In Burnell v Trans-Tag Ltd and Robert Aird [2021] EWHC 1457, the High Court considered the scope of a director's duty to avoid conflicts of interest under s. 175 Companies Act 2006 ("CA 2006") and whether it should apply to former directors by virtue of s 170(2) CA 2006.
The High Court held that a former director of a company breached his duty to avoid a conflict of interest by using information that he had acquired while he was a director, to the detriment of the company.
Directors or de facto directors usually have access to vast amounts of confidential information including trade secrets. This case provides helpful guidance on what happens when a director or de facto director resigns and sets up a similar business in competition with the first company.
Facts
In a nutshell, this case concerns a dispute surrounding the collapse of Trans-Tag Limited (TTL) and the actions of Mr Burnell (who believed he was a director) when he left and joined a competitor company, invested in shares and later became a company director for the competitor.
Mr Burnell issued proceedings to recover a loan he had made to TTL and TTL counterclaimed alleging Mr Burnell had breached his duty to promote the success of the company and his duty to avoid a conflict of interest.
The Law
The Court found that Mr Burnell was not a validly appointed director either under TTL’s Articles or by a decision of the members. He was, however, treated by others as a director and sought to exercise his powers as a purported director, and on this basis the Court held he was a ‘de facto’ director.
A de facto director is subject to the same duties as an appointed director. Mr Burnell was, therefore, bound by the fiduciary duties contained in the Companies Act 2006 (CA 2006).
Under s175 CA 2006, directors must ensure they avoid situations where any interest that they have conflicts with the interests of the business, in particular as regards the exploitation of property, opportunity or information.
The general rule is that a director ceases to be subject to any duties when they cease to be a director of the company. Section 170(2) CA 2006 contains an exception to this general rule and provides that a former director continues to be subject to the 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. The wording of section 170(2)(a), and whether it constituted any change to the duty to avoid conflicts as it had been understood in the pre- codification case law, was subject to careful consideration in Burnell.
The decision
Previously, the actions of a director "before or at the time of resignation" had been key to determining breach of duty. However, following Burnell, it is now clear that after the person ceases to be a director, they will remain subject to the duty to avoid a conflict which relates to the "exploitation of property, information or opportunity".
On the facts, the Court concluded that Mr Burnell had acted in breach of his continuing duty to avoid a conflict of interest to TTL.
What does this mean for directors?
The decision clarifies that the duty to avoid conflicts does not end when a director resigns from his directorship.
The Court will take a merits-based approach to assessing if a breach of duty has occurred. It will look at the director’s conduct pre and post resignation to decide whether a director used information obtained from a previous role to their advantage post resignation. If a director spots a new opportunity, resigns and uses that information to their advantage at a subsequent company in competition with the first company, then it is likely that the Court would determine this is a breach of duty.
With the extension of the scope of duty, directors starting a new company will need to err on the side of caution as to where information and opportunities have arisen.
