The extent of directors’ fiduciary duties re-affirmed

18 September, 2009

Amongst the fiduciary duties owed by directors to their company is the duty not to make “secret profits”, in other words, a duty not to purloin opportunities belonging to the company for their own personal benefit.  In recent years the strict nature of this duty has been put into question by reference to principles originating in partnership law.

 

The court of appeal case of O’Donnell -v- Shanahan & Anor [2009] EWCA Civ 751 firmly rejects this incursion of partnership law and re-affirms the strict nature of this duty on the part of directors.

 

The defendant directors in this case acquired, via another company in respect of which they had a 50% interest, a property in London.  The opportunity to purchase the property came to their attention in their roles as directors of the company in which they were joint shareholders with the claimant.  Their exploitation of the opportunity was not fully disclosed to that company and no consent, informed or otherwise, was obtained by them.

 

The defendants relied principally on the case of Aas v Benham ([189] 2 Ch 244) which is a partnership case.  This case limited the duties of a fiduciary where the benefit obtained is outside of the fiduciary relationship.

 

It was argued in the O’Donnell case that because the company was not a property development company it was not within its scope of business to have taken up the opportunity in relation to the property and that therefore there was no breach of duty.  It was asserted as a matter of fact that the company could not or would not have taken up the opportunity in any event.  This argument was accepted at first instance.

 

The argument was firmly rejected by Lord Justice Rimer in the court of appeal.  The Aas -v- Benham case was relevant to the fiduciary duties owed by a partner which were circumscribed by the contract of partnership.  It was not relevant to a company case.  In the case before him it was clear that the company’s business was not similarly circumscribed by its constitution.

 

The case law about directors’ fiduciary duties made it clear that any inquiry as to whether the company could, would or might have taken up the opportunity itself was irrelevant.  On this basis it was not necessary or relevant to engage in a “scope of business inquiry”.

 

The key point as far as the court of appeal was concerned was that the existence of the opportunity was one that it was relevant for the company to know.  Consequently, the directors had a duty to inform the company of the opportunity.

 

It was not for the directors to make their own decision that the company would not be interested and to proceed, without more, to appropriate the opportunity for themselves.  Their duty was one of undivided loyalty.

 

The case affirms the strict rule that directors will be in breach of their fiduciary duty if:

  • an opportunity arises in the course of their acting as directors for a company;
  • they take that opportunity for their personal benefit;
  • they fail to obtain the informed consent of the company.

 

This will apply even if the opportunity was something that the company would not or could not have taken up.

 

Reviewed in 2015