MacRoberts Corporate Law e-update 02/05/07
DRAWING A LINE IN THE SAND
The whole question of which duties a director owes to a company has been a subject of some discussion over the recent past particularly in light of the new statutory statement of duties set out in the Companies Act 2006. The majority of the provisions of that Act relating to directors duties are due to come into force on 1 October 2007. A recent case, Foster Bryant Surveying Limited v Bryant & another has also thrown this particular area into the limelight.
Mr Bryant was a chartered surveyor who conducted his business through a company, Foster Bryant Surveying Limited, together with a business partner, Foster. Relations between Foster and Bryant broke down culminating with Bryant resigning as a director and employee of the company. It was agreed that his resignation would take effect on 28 January 2005. A customer of the company offered to employ Bryant under a retainer arrangement. Bryant accepted this offer. Both offer and acceptance occurred after Bryant’s intimation of resignation but before it took effect. The customer also offered to allocate projects to both the company and to Bryant to ensure that both received as much work as they could personally handle.
Foster rejected the proposed arrangement and began a claim against the client and Bryant. Foster claimed, amongst other things, that Bryant had breached his fiduciary duties to the company.
A company director acts as a fiduciary in consequence of which he must not place himself in a position where his own interests conflict with those of the company (or where there is a real possibility that will happen) and, further, must not profit from his position at the expense of the company or use the company’s property to make a profit. This means that where there is a business opportunity from which the company might gain, a director cannot take advantage of it for his own account. Even if the company is not able to take advantage of the opportunity when it presents itself, the director may still not exploit it for his own benefit. To do so would breach the no conflict rule.
None of this affects a director’s ability to resign from office. He is entitled to resign even if to do so would have a disastrous effect on the company’s business reputation. Following resignation, a director is not, in general, under continuing fiduciary obligations to the company. A breach of duty does arise even after resignation if a director takes advantage of a maturing business opportunity to which he was led by virtue of his position with the company. The opportunity is treated as the company’s property and by seeking to exploit it, the director is treated as appropriating the property to himself.
This formed the basis of Foster’s action against Bryant for breach of duty. Both the High Court and the Court of Appeal dismissed Foster’s claims. The Court of Appeal held that Bryant had acquiesced in a customer led initiative. Once Bryant had been excluded from his role as a director it was arguable that his only duties were to remain honest and not to exploit or expropriate any company property. To demand more was unrealistic and inequitable. Bryant’s acceptance of the customer’s offer at worst set in train preparations for potential competition with the company after his resignation had become fully effective. That degree of activity did not render him liable to account.
The Court of Appeal noted that where the line between a defendant being or not being a Director was hard to identify, the Courts have adopted a common sense and merits based approach to the question of whether there has been a breach of fiduciary duties. Some of the judges considered that the fact that Bryant’s resignation from the company was forced on him by Foster’s attitude was pertinent.
All cases of this type are very fact sensitive and great care has to be taken by any resigning director in ensuring that he continues to abide by his obligations to the company.
Upcoming event - How to increase and realise the value of your business
MacRoberts is fielding two speakers at a forthcoming conference that is being organised by Avondale Group under the title "How to increase and realise the value of your business".
It is taking place on Tuesday 15th May in Glasgow, at the Dakota Eurocentral Hotel.
Our speakers are Ralph Riddiough and Nirosha Sirisena. Ralph is an Associate in our corporate group who will be speaking on the legal aspects of selling a company, and Nirosha is a member of our corporate tax group who will be speaking on efficient tax structures.
This seminar will be of interest to business owners who are considering a sale, or succession issues, within the next few years.
Clients and contacts of MacRoberts are entitled to a 10% discount.
If you wish to attend, to book a place go to:
http://www.avondale-group.co.uk/events.php?m_id=44
If you require any further information please contact Robert Burns on 0141 332 9988 or Alan Kelly on 0131 229 5046
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