Towers v Premier Waste Management Limited emphasises the strict nature of the duties that a director owes his company
Just a loan of a dumper truck…Mr Towers was a director of Premier Waste Management Limited (the Company) from 2001 to 2007. In 2003 Mr Towers borrowed a small excavator and a dumper from a Mr Ford, who was a customer of the Company. The loan of the plant was arranged for Mr Towers by an employee of the Company, a Mr Rafter. The plant remained at Mr Towers’s property until 2008, although it was only used by Mr Towers for 6 months in 2003. The tracks on the excavator broke when Mr Towers was using it and Mr Rafter put the expense of repairing the tracks through the Company; Mr Ford reimbursed the Company for the cost of this repair in 2005. Mr Towers did not disclose to the other directors of the Company that he had borrowed the plant from Mr Ford, until the Company became aware of the loan of the plant in 2008.
Between friends…So far as Mr Towers was concerned, the loan was a private, informal and ad hoc arrangement between friends; he did not consider the loan to be potentially unlawful or notifiable to the Company. The High Court judge “commented that his attitude throughout was that this was an entirely personal matter having nothing to do with the Company and that Mr Ford was merely doing him a favour”.
Was a breach of director’s duties…In 2010 the High Court, in an action brought by the Company, found Mr Towers liable to account to the Company for breach of the duty of loyalty and breach of the “no profit” and “no conflict” duties. Mr Towers was ordered to pay the Company the sum of £7,997. Mr Towers appealed to the Court of Appeal
The Court of Appeal judgment: Breach of duty
Mr Towers’s appeal was dismissed by the Court of Appeal (the CA) in July 2011. The CA agreed with the judge in the High Court that Mr Towers had breached his duty:
- Of undivided loyalty to the Company: By placing himself in a position where he was (theoretically) indebted to a customer of the Company. The duty was also breached by Mr Towers allowing the Company to bear the financing cost of the repair to the tracks.
- To avoid a conflict between his personal interests and those of the Company: By receiving an undisclosed benefit from the a customer of the Company, there was “a real sensible possibility of conflict…the dealing between [Mr Towers and Mr Ford] was a case of an actual conflict of interest and duty”.
- Not to make a secret profit: By accepting and not disclosing the loan of the equipment (so sparing himself the expense of hiring the plant).
The CA added that “the no conflict duty extends to preventing Mr Towers from disloyally depriving the Company of the ability to consider whether or not it objected to the diversion of an opportunity offered by one its customers away from itself to the director personally”.
The CA emphasised, as had the High Court, that these duties are strict duties. It is irrelevant that Mr Towers had acted in good faith, or that the Company could not, or would not, take advantage of the opportunity. It was equally irrelevant that the sums involved were arguably de minimis to the Company, and that Mr Towers had not direct contact with Mr Ford, or that Mr Ford had received no favours from Mr Towers arising out of the loan of the plant.
Ramming home the point, the CA quoted with approval Lord Cranworth in Aberdeen Railway Co v. Blaikie (1854) 1 Macq 461 at 471:
“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.”
Contrast this case with the actions of the director in Anthony Kleanthous v Theodoros Paphitis & others
The failure in this case by Mr Towers to disclose his potential conflict of interest can be contrasted with the recent judgment in Anthony Kleanthous v Theodoros Paphitis & others. In that case, the potential conflict faced by a director when presented with an opportunity to acquire a business was addressed by the director disclosing the situation to the board, as required by the Companies Acts and by the company’s articles of association. The Paphitis case is summarised well (and contrasted with Towers) in this note by Wragges, which also compares the law under the 1985 and 2006 Companies Acts.
The Court of Appeal judgment: Should be Mr Towers have been given relief under section 1157?
The CA agreed with the High Court judge that Mr Towers should not be excused under section 1157 of the Companies Act 2006 – which permits a court to excuse a director or officer for liability for negligence, default, breach of duty or breach of duty if it appears to the court that he has acted honestly and reasonably – as Mr Tower acted unreasonably in not disclosing the loan of the plant. The CA’s view was that “Mr Towers owed fiduciary duties to the Company and acted in breach of them where there was no mitigating factor and no evidence of injustice or hardship which might be relevant to granting relief in his favour”.
The Court of Appeal judgment: The general duties in the Companies Act 2006 and their relationship to the pre-2006 law
The law on directors’ duties that was considered in this case was the law as it stood in 2003 – that is, before the codification of directors’ duties in Part 10 of the Companies Act 2006. Lord Justice Mummery, giving the CA’s judgment, took the practical position that:
“…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”.
So the CA in this case finds little difference between the pre-2006 (equitable principles and duties) and post-2006 (codified) law on directors’ duties.
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