Directors’ duties to avoid conflicts of interest continue in respect of acts carried out post-termination

A director of a company owes various statutory and equitable duties to that company by virtue of their position. The statutory duties, known as directors’ general duties, are set out in sections 170 to 177 of the Companies Act 2006 (CA 2006) and comprise the following duties:

• To act within powers
• To promote the success of the company
• To exercise independent judgement
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare an interest in proposed transactions or arrangements.

Equitable duties include, for example, a duty of confidentiality to the company for so long as the relevant information remains confidential.

When do your duties as director cease?

Generally, directors’ duties to a company will commence on them becoming a director and terminate on them ceasing to hold the office of director with the company. However, the CA 2006 (section 170(2)) specifically provides that certain of the statutory duties will continue after a director’s termination, namely:

• duty to avoid conflicts of interest – as regards the exploitation of any property, information or opportunity of which a director became aware at a time when they were a director; and
• duty not to accept benefits from third parties – as regards things done or omitted by the director before they ceased to be a director.

The recent case of Burnell v Trans-Tag Limited [2021] EWHC 1457 (Ch) considered the post-termination duty to avoid conflicts of interest finding that a former director was in breach of such duty on the basis solely of his acts post-termination.

Burnell v Trans-Tag Limited

Facts

The case concerned circumstances surrounding the collapse of Trans-Tag Limited (TTL). Mr Burnell (Mr B), the claimant and CEO of TTL, sought repayment of a £250,000 loan made by him to TTL. TTL counterclaimed that Mr B, by seeking to gain control of TTL’s business for his own benefit, was in breach of his duties as a director to avoid a conflict of interest and/or in breach of his equitable duty of confidence to TTL.

TTL’s business involved the design, manufacture and sale of devices known as Tags which allowed for remote tracking and monitoring of goods, equipment and people. The company was also involved in the development of the Restore product which allowed for vehicles to be controlled remotely. All the intellectual property (IP) in the Tags and Restore devices and products was owned by a separate company, TTS. Under a licence agreement (Licence Agreement), TTS granted an exclusive licence to TTL to manufacture, use and sell the licensed products worldwide and an option to TTL to purchase the IP relating to the products on certain terms.

After Mr B ceased to be a director of TTL, the opportunity arose to acquire shares in TTS from existing shareholders. Mr B availed himself of the opportunity to acquire the shares and following the acquisition, he took immediate steps for TTS to: (a) defend proceedings by TTL against it relating to the termination of the Licence Agreement with TTL; and (b) terminate the Licence Agreement.

Findings

The High Court found in favour of Mr B in relation to the repayment of the loan but also allowed the counterclaim by TTL finding that Mr B had breached his statutory duty to avoid a conflict of interest post-termination.

This case marks a departure from existing common law whereby a claim for director’s breach of duty had to be based on the director’s actions before or at the time of their resignation. The Court confirmed the general principle that a director ceases to be subject to fiduciary duties associated with their position as director when the relationship ceases. However, section 170(2)(a) extends the application of the duty to avoid conflicts in certain circumstances (i.e. those involving the exploitation of any property, information or opportunity of which the director was aware when they were a director). As the extended statutory duty is a continuing duty the Court found that it must be possible for a breach of such duty to be based on acts which take place after a director’s resignation.

The Court held that the termination of the Licence Agreement by TTS after Mr B acquired shares in TTS must have involved the use of information regarding the terms of the Licence Agreement and concerns around the enforceability of the Licence Agreement of which Mr B became aware when he was a director of TTL. The purpose of the acquisition of shares and the termination of the Licence Agreement was to secure to TTS the right to exploit the IP of the licensed products and deprive TTL of its rights under the Licence Agreement. The Court held that Mr B had knowingly put himself in a position of conflict with TTL by acquiring the shares in TTS with the aim of acquiring the rights to the licensed products. Furthermore, the Court found that Mr B had breached his duty of confidence to TTL in relation to the information relating to the Licence Agreement.

Conclusion

It should be noted that the extended statutory duty of a director to avoid a conflict of interest post-termination in section 170(2)(a) is limited to the “exploitation of any property, information or opportunity of which he became aware when he was a director”. It is not sufficient to point to any information/opportunity as the basis of a claim against a director. It “must have some quality that permits it to be treated in law in a manner akin to property of the company” which the courts have previously characterised as “a maturing business opportunity”. In the case of Burnell v Trans-Tag, the Licence Agreement was such property/information whereas the opportunity to acquire the shares in TTS was not, as that opportunity arose after Mr B ceased to be a director of TTL.

Nothing prevents a former director from using the general skill and knowledge they acquired as a director but given this recent case, former directors will need to be mindful of their continuing duties and their post-termination actions. A breach of these duties can give rise to significant personal liability, including a damages claim and also liability to account for any profits made by such former director.

Please do get in touch with your regular Forsters’ contact if you would like to discuss further.

Disclaimer

This note reflects our opinion and views as of 1 July 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.