Once a director, always a director?

It is commonly understood that there is an absolute prohibition for a director to profit from property, information or opportunity through their role as a director, even if that director resigns his post first. It seems now, however, that the reach of the duties under the Companies Act 2006 extends so that a claim for breach may be founded on acts taking place after a person has ceased to hold office.

The Companies Act and conflicts of interest

The position under common law (as expounded in cases such as Foster Bryant Ltd v Bryant & Anor (2007)) has long been accepted to be that conduct after a director has resigned their office cannot of itself amount to a breach of duty. However, section 170(2)(a) of the Companies Act provides that "a person who ceases to be a director continues to be subject to the duty in section 175 (duty to avoid conflicts of interest) as regards to the exploitation of any property, information or opportunity of which he became aware at a time when he was a director".

Although there are some exceptions that relieve a director from a conflict of interest (such as if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or if the matter has been authorised by the other directors) in essence, section 170(2)(a) extends the directors' duty to avoid conflicts of interest to the period after they cease to hold office, and consequently imposes a duty of a continuing nature.

The need to prevent the "emasculation of fiduciary duties" which could occur if a director escaped liability by resigning has been broadly accepted. But what if that director came across the chance to exploit company property, information or opportunity only after he or she had resigned?

Breach of duty after termination of directorship

In Burnell v Trans-Tag Ltd (2021), the High Court dealt with just that question. The dispute concerned the collapse of the business of the First Defendant, Trans-Tag Limited (TTL). The claimant, Mr Alan Burnell, became involved with TTL in 2016 and, in due course, became an investor in and the Chief Executive Officer of TTL. He resigned from that role in March 2017. In June 2017, Mr Burnell had bought shares in and become a director of TTS, an Estonian company which was party to a licence agreement with TTL.

The majority shareholder of TTL was a company beneficially owned by Mr Aird, the Second Defendant.  TTS and TTL had fallen out in early 2017: TTS asserted a breach of the licence agreement against TTL in April 2017 and commenced proceedings against it.

Mr Burnell submitted claims against TTL and against Mr Aird, alleging that he had loaned money to TTL as part of an arrangement by which Mr Burnell was to receive shares in TTL which never materialised. In response to the claims, TTL counterclaimed that Mr Burnell sought to gain control of TTL’s valuable rights for his own benefit in breach of his duties as a de facto director of TTL and/or in breach of his equitable duty of confidence to TTL.

The court accepted that Mr Burnell had been acting as a de facto director of TTL between February 2017 and 29 March 2017, but 29 March 2017 was the last date on which there was evidence of Mr Burnell purporting to act in his capacity as director and being treated as acting in that capacity.

The question was whether Mr Burnell had remained subject to the duty under section 175 even after the termination of his directorship as a result of s170(2) of the Act. The court answered in the affirmative, stating that "in my view it is not permissible as a matter of construction to ignore the plain words of the statute". Mr Burnell had obtained specific information during his directorship (including, the circumstances in which the licence agreement might be terminated and legal advice received by TTL on that point) and had misused that confidential information after his director role ceased. That was a breach of section 175 of the Act.

Osborne Clarke comment

The diligent director would be well advised to maintain a clear separation between enterprises if he or she moves on to pastures new. Their former fellow directors need no longer rely upon conduct which occurred pre-termination to found a claim for breach of the section 175 duty to avoid conflicts