Former directors and the scope of their duty to avoid conflicts of interest

In Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) the High Court examined whether a claim for breach of the duty to avoid conflict of interest situations can be based entirely on the activities of a director after they have left office. The case will be of interest to directors and former directors, particularly, in our view, those involved in mergers and acquisitions or who may move on to new boards that compete with their former company.

Directors of a company are subject to general duties under the Companies Act 2006 (‘CA 2006’). The CA 2006 codified, to a material extent, what had previously been established as director’s duties under common law principles (pre-CA 2006 position). The codified duties include the duty to promote the success of the company, to exercise reasonable care, skill and diligence, and to not accept benefits from third parties.

Section 175 CA 2006 sets out the duty to avoid conflicts of interest i.e. a situation in which the director ‘has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’ (section 175(1) CA 2006). This applies ‘in particular to the exploitation of any property, information or opportunity’ (section 175(2) CA 2006). The common law rules and equitable principles should be considered when interpreting and applying the general duties and, accordingly, the Court will interpret and apply the general duties to reflect the pre-CA 2006 position.

Mr Ashley Greenbank (sitting as a Deputy Judge) in Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) explained pre-2006 Companies Act case law, in particular Foster Bryant Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200, noting that the better explanation was that the conduct of a director after he or she has left office could not of itself amount to a breach of duty. The general rule is that a director (including a de facto director) is no longer subject to the duty in section 175 when he or she ceases to hold office. However, the duty ‘continues’ in certain circumstances; specifically, ‘as regards the exploitation of any property information or opportunity’ of which the director became aware when he or she was a director (as was relevant to the facts of this case) (section 170(2) CA 2006).

In the learned Judge’s view, it was not possible to ignore the plain words of the statute. It was held that the former de facto director was in breach of the extended duty under section 170(2)(a) CA 2006. The recent judgment clarifies that the relevant provisions of the CA 2006 go further than reflecting the pre-2006 position.

For specific advice on directors’ duties, or if you have questions about any other commercial or corporate issues, please contact Richard Baxter on 020 7412 0050 or richard.baxter@hunterslaw.com.