Towers v Premier Waste Management Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Etherton,Lord Justice Wilson |
| Judgment Date | 28 July 2011 |
| Neutral Citation | [2011] EWCA Civ 923 |
| Docket Number | Case No: A3/2010/2574 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 July 2011 |
[2011] EWCA Civ 923
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
NEWCASTLE DISTRICT REGISTRY
HHJ ROGER KAYE QC (sitting as a Judge of the High Court)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Wilson
and
Lord Justice Etherton
Case No: A3/2010/2574
Case No: 9NE30012
MR BEN QUINEY and MR RICHARD SAGE (instructed by Sintons LLP) for the Appellant MR ALASTAIR WALTON (instructed by Dickinson Dees LLP) for the Respondent
Hearing dates: 18 th & 19 th May 2011
Legal background
A director of a company is appointed to direct its affairs. In doing so it is his duty to use his position in the company to promote its success and to protect its interests. In accordance with equitable principles the special relationship with the company generated fiduciary duties on the part of a director. His fiduciary commitments to the company took the form of a duty of loyalty and a duty to avoid a conflict between his personal interests and his duty to the company.
Those duties, which were simple, strict and salutary, were the basis of the respondent company's claim against the appellant director that he had breached his duties by accepting personal benefits from one of the company's customers. He did not disclose the benefits to his fellow directors or seek or obtain their approval on behalf of the company.
I have described the equitable principles and duties in the past tense because, under codification measures in Chapter 2 of the Companies Act 2006, a director's general duties to the company are now statutory. The codified duties are expressly derived from common law rules and equitable principles as they apply to directors. The relevant events in this litigation occurred in 2003, well before those provisions of the 2006 Act were brought into force. Although the pre-2006 Act common law rules and equitable principles continue to apply to a pre-2006 Act case, it is unrealistic to ignore the terms in which the general statutory duties have been framed for post-2006 Act cases. They extract and express the essence of the rules and principles which they have replaced.
Section 170 (3) provides that those general duties—
"…have effect in place of those rules and principles as regards the duties owed to a company by a director."
That did not consign the replaced rules and principles to legal history because s. 170 (4) provides that—
"The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties."
Three of the general statutory duties would be potentially applicable to the facts of a case like this occurring after the relevant provisions of the 2006 Act had come into effect:—
Duty to promote the success of the company
"172. (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters).." to [various matters are specified].
Duty to avoid conflicts of interest
175. (1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(4) This duty is not infringed –
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) if the matter has been authorised by the directors.
Duty not to accept benefits from third parties
176. A director of a company must not accept a benefit from a third party conferred by reason of—
(a) being a director; or
(b) his doing (or not doing) anything as a director."
What are the equitable principles and duties that apply to the facts of this case and are available for the interpretation and application of the general statutory duties?
Lord Cranworth LC in Aberdeen Railway Co v. Blaikie 1 Macq 461 at 471 explained how potential conflicts of interest are to be avoided by those who are committed as directors to be loyal to the company:—
"And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interest of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into."
In Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 at 636 Upjohn LJ said that the principle has nothing to do with establishing that the director is guilty of fraud or corruption. In the case of a company director the principle recognises the primacy of the interests of the company which he is trusted not to betray. Thus a company is entitled, in the words of Upjohn LJ, "to the undivided loyalty of its directors." We have been reminded by counsel for the appellant that Upjohn LJ referred to the rule as being a broad and flexible one to be fashioned according to changing circumstances and to be applied with common sense and realistically: see pp 636 and 638. That approach to the formulation and the application of the principle does not, however, undermine the strict nature of the liability enshrined in the principle where it applies. The rationale and the justice of the principle lie in its strict regard for the protection for those interests potentially at risk from a director who does not give his undivided loyalty to the company.
Thus a director's liability for disloyalty in office does not depend on proof of fault or proof that a conflict of interest has in fact caused the company loss: Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200. A director's potential conflict of interest may arise, for example, in connection with a business opportunity. If a director obtains the opportunity for himself, he will be liable to the company for breach of duty regardless of the fact that he acted in good faith or that the company could not, or would not, take advantage of the opportunity.
As explained by Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver [1967] AC 134 at 144 the liability of a fiduciary to account for the profit made by use of his position—
"…in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged of benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account."
Equity's response of strict liability to account for breach of a fiduciary duty is similar whether the liability is triggered by an event which breaches the loyalty duty, or the "no conflict principle", or the "no profit principle."
Proceedings in outline
This case arose from a director's acquisition of equipment for his personal use by way of a free, undisclosed and unapproved loan from one of the company's customers. In its proceedings against the director the company joined the customer as a co-defendant. The claim against the director was that he was under a liability to account to the company for breach of the loyalty and the "no profit" and "no conflict" duties.
Premier Waste Management Limited (the Company) is a waste disposal and treatment company. It brought this action against Mr Philip Towers, a director of the Company from June 2001 until December 2007 when he left on what may fairly be described as bad terms. It came to light in 2008 that Mr Towers had in 2003 accepted from Mr Colin Ford, a customer of the Company, a personal loan of plant and equipment without charge. Mr Towers did not tell the board of the Company about the transaction. He returned the plant and equipment in 2008 after Mr Ford had invoiced the Company for the cost of its hire.
The Company made a claim against Mr Ford for a declaration that it was not liable to pay hire charges to him and a claim against Mr Towers for an account of the profit received by him. Mr Ford counterclaimed for the cost of the hire of the equipment. Neither that claim nor the cross claim feature in the appeal, as the Company and Mr Ford have settled their differences. Viewed commercially, an aspect of the matter pressed on the court in various submissions on behalf of Mr Towers, it is surprising that Mr Towers and the Company have not also found a way of settling their differences given the modest amounts at stake and the substantial costs incurred.
The appeal brought by Mr Towers is from an order made by HHJ Roger Kaye QC on 15 October 2010 to pay to the Company within 28 days the sum of £5,200 together with interest making a total of £7,997.31. That is considerably less than the...
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