CH15 Directors duties remedies PDF

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Directors’ duties 2: Breach of duties3rd Step_ Remedies for Breach of Duties➔ s178 : (1)The c onsequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied. (2)The duties in those sections (with the...

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Directors’ duties 2: Breach of duties

3rd Step_ Remedies for Breach of Duties ➔ s178 : (1)The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied. (2)The duties in those sections (with the exception of section 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors. ➔ s178 CA06 preserves the existing civil consequences of breach (or threatened breach) of any of the general duties.

➔ In the case of fiduciary duties the consequences of breach may include: ◆ damages or compensation where the company has suffered loss ● see Re Lands Allotment Co [1894] ◆ restoration of the company’s property ● see JJ Harrison (Properties) Ltd v Harrison [2002] ◆ an account of profits made by the director ● see Regal (Hastings) Ltd v Gulliver ◆ injunction or declaration ● see Cranleigh Precision Engineering Ltd v Bryant [1965] ◆ rescission of a contract where the director failed to disclose an interest

Re Lands Allotment Co [1894]

1. A limited company is not a trustee of its funds, but their beneficial owner. 2. However, the fiduciary character of the duties of its directors mean that they are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust.

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The court contrasted the conduct of two directors (one of whom, Mr Brock, was also chairman) in determining their responsibility for an ultra vires investment made by the company. Neither was present at the meeting at which the investment had been approved. Attendance at a later meeting at which the minutes of that meeting were confirmed was held to be insufficient to make either director liable. On the other hand statements made by Mr Brock showing he had taken an active part in the decision to make the investment were sufficient to hold him responsible for it. ● However the other director had been ‘away on the sea’ and ‘had nothing to do with the transaction at all’ which was ‘past praying for’ on his return. ● In a case of a company director being treated as a trustee within the limitation provisions of ss1(3) and 8(1) of the Trustee Act 1888 in respect of a claim that unauthorised investments had caused loss to the company. ○ The court recognised the trustee-like nature of a director’s duties as very relevant to the statutory limitation periods for actions by beneficiaries against express trustees for breach of trust and for the recovery of trust property, whether those periods are applied directly or by analogy. ○ In consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust. ○ Lindley LJ : Directors are not regarded as trustees merely by virtue of their office; but they are treated as trustees ‘of money which comes to their hands or which is actually under their control’; or ‘they are only trustees qua the particular property which is put into their hands or under their control’ (per Kay LJ).

❖ in France ≠ in Uk where there is no criminal charges (even for breach of the provisions) only civil consequences ❖ Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors. ➢ General criminal charges can be brought for theft, bribery and fraud. ➢ Specific criminal charges are available against the chairperson, the directors, the CEO and any deputy CEO(s) for: ■ Misappropria tion of corporate assets. ■ Abuse of powers or of votes. ■ Distribution of fictitious dividends. ■ Publication of inaccurate annual accounts. ➢ Tortious claims can be joined to criminal charges by the company, shareholders or third parties who have personally suffered direct loss as a result of the offence ❖ Briefly outline the potential liability for

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see Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914]

JJ Harrison (Propertie s) Ltd v Harrison [2002]

⚠ these (above) do not occur with 3rd parties.

➔ liability of accessories : rules developed to establish this liability will be applied notwithstanding that the breach may be of a duty, which is statutorily defined and imposed. ➔ liability to account : arises even where the director acted honestly and where the company could not otherwise have obtained the benefit. ◆ as in Regal (Hastings) Ltd v Gulliver [1967] ⇒ Arden LJ explained the policy underlying each liability (see the case Murad v Al- Sara [2005])

➔ Robert Reid QC (deputy judge of the high court) stated that a company is entitled to elect whether to claim ◆ damages (= equitable compensation) or

Cranleigh Precision Engineeri ng Ltd v Bryant [1965]

◆ an account of profits against a director who, in breach of duty, makes a secret profit ◆ 3rd possibility used by courts, when profit may arise out of the use of position as opposed to the use of trust property, it is the ‘constructive trust’ (= fashioning a remedy) ● see Boardman v Phipps [1967]

Transvaal

1. A director usurped a corporate opportunity by acquiring for his own benefit development land owned by the company. 2. At the time of valuation he failed to disclose that planning permission was forthcoming which, once granted, would greatly inflate its value. 3. The company, having unsuccessfully applied for planning permission a couple of years earlier, was unaware that local authority policy in this respect had changed. 4. The director purchased the land from the company in 1985 for £8,400. Having obtained planning permission through, to add insult to injury, use of the company’s resources, he then resold part of it for £110,300 in 1988 and the rest in 1992 for £122,500. 5. The director resigned and the company sought to hold him liable as a constructive trustee

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1. The parties drew up heads of agreement. The heads of agreement provided for the assignment by Mr Bryant of certain patents and designs in return for a royalty. 2. They also provided that Mr Bryant and the company would enter into a service agreement on terms set out in the heads of agreement. 3. Mr Bryant argued that the agreement was not binding because it was ‘subject to contract’, although that phrase did not actually appear in the heads of agreement.

