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Applying Section 175 Companies Act 2006 in the Post-Resignation Context: C.J.C. Media (Scotland) Limited v Sinclair

Document Cited authorities 4 Cited in Related
Vincent
Published date01 January 2020
DOI10.3366/elr.2020.0601
Date01 January 2020
Pages74-82
INTRODUCTION

In the recent case of C.J.C. Media (Scotland) Limited v Sinclair1 (“Sinclair”) the Outer House considered whether a former director had breached his fiduciary obligations after resignation under section 175 of the Companies Act 2006.2 With respect, the authors disagree with the decision taken in Sinclair. Before addressing the reason, however, it is important to say a few preliminary words about the case itself, the directorial role and what UK company law requires of directors after resignation.

 FACTS AND DECISION

At the relevant time, the pursuer company had two directors – Mr Clark and Mr Sinclair. Mr Clark handled the operational side of the business; Mr Sinclair dealt with sales and customer relations, and was essentially the “face” of the company.3 From 2007 to 2013, a Scottish Government appointed media provider – “Carat” – contracted with the company for it to perform social and health education related media work in community pharmacies throughout Scotland.4 Although not discussed in Sinclair, it is important to note that Scottish Government appointed media providers are public bodies charged with the subsequent outsourcing of the substantive works to contractors through tender competitions. The tender competition and awarding of contracts must be conducted according to certain criteria. These considerations will be returned to later.5 On 5 March 2013 Mr Sinclair resigned as a director of the pursuer, and incorporated a new company called Tactical Media Limited (“Tactical”) on 6 March 2013. Less than three weeks after Tactical was formed, it was awarded the 2014 contract by Carat in preference to the company.6 The issue before the Outer House was whether Mr Sinclair had breached his fiduciary obligations to the company under section 175. The Lord Ordinary (Doherty) held that Mr Sinclair had breached his fiduciary obligations after resignation: the 2014 contract was a “maturing business opportunity belonging to the pursuer”.7

 THE DIRECTORIAL ROLE AND THE POST-RESIGNATION CONTEXT

Directors qua “organizational gatekeepers”8 enjoy a wide degree of control and discretion over the flow of corporate information.9 As the argument runs, the company “has no other access to relevant information, and therefore potential business opportunities…except through its directors” and directors (particularly executive directors) must “evaluate new business prospects and…recommend those that the company should pursue against those which it should not”.10 Owing to the control and discretion conferred, a director is expected to be loyal to her company, which is essentially the “irreducible core” at the heart of the relationship.11 This is now reformulated in section 172 as the duty to promote the success of the company.12 A number of other sub-duties are attached to the expectation that directors ought to be loyal, one of which is the duty to avoid conflicts of interest under section 175.

It is explained in section 170(2)(a) that the duty to avoid a conflict of interest continues after a director resigns. To understand what this means, reference must be made to the language of section 175. Absent (disinterested) board approval,13 a director must avoid a situation in which she has, or can have, a direct or indirect interest in the exploitation of any property, information or opportunity that conflicts, or possibly may conflict, with the interests of the company.14 Whilst a director is in office, a company's “interests” are confined to what commercial opportunities are notionally within its “scope” (or “line”) of business.15 Warren J reviewed this in Wilkinson v West Coast Capital, where he observed that, whilst modern corporate objects clauses are typically drafted broadly to allow for potential ad hoc business diversification, there would, for example, be no real possibility of a conflict of interests if a director of a company that sells women's fashion purchased shares in a company that manufactures farm machinery.16 Theoretically, therefore, whilst a director is in office it would not be a fiduciary breach if the exploitation of a particular business opportunity was outwith those boundaries.17 Said more formally, if a director exploited a business opportunity that stood beyond the scope of her company's commercial operations, then the situation “cannot reasonably be regarded as likely to give rise to a conflict of interest” under section 175(4)(a). However, it ought to be highlighted that, in applying the rule, there is still an emphasis placed on the idea that a director must be loyal. Thus, courts “continue to approach the definition of a company's scope of business cautiously, taking a broad view of which opportunities the company can be expected to want to pursue, or at least consider”.18

A company's “interests” are viewed more narrowly in the post-resignation...

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