

The court had this to say:

… a number of points are clear, and in terms of what Mr Monks did, they include the following:
i) He caused the incorporation of GBRK, with the intention that it would trade as a waste management business from the Ashford Site.

ii) With that in mind, Mr Monks caused efforts to be made to clear the Ashford Site of waste.

iii) Mr Monks recharged at least part of the cost of clearing the Ashford Site to GBR, even though GBR itself would not have use of the Ashford Site once cleared.

iv) Mr Monks engaged in a process which involved the WML (later Environmental Permit) previously held by GAL being transferred to his new company, GBRK. This was tied to the issue of clearing the Ashford Site. Once the transfer was complete, it gave GBRK regulatory authority to conduct a waste management business from the Ashford Site.

v) Mr Monks acquired, via GBRK and later directly in his own name, a lease of the Ashford Site. The detail of this is obscure. It seems that GBRK entered into a lease with GAL at some point in early 2011 which was backdated to 1 December 2010; but more significantly, Mr Monks acquired a leasehold interest in his own name in June 2011 from Benchmark.

vi) Mr Monks caused GBRK, early in 2010, to enter into new hire purchase and lease agreements in respect of the equipment previously held by SIK, and which had been used by SIK in operating the Business at the Ashford Site. It appears he also caused the transfer to GBRK of certain assets previously owned by Nero, but again used by SIK in the Business.

vii) He took over GBR’s O Licence application, which the Traffic Commissioner was persuaded to treat as an application in the name of GBRK, and procured the issue of a new O Licence in the name of GBRK, to be used in the course of the new waste management business to be conducted by GBRK from the Ashford Site

In my judgment, and leaving aside for the moment any modification to the orthodox position which might be said to arise from GBR being insolvent or of doubtful solvency, each of these steps on the face of it involved Mr Monks in a breach of the duties he owed as a director and fiduciary.

It is convenient to start with section 175, which in any event was the main focus of Mr Davies’ case. It seems to me that each of the steps identified above involved a breach by Mr Monks of his duty under CA 2006 section 175. I say that because they each occurred, as Mr Monks well knew, in circumstances where the intention had been that GBR, not GBRK, would operate a waste management business from the Ashford Site. Indeed, Mr Monks had been engaged – initially as a consultant, but latterly as a director – with the remit of building up that business. GBR therefore had its own, one might say equal and opposite, interest in the matters identified above – i.e., in regularising the position at the Ashford Site by clearing it of waste and obtaining an environmental permit which would allow waste management activities to be carried out; in regularising the terms on which the Ashford Site was occupied by entering into a lease or licence; in regularising the position as regards the use of the plant and machinery necessary to permit a waste management business to be conducted; and on obtaining the appropriate licence or licences to permit waste to be transported.

Consequently, in taking the steps identified above, all of which were in the interests of GBRK, Mr Monks was in an obvious position of conflict given his countervailing interest both as a director of, and shareholder in, GBR, which was looking to develop exactly the same trading business, operating from the same premises, as GBRK.

At a number of points in developing his case, Mr Monks made the point that GBR was not itself in a position to exploit the opportunities presented to GBRK; for example, he suggested that the financing companies would not enter into new agreements with GBR because it was a bad credit risk and there was concern about Mr Davies given his relocation abroad; and he said that the Traffic Commissioner would not grant an O Licence to any business associated with Mr Ford (although in the latter case the difficulty was avoided by the simple expedient of Mr Monks giving certain assurances about excluding Mr Ford from involvement in any transport-related activities).

Even if taken at face value, however, such points do not help Mr Monks. It is no answer to a claim for breach of duty for a trustee to say that the opportunity he has exploited was not one which could ever have been taken up by the beneficiary. That is an entirely conventional analysis which, as Mr Shaw pointed out, has been the law for at least 300 years, since the trustee in Keech v. Sandford was held in breach of duty for taking a new lease in his own name, even though the landlord had refused to renew the lease in the name of the infant beneficiary. As Lord King LC commented:

“This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that the rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to the cestui que use… .”

This same point finds expression in CA 2006 section 175(3), which says that the no conflict rule applies in particular the exploitation of any property, information or opportunity, and that:

” … it is immaterial whether the company could take advantage of the property, information or opportunity.”
Thus, in this case it seems to me immaterial, even if true, to say that GBR may not itself have been in a position to:
i) obtain a WML or environmental permit;

ii) take a lease of the Ashford Site;

iii) enter into hire purchase or other financing arrangements in respect of the plant and equipment previously leased to SIK;

iv) obtain an O Licence;

v) continue or renew the factoring agreement with Lloyds TSB,

with a view to operating the Business (or at least, a business) from the Ashford Site.

The Court considered a discussion of the cardinal principle of director conflict. In the context of this post about ‘Director Duties: Wasted Opportunity?’ the following appears notably germane:

In my view, the focus in the case as it has developed, on whether something corresponding to the Business was transferred to GBR, has led to a misplaced emphasis, in determining whether Mr Monks was in breach of duty, on the question of what existing corporate assets GBR had, and whether they had been misapplied. To a large extent Mr Monks’ case has been to say – GBR had no corporate assets, and therefore nothing to divert, and therefore there was no breach of duty.

That is a misplaced emphasis because the real focus should be on the duties owed by Mr Monks, by reason of his status as a director of GBR, and whether he was in breach of them. Although a company director may certainly breach his duties to the company by misappropriating its existing assets, that is not a pre-requisite. He may also breach his duties on other ways, not at all dependent on the misapplication of pre-existing corporate assets, for example by putting himself in a position of conflict and thereby making an unauthorised profit.

A good example is Re Bhullar Bros. Ltd [2003] EWCA Civ 424, [2003] BCC 711. In that case, a company owned an investment property which was used as a bowling hall. Two directors of the company came to know that a plot of land next to the investment property was for sale, and they acquired it using another company which they owned and controlled called Silvercrest. They said that there was no breach of fiduciary duty in doing so because the company itself has shown no interest in acquiring the plot of land at the relevant time, and accordingly had not been deprived of any “maturing business opportunity”. This argument was rejected and the Court of Appeal affirmed the declaration made by the judge at first instance that Silvercrest held the plot of land on trust for the company. It was not necessary, in determining that there had been a breach of duty, to show that the company had some pre-existing interest in the opportunity in question. Jonathan Parker LJ said as follows:

“[27]. I agree with Mr Berragan that the concept of a conflict between fiduciary duty and personal interest presupposes an existing fiduciary duty. But it does not follow that it is a pre-requisite of the accountability of a fiduciary that there should have been some improper dealing with the property ‘belonging’ to the party to whom the fiduciary duty is owed, that is to say with trust property …

[28]. In a case such as the present, where a fiduciary has exploited a commercial opportunity for his own benefit, the relevant question, in my judgement, is not whether the party to whom the duty is owed (the company, in the instant case) had some kind of beneficial interest in the opportunity; in my judgement that would be too formalistic and restricted an approach. Rather, the question is simply whether the fiduciary’s exploitation of the opportunity is such as to attract the application of the rule.”

Disclaimer: ‘Director Duties: Wasted Opportunity?’ is a post that is not legal advice and not to be relied upon as such. No liability is accepted by the author and or the author’s firm for any reliance upon the same. You should take independent professional advice on the facts of your case.

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