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He had acquired the property as a constructive trustee for the company, and was accordingly accountable for it.

The court applied the principle in Von Hatzfeldt-Wildenstein, and decided, as a matter of construction, that the document was an immediately binding agreement. ● principle in Von Hatzfeldt-Wildenstein, per Parker J : ‘Where a document, said to be contractual, contemplates the execution of a further contract between the parties, it is a question of construction as to whether the execution of the further contract is a term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will, in fact, proceed.’

directors under securities laws. ➢ The CEO, deputy CEO(s), the chairperson and the directors can incur civil and criminal liability or administrative sanctions for: ■ Insider trading. ■ Communicat ion of inside information. ■ Market manipulation ■ Disclosing false or misleading information, including information contained in prospectuse s and other offering documents. ■ Failure to declare the crossing of certain shareholding thresholds. ❖ Briefly outline the potential liability for directors under anti-trust laws. ➢ The CEO, deputy CEO(s), the chairperson and the directors can incur criminal liability if they: ■ Have fraudulently played a personal and determinant

Lands Co v New Belgium (Transvaa l) Land & Develop ment Co [1914]

Recap : A director has a duty to account for any secret profit if he has an undisclosed and unapproved conflict of interest. The rule against self dealing applies to cases where the fiduciary has conflicting duties to each of the contracting parties. 1. Transvaal Lands Co (Transvaal) was a company which was also involved with New Belgium. 2. Two of Transvaal’s directors, Samuel and Harvey, were also shareholders of New Belgium. Samuel was also a director of New Belgium. 3. Samuel and Harvey convinced Transvaal’s other directors to agree to have Transvaal purchase some property from New Belgium. 4. They did not disclose their interest in New Belgium to the other directors, or the benefits which they would gain from that purchase

Regal (Hastings ) Ltd v Gulliver [1967] IDC v Cooley

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Did Samuel and Harvey breach their duties to avoid conflicts of interest? ● The Court of Appeal held that Samuel and Harvey had breached their duties to avoid a conflict of interest. ● The directors should have disclosed their interest in New Belgium prior to the purchase. The purchase transaction was rescinded by Transvaal. ● Astbury J: “a director of a company is precluded from dealing, on behalf of the company with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect”

see below

1. Mr Cooley was the managing director of the claimant. His duties included procuring business in the field of developing gas depots. 2. The company had unsuccessful negotiations with the Eastern Gas Board for the development of four depots. 3. However, the Gas Board was not prepared to let the contracts to the company. 4. The Gas Board subsequently approached Mr Cooley in his private capacity; and indicated

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He was accountable for the profit. ○ Where a fiduciary obtains a benefit in breach of his fiduciary duty, he is liable to account even if the beneficiary could not itself have obtained that benefit or opportunity. ● A company director owes a fiduciary duty to report relevant information of concern to the company: ‘Information which came to [the director] while he was managing director and which was of concern to [the company] and was relevant for [the company] to know, was information which it was his duty to pass on to [the company] because between himself and [the company] a fiduciary relationship existed’ and

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role in the conception, organisation or implementati on of anti-competit ive practices. Obstruct a French Competition Authority enquiry.

that they would be prepared to contract with him personally. 5. In the course of the meeting, Mr Cooley acquired knowledge that the company did not have; and would have wanted to have. 6. Mr Cooley therefore resigned his office (on the basis of a false excuse) and entered into the contracts with the Gas Board.

Murad v Al- Sara [2005]

1. The Murad sisters and Mr Al-Saraj, who acted through his company called W Co, started a joint venture (which creates fiduciary duties among those in the venture) to buy a hotel at £4.1m, through a new company. 2. The Murads would contribute £1m, and £500,000 was meant to come from Mr Al-Saraj. The rest was to come from a bank loan. 3. But Al-Saraj instead set off an unenforceable debt that the seller of the property owed him, and also got a commission for arranging the sale. 4. This was a breach of fiduciary duty, by fraudulently misrepresenting his contribution and failing to disclose his profit. 5. The hotel was then sold at a profit of $2m.

‘Therefore, I feel impelled to the conclusion that when the defendant embarked on this course of conduct of getting information... using that information and preparing those documents... and sending them off... , he was guilty of putting himself into the position in which his duty to his employers, the plaintiffs, and his own private interests conflicted and conflicted grievously. There being the fiduciary relationship I have described, it seems to me plain that it was his duty once he got this information to pass it to his employers and not to guard it for his own personal purposes and profit. He put himself into the position when his duty and his interests conflicted.’

