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Rigorous regime of the fiduciary duties of directors.

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The recent Court of Appeal decision in Towers v Premier Waste Management Limited1 serves as an important reminder of the dangers of falling in breach of the strict fiduciary duties that directors owe to their companies.

The fiduciary duties were codified in the Companies Act 2006 and deal with any potential benefits that might be obtained by directors through dealings with their companies. The case is an example of the strict application of these duties by the courts, and the potentially harsh and onerous way in which they can play out in practice.

The facts

Mr Towers ("the Director) was a director of Premier Waste Management Limited ("the Company"). Although not personally involved in the negotiation of the arrangement, the Director enjoyed a free, undisclosed and unapproved loan of equipment from a customer of the Company, Mr Ford ("the Customer"). It was made clear to the Customer at the time of the agreement that he was to receive no specific benefit in return for the loan of the equipment.

The equipment was used by the Director for six months, and then remained on his property for five years until the Customer asked for it back. At this point the Customer invoiced the Company for the costs of hire of the equipment for the full five-year period. The Company negotiated a settlement with the Customer, and then sought to recover sums from the Director on the basis that he had breached a number of his duties to the Company as a director.

The decision

The Court of Appeal found that the Director had breached his fiduciary duties as a director of the Company by accepting the free loan without disclosing the transaction to the Company or seeking approval for it. It was held that the Director was in breach of his duty of loyalty to the company, as well as in breach of the "no conflict" principle (s.175 of the Companies Act 2006) and the "no profit principle" (s.176 Companies Act 2006). The Court ordered him to pay the Company an amount based on what it would have cost him to hire the equipment in the open market.

It was observed that it did not matter that there was no evidence that the Company would have taken the opportunity of the free loan for itself or that it had suffered any loss. It also did not matter that the Director had acted without any corrupt motive and in good faith. It was stressed that any such arguments were irrelevant and the mere fact that the Director had benefitted without Company approval or having declared it, was sufficient for liability to arise.

The Court also refused to excuse the Director under s.1157 of the Companies Act 2006, which gives the court discretion to relieve an officer of a company for negligence, default, breach of duty or trust if it appears to the court that that person acted honestly and reasonably in the circumstances and they ought fairly to be excused. The defence was rejected on the simple basis that it had been unreasonable of the Director to have failed to disclose the loan.

Duties 

The case demonstrates the strict nature of the application of director's fiduciary duties owed to their company. It reminds of the importance of avoiding situations where a breach of such duties might arise, as the court will apply them rigorously and will take few mitigating factors into consideration. It also appears that s.1157 defence can be interpreted as being extremely narrow in scope, evident from the fact that any failure to disclose to the company will render a transaction as unreasonable.

Directors should ensure that they are aware of the fiduciary duties that they owe to their companies, and precede with caution if there is any risk of breach no matter how trivial it may appear. If you are unsure of any aspects of the duties that you might be subject to you should consider seeking legal advice, as ignorance of the law will not be a defence and as this case highlights that even acting in good faith would not be sufficient to avoid liability. 

1 [2011] EWCA Civ 923

For additional information please contact Justin Emerson of Gepp & Sons on 01245 228113 or emersonj@gepp.co.uk

The above is not legal advice; it is intended to provide information of general interest about current legal issues.