A recent High Court case extended the scope of the directors' duty to avoid conflicts of interest to new bounds, in a judgment that should prick directors' ears. Despite only acting as a de facto director for around a month and leaving for reasons unrelated to the later conflict, a former director was found in breach of that duty.

What happened?

In Alan Burnell v. Trans-Tag Limited, Robert Aird [2021] EWHC 1457 (Ch), Trans-Tag Limited (Trans-Tag) was a company selling remote tracking devices. A related Estonian company, TTS, developed the software used by Trans-Tag in its products. The companies had signed a licence agreement concerning intellectual property rights in the software, which was at the time considered Trans-Tag's greatest asset. Mr Burnell, an investor, agreed to become director of Trans-Tag, although he was never officially appointed as such.

After an acrimonious fallout, Mr Burnell exited the company. He subsequently acquired shares in TTS. During a dispute with Trans-Tag, TTS terminated the licence agreement and took back the intellectual property rights.

Part of the subsequent litigation was Trans-Tag's claim against Mr Burnell for breach of his directors' duties by exploiting his knowledge gained whilst a de facto director for Trans-Tag about the licence agreement and the longstanding concerns around its enforceability.

Directors' duties

Mr Burnell's duty under section 175 of the Companies Act 2006 (the Companies Act) was to avoid conflicts of interest with the company. Having found that Mr Burnell was a de facto director for around a month, the judge considered whether the duty continued beyond this period and covered the point when the alleged breach of duty took place.

The Companies Act provides that former directors continue to be subject to this duty to avoid conflicts of interest "as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director". Prior to the existence of the Companies Act, this was limited to situations where the director had resigned simply in order to take advantage of that opportunity. Mr Burnell had argued that, given the wording of the Companies Act, that limit should still apply.

The judge, however, found that the general duties in the Companies Act were not the same as the pre-existing rules and principles – the former had replaced the latter. The wording of the Companies Act means that the conflict of interest duty has indeed been extended beyond the common law rules and is now a continuing duty that applies after the end of a directorship, irrespective of why the director left the company.

What is the impact of this?

This judgment begs the question: will we see the floodgates open to claims against former directors who have acquired useful knowledge of their industry at their former company and who put it to good use in their later career? The judge, although acknowledging this risk, did not think so. This was because the general duties, even if extended through codification, must still be interpreted in accordance with existing rules and principles.

This was relevant in the present case as the meaning of "information or opportunity" retained its narrow interpretation, that it must have "a quality akin to property". In other words, it must be limited to a clear, specific opportunity.

Former directors may be asking themselves whether their actions since leaving a company could be put under the spotlight as a result of this decision. They may suddenly find themselves needing to consider duties owed to their former company in far greater detail. They may need to take legal advice on whether they became aware of any "property, information or opportunity" whilst director and whether, given the narrow interpretation mentioned above, anything they have done subsequently (or are considering doing) could be said to be in conflict with the company.

Schrödinger’s director

In Davies v. Ford and others [2020] EWHC 686 (Ch), the time limits of the Companies Act conflict of interest duty were similarly tested. A company had been dissolved in 2011 and then restored in 2016 by the claimant for the purposes of bringing the claim. An issue in dispute was whether the directors' duties of one of the defendants continued in the period between the company's dissolution and restoration. In particular, the court considered section 1032(1) of the Companies Act, which provides that, upon restoration, "the company is deemed to have continued in existence as if it had not been dissolved".

In this instance, the court found that the directors' duty was not still in force in the relevant period. The above Companies Act section concerned the existence of the company and the validity of acts undertaken in relation to it, rather than the directors' acts. The judge explained that fiduciary duties are onerous and require certainty so that those subject to them can organise their affairs accordingly. He compared the suggested approach to Schrödinger’s cat, in that the director would simultaneously be both a fiduciary and not a fiduciary.

Comment

Despite the general duties being broadened by statute, the courts are ensuring they retain sensible limits. The same certainty in fiduciary duties required by the judge in the Davies v. Ford case is present in the Burnell v. Trans-Tag decision. It is clear that, once the relevant "property, information or opportunity" has been identified, the duty to avoid conflicts of interest resulting from it lasts for as long as the company does.

With thanks to Alice Culkin.