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15 Nov 2021

Directors' duties to avoid conflicts of interest – how long do they last? Burnell v Trans-Tag Ltd

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Whilst it is well established that a director cannot simply resign in order to exploit "property, information or opportunity" of which he or she became aware while holding office, the decision in Alan Burnell v Trans-Tag Limited and Robert Aird [2021] EWHC 1457 (Ch) establishes that a director may otherwise be in breach of their duty to avoid a conflict of interest under s175 of the Companies Act 2006 ("CA 2006") following their departure from office pursuant to s170(2) of the CA 2006, even where the conduct entirely relates to the period after the director's departure from office. This represents a significant development from the position pre-CA 2006.

Background

Trans-Tag Limited ("TTL") is a company involved in the design, manufacture and sale of a range of devices ("Tags") which allowed for the remote tracking, monitoring and analysis of goods, equipment and people.

Throughout the relevant period, the majority shareholder in TTL was Monagram Capital Ltd, which was beneficially owned by Mr Aird, the Second Defendant.

Mr Burnell, the Claimant, was an investor in TTL and later became its CEO.  The Second Defendant alleged that Mr Burnell was also a director of TTL, although he was never formally appointed as such (this issue fell to be determined at trial).

In early 2017, there was an acrimonious fall out between the parties involved in TTL and Trans-Tag Systems Ou (“TTS”), an Estonian company which designed and developed the hardware and software for the Tags and licensed certain intellectual property rights to TTL under a licence agreement (the "Licence Agreement").

Mr Burnell resigned from his role as CEO of TTL in March 2017. 

Thereafter, in April 2017, TTS asserted that TTL had breached the Licence Agreement. TTL then commenced proceedings against TTS for a declaration that it was not entitled to terminate the Licence Agreement, an injunction and/or damages. 

In June 2017, Mr Burnell acquired shares in, and became a director of, TTS.

The proceedings

In May 2018, Mr Burnell issued proceedings for: (1) as against TTL, repayment of a loan of £250,000 that he made in two tranches in July 2016 and February 2017 (the "Loan"); and (2) as against Mr Aird, breach of contract in relation to shares in TTL that Mr Burnell alleged Mr Aird should have procured were issued or transferred to him in the context of the Loan.

TTL counterclaimed against Mr Burnell alleging that he was in breach of his duties as a director of TTL and/or in breach of his equitable duty of confidence to TTL, including by way of his conduct following his involvement in TTS. In particular, it was alleged that Mr Burnell had exploited opportunities and confidential information rightfully belonging to TTL in: (1) acquiring the shares in TTS; and (2) causing TTS to seek to terminate the License Agreement; and during the course of the proceedings commenced by TTL against TTS.

The Judge's findings

The Claim

Ashley Greenbank, sitting as a Deputy Judge of the High Court, found that: (i) Mr Burnell was entitled to repayment of the loan; and (ii) Mr Aird was in breach of contract and so Mr Burnell was, in principle, entitled to recover damages against him to be assessed in light of his recovery from TTL. 

The Counterclaim

The Judge summarised the Counterclaim as follows:

"(a) Mr Burnell was a director of TTL, whether de jure or de facto and as such owed duties to TTL during and after the termination of his directorship.

(b) Mr Burnell engaged in various acts (including the acquisition of TTS after he resigned as director) aimed at destabilising TTL so that Mr Burnell could obtain control of the valuable right to develop, manufacture and sell the Tags and Restore which were in breach of those duties.

(c) The acquisition of TTS also involved a breach of his equitable duty of confidence.

(d) Mr Burnell's actions damaged TTL's business and resulted in a loss to the value of its assets of up to £9,895,000.

(e) TTL claims damages and or equitable compensation, interest, an account of profits and/or a declaration of trust."

In determining the Counterclaim, the Judge considered the following questions in turn.

Was Mr Burnell a director of TTL?

TTL alleged that Mr Burnell was appointed as a director of TTL either on 1 July 2016 or at some point between 28 February 2017 and 7 March 2017.

The Judge found that Mr Burnell was not validly appointed as a director at any time, whether under the terms of the Articles of Association of TTL or by way of an informal decision of the members. However, Mr Burnell was, and acted as, a de facto director of TTL by 28 February 2017 at the latest holding that he: "acted as a director, was treated by others as a director and sought to exercise his powers as a purported director".

If Mr Burnell was a de facto director, when did he cease to be a director?

The Judge considered that: (i) a meeting on 29 March 2017 was the last date on which there was any evidence of Mr Burnell purporting to act in his capacity as a director of TTL and being treated by others as acting in that capacity; and (ii) the other directors were clearly treating him as a former director in April 2017.

The scope of Mr Burnell's duties as a director

As a de facto director, Mr Burnell owed the same fiduciary duties to TTL as if he had been validly appointed as a director1. Those fiduciary duties are set out in Chapter 2 Part 10 Companies Act 2006 ("CA 2006").

In particular, Mr Burnell was subject to a duty to avoid conflicts of interest with TTL in accordance with s175 CA 20062 and, as regards the period after he ceased to be a director, s170(2)(a) CA 20063.

Does the duty under s175 CA 2006 continue after termination of a directorship?

