Member Article

Company Directors ? Putting the Company First

With Watson Burton LLP Law FirmCompany directors have a number of duties prescribed by statute (soon to be extended by the Company Law Reform Bill). In addition, directors owe fiduciary duties to the company to act in good faith for the benefit of the company as a whole, including not putting themselves in a position where their personal interests conflict with the interests of the company. The court has recently considered the extent of directors’ fiduciary duties in the case of Shepherds Investments Limited v Walters & 5 Others (2006) EWHC 836 (Ch) where the former directors of two companies had taken steps to set up a competing business prior to their resignation.The two claimant companies involved advised and dealt with the marketing of an investment company concerned with life policies. The defendant directors took preparatory steps in setting up a competing business before their resignation, including preparing a business plan and financial forecasts, and approaching advisers about the venture. The claimant companies brought an action against the directors for damages and an account of profits in respect of breaches of their fiduciary and contractual duties, diversion of a business opportunity and misuse of confidential information. The court found that the directors were in breach of their fiduciary duties and their obligation of loyalty to the company because they had intended to set up a business which they knew the companies could fairly regard as a competitor, and yet had still proceeded to do so. Their conduct was contrary to the companies’ best interests and without its consent. This applied even though one of the directors had never been formally appointed as a director, because the court found that he had assumed the role of an actual director and, in any case, he had breached his duty of good faith and fidelity as an employee. Two of the directors were also found to have exploited for their own benefit a business opportunity which they had become aware of through their employment with the company. However, the claimants had been unable to prove that the directors had misused confidential information or that they had, in fact, suffered any loss as a result of their breaches. The defendants were therefore not ordered to pay damages but had to provide the company with an account of the profits made by them in consequence of their breaches of duty. Although the directors did not have to pay damages in this case, the position would have been different if the companies had been able to show that the directors’ breaches had caused them to suffer losses. The case therefore illustrates the importance of directors being aware of the duties they owe to the company, and highlights the dangers of pursuing personal ventures to the detriment of the company. If you have any questions on this issue or any other corporate issues, please contact Helen Scott at Watson Burton LLP (email helen.scott@watsonburton.com).

This was posted in Bdaily's Members' News section by Ruth Mitchell .