Directors’ Duties TRINITY CHAMBERS Legal 500 ‘ An extremely good chambers with fantastic clerking’ ‘Clients praise Trinity Chambers’ ‘excellence’’

AIA Breakfast Meeting 2 May 2018 Directors’ Duties RICHARD STUBBS Trinity Chambers 2

Directors Companies Act 2006 (1) Codification of common law on directors’ fiduciary duties - S175 – duty of avoid conflicts of interest - S176 – duty not to accept benefits from third parties Also S172 – duty to promote success of company All three (plus others in ss171-177) “designated” fiduciary by S178(2) 3

Companies Act 2006 (2) Duties to be interpreted in accordance with common law rules & equitable principles - S170(4) (NB – West Mercia Safetyware – best interests focus changes to creditors when approaching insolvency) Statutory “no conflict” & “no profit” rules survive end of directorship re matters arising during directorship - S170(2) Defence of disclosure & consent put on statutory footing - S175(4) no infringement if authorised by directors - S175(5) sets out manner of authorisation - If private company, permitted unless constitutional bar - If public company, prohibited unless constitution permit S1157 – court has power to grant relief from liability 4

The Nature of Fiduciary Duties Founded on trust/loyalty in relationship Often employment relationship – primarily Directors but also some generally senior employees Also trustees, solicitors, partners, agents, promoters, guardians, receivers etc (“classic cases”) Require “fiduciary” to act solely in interests of their “principal” Not duty of fidelity, which is owed by all employees – to act loyally in interests of employer but not undivided loyalty Implied contractual term for fidelity and damages Equitable remedies for fiduciary duties – acct of profits/prop remedies

De Facto and Shadow Directors The distinction between the two is not as clear as it should be Guidance from cases such as Holland v HMRC [2010] 1 WLR 2793 For a de facto director look for: A person assuming to act as a director as opposed to operating in the background A person being held out as a director as opposed to having someone act as director without any real authority A person carrying out functions that can only properly be discharged by a director 6

Duties of De Facto and Shadow Directors The law is settled that a de facto director does owe fiduciary duties – see Ultraframe (UK) Ltd v Fielding [2003] EWCA Civ 1805 at para 39 The position as regards shadow directors has been less certain: Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) Lewison J suggested at 1284 and 1289 that shadow directors were not generally subject to fiduciary duties In Vivendi SA v Richards [2013] EWHC 3006 (Ch) Newey J (at paras 133 – 143) cited the decision of the High Court in Ultraframe and set out the criticism that it had received and held that a shadow director would often owe fiduciary duties (approved by Munby J in R v R [2014] 2 FLR 699) 7

s170(5) CA 2006 then amended as from 26 May 2015 In Sukhoruchkin v Van Bekestein [2014] EWCA Civ 399 the CA noted the differing positions and said that whether fiduciary duties were owed or not would be fact dependent s170(5) CA 2006 then amended as from 26 May 2015 From apply to shadow director to where and to the extent that the common law rules or equitable principles so apply To duties apply to shadow director where and to the extent that they are capable of applying Clear change in emphasis reflecting CA Probable effect = apply unless good reason not to but will be fact dependent 8

Duties of Disclosure - Directors Extension of traditional view Pre-2006, Item Software [2005] 2 BCLC 91, CA held that a director owed a duty at common law to disclose his own misconduct or material information to company - Not separate duty - founded upon director’s duty to act in good faith in best interests of company - Controversial (criticised in Australia – P&V Industries (2006)14 VR 1) BUT binding S172 Companies Act 2006 puts “best interests” duty on statutory footing Now generally accepted that duty to disclose exists for directors as part of best interests duty. 9

Remedial Advantages of Fiduciary Duties Remedies available are either proprietory or personal Proprietory - Constructive trust – traceable property & proceeds - (Equitable charge or lien e.g. where improvement of property) - (Equitable right of subrogation e.g. where mortgage discharged) Personal - Account of profits - Restoration of property - Equitable compensation NB – where solvency in issue a proprietory claim entitles C to priority over Ds general creditors. A personal claim will be unsecured 10

Misfeasance Only available where Company in liquidation (not administration). Otherwise a breach of duty claim would be the proper forum. Section 212 Insolvency Act 1986 Expressly includes breach of fiduciary duty (s212(1)) Available not just to liquidator but also to creditor or contributory (s212(3)) but the order will only be in favour of the Company, not the creditor/contributory Remedies include making delinquent Director: repay/restore or account for any money with interest restore property provide such compensation as the Court thinks just 11

Interim Remedies Springboard Injunctions To prevent the springboard that someone has gained by their unlawful conduct Available for breach of fiduciary duty Midas IT Services Ltd v Opus Portfolio Ltd, 21st December 1999 QBE v Dymocke Also available for breach of duty of fidelity Roger Bullivant v Ellis [1987] FSR 172 12

THANK YOU Richard Stubbs r.stubbs@trinitychambers.co.uk