The Judge began considering how to approach this issue by reference to the case law pre-CA 20064. Particular emphasis was placed on the judgments of Lord Justice Rix in Foster Bryant Surveying Limited v Bryant [2007] EWCA Civ 200 and Mrs Justice Cockerill in Recovery Partners GP Limited v Rukhadze [2018] EWHC 2918 (Comm) which reflected the Court's attempts to "balance the need to prevent the emasculation of fiduciary duties, which might occur if a fiduciary was free to exploit opportunities which arose during the course of the fiduciary relationship by the simple expedient of resigning, with public policy issues in relation to the restraint of trade"5.

The parties broadly agreed that "the extension of the duty to avoid conflicts of interest in s175 CA 2006 by s170(2)(a) is intended to 'extract the essence' of the principles which underlie the case law governing the circumstances in which a former director may be found to be in breach of duty by reference to post-resignation acts." Further, the parties agreed regarding the interpretation of the meaning of "any property, information or opportunity" in s170(2)(a) CA 2006 (and accordingly when applying s175 in accordance with s170(2)(a))6

However, the parties disagreed regarding whether s170(2)(a) CA 2006 had the effect that the duty under s175 CA 2006 continues after the termination of a directorship and, if so, whether a breach of duty could result only from acts which occurred thereafter

Whilst the position under the common law indicated that conduct of a director after he or she has left office could not of itself amount to a breach of duty, s170(2)(a) CA 2006 expressly provides that the duty in s175 CA 2006 to avoid conflicts of interest continues after the director ceases to hold office.

The Judge noted that, "notwithstanding the instruction in s170(4) and the ability to apply s175 with "necessary adaptations", in my view, it is not permissible as a matter of construction to ignore the plain words of the statute" and it must therefore be possible for the relevant breach to be founded solely on acts which take place after a director has resigned.

Did Mr Burnell act in breach of his fiduciary duties?

The Judge found that Mr Burnell had acted in breach of his continuing duty to avoid conflicts of interest under s175 as extended by s170(2)(a) CA 2006, but only after he had ceased to be a de-facto director of TTL.

Whilst the Judge did not consider that the opportunity had arisen for TTL to acquire TTS' shares, and therefore there was no breach in this regard, the Judge held that by taking into account: (i) his knowledge of the circumstances in which the Licence Agreement might be terminated and legal advice received by TTL in this regard; (ii) some of the information surrounding the target market for Tags; and (iii) some of TTL's financial modelling, in his acquisition of shares in TTS and subsequent steps to terminate the Licence Agreement, Mr Burnell had breached the duty under s175 20067 and misused TTL's confidential information.

Loss

TTL's loss was limited to the loss of its rights under the Licence Agreement, which the Judge valued at £200,000.  That was set off against: (i) Mr Burnell's claim against TTL in respect of the Loan the amount of £250,000; and (ii) Mr Burnell's claim against Mr Aird for breach of contract for any amount which Mr Burnell is unable to recover from TTL up to the amount of £67,500.

Comment

The decision in this case has provided some welcome clarity on the application of directors' duties under the CA 2006, and the extent to which the position is different from the position prior to the CA 2006 coming into force. In particular, the Court has made clear that the duty to avoid conflicts of interest post-termination of a directorship as codified under the CA 2006 is more extensive than was formerly the case.

This duty does not prohibit directors from utilising the "general fund of knowledge and skill" they obtained in the course of a prior directorship in a future enterprise. However, it does mean that if they 'exploit' specific information deemed to be "akin to property of the company" obtained during a prior directorship in a future enterprise, there is a risk that they may be in breach of their directors' duties in respect of their prior appointment, notwithstanding that that appointment has terminated and the relevant conduct all takes place thereafter.

Accordingly, there is no longer any need for Claimants pursuing claims for breach of this duty to identify specific conduct which occurred whilst the delinquent former director was in office; all that needs to be established is that their subsequent conduct was predicated by knowledge which they acquired whilst they were an officeholder.

 
 

1 Per McKillen v Misland (Cyprus) Investments Limited [2012] EWHC 521 per David Richards J at [19].

2 Which provides:

"175 Duty to avoid conflicts of interest

(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).

3 Which provides:

"170 Scope and nature of general duties…

(2) A person who ceases to be a director continues to be subject—

(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director... To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.

(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.

(4) 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."

4 Which is relevant to the interpretation of these statutory provisions and determining their scope and application per s170(4) CA 2006.

5 Per Rix LJ, Foster Bryant at [76].

6 The Judge held: "it was common ground between the parties that the phrase "any property, information or opportunity" in s170(2)(a) (and accordingly when applying s175 in accordance with s170(2)(a)) should be given a narrower meaning consistent with the existing case law and, in particular, the case law concerning the need for a "maturing business opportunity" (such as Canaero and CMS). To my mind, that is the correct approach; it is consistent with the interpretation of the scope of the duty in s175 as extended by s170(2)(a) in accordance with the principles of s170(4) and permitted by the application of s175 in those circumstances with "necessary adaptations" in accordance with s170(2)."

7 The Judge held: "[b]y acquiring shares in TTS and then taking action to terminate the Licence Agreement whether pursuant to the Chancery Division Proceedings or otherwise, Mr Burnell put himself in a position in which his personal interests conflicted with the interests of TTL as regards the exploitation of property of TTL – its rights under the Licence Agreement – of which he was aware when he was a director. In my view, Mr Burnell acted in breach of his continuing duty under s175 CA 2006 in doing so."

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