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At first instance (high court) Etherton J held that even if Murad had known, they would have gone ahead with the purchase, although they would have demanded a greater share of the profits. Nevertheless, Mr Al-Saraj and his company had to account for the entire profit made. Mr Al-Saraj argued that his liability should not be his full profits, but only those that he would not have made if the fraud and secret profit were not present. The Court of Appeal held that a fiduciary had to give up his unauthorised gains. It was irrelevant what he might have done, and not within the ability of Mr Al-Saraj, given his wrongdoing, to argue that some better outcome may have transpired if he had been honest. A fiduciary may retain gains that are properly to be regarded as the product of his own skill and labour, rather than breach of duty. Only actual consent could get rid of the liability to account. Arden LJ explained the policy underlying such liability: ‘It may be asked why equity imposes stringent liability of this nature... equity imposes stringent liability on a fiduciary as a deterrent – pour encourager les autres. Trust law recognises what in company law is now sometimes called the ‘agency’ problem. There is a separation of beneficial ownership and control and the shareholders (who may be numerous and only have small numbers of shares) or beneficial owners cannot easily monitor the actions of those who manage their business or property on a day to day basis. Therefore, in the interests of efficiency and to provide an incentive to fiduciaries to resist the temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an extensive liability to account.’ Clarke LJ dissented on the extent of Mr Al-Saraj’s liability to account. Where there was an antecedent arrangement for profit sharing, it could be shown that it is inequitable to account for all profits. On the judge's findings, the sum of GBP 500,000 was treated as a cost of the acquisition in its entirety and was accordingly allowed as a deduction from the profits for which Mr Al-Saraj was to account. But that overlooked the fact that some GBP 369,000 was a commission earned by Mr Al-Saraj on the acquisition of the hotel for which he should account as a secret profit. No objection could be taken to the allowance of the balance of the GBP 500,000 as one of the costs of acquisition. The claim for an account of the GBP 369,000 was unanswerable unless the claim to recover that sum belonged to

D and the issue whether that company was the proper claimant in respect of the secret commission should be remitted to the judge on terms that the appellants should join D as a defendant. Therefore the cross appeal was allowed to the extent of the GBP 369,000 for the purpose of remitting to the judge for determination the question whether any claim to recover the commission paid to Mr Al-Saraj in respect of the acquisition of the hotel was vested in D or Murad. Coleman Taymar Ltd v Oakes [2001]

1. The claimants (Michael Supperstone QC and Andrew Clutterbuck) brought an action against the first defendant (David Oliver QC) for breach of confidence and/or fiduciary duty, alleging that the first defendant had misused confidential information received while a director of the claimants to enter into wrongful competition with that company, either personally or through the agency of the second defendant (Thomas Moody-Stuart), and claimed an account of profits. 2. The first defendant sought relief under section 727(1) of the Companies Act 1985 on the basis that he had acted honestly and reasonably and ought fairly to be excused his breach of duty.

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Boardma nv Phipps [1967]

1. A solicitor for a trust fund noticed a significant opportunity in the accounts of the company 2. He utilised this opportunity with the knowledge of some of the trustees, making a significant profit for both the trustees and himself

Held, giving judgment for the claimants, that as a director and senior employee the first defendant owed the first claimant both contractual and fiduciary duties to do his best to promote its business and to act in complete good faith towards it, but such duties did not prohibit that person while still a director or employee forming the intention to set up in competition once his employment had ceased or taking preliminary steps provided there was no actual competitive activity while the directorship/ employment continued; that the first claimant's decision to seek an account of profits in lieu of damages did not prevent the first defendant relying on section 727(1);

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that section 727 required an essentially subjective approach to the question of honesty, but any test of reasonableness was inherently objective. This even if a director had acted honestly and reasonably the court still had to consider whether in all of the circumstances the director ought fairly to be excused from liability, either absolutely or on such terms as the court thought fit. That by going behind the claimants' back to negotiate leases of the claimants' business premises for his own benefit, the first defendant may not have acted dishonestly but he had acted unreasonably and so was not entitled to relief under section 727. But that relief pursuant to section 727 would be granted in relation to the purely technical breaches of duty which had taken place during the period in which the first defendant was technically still a director of the first claimant but had ceased to be employed by it.

No damages would however be awarded for the period after the termination of his employment, but whilst he remained technically a director. Section 727 might apply so as to relieve a director of a duty to account which would otherwise have arisen because of a failure to disclose an interest.

Was the solicitor liable for his personal profit? Yes The solicitor had acted on information available to him only due to his agency relationship with the trust fund. He used this information for his own personal profit, which breached his fiduciary obligation not to make any unauthorised profit ● Not all of the trustees consented to the profit ● The solicitor was able to keep a significant equitable allowance for his effort though ● Lord Denning, in the Court of Appeal (current case in House of Lords) advocated

a very significant equitable allowance

A-G Hong Kong v Reid [1994]

Paragon Finance plc v DB Thakerar & Co (1999)

1. Bribes were taken by an employee, a crown prosecutor in Hong Kong, in a fraud on his employer. 2. He then invested the proceeds in the purchase of property in New Zealand. 3. The property had increased in value. 4. The employer sought repayment of the bribes received from the properties purchased.

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The bribes received by the policeman were held on trust for his principal, and so they could be traced into properties which he had acquired in New Zealand. ● Thus the employer had a proprietary interest both in the bribe and in the asset substituted for it. Hence the property belonged in equity to the employer. ○ The first stage in the analysis was the decision that the bribe itself was trust property. ○ The second stage in the analysis was simply the application of the process of tracing the value of the bribe into the asset that had been substituted for it. ○ A fiduciary office holder who accepted a bribe holds both the original sum, and any increase in its value, on a constructive trust for the person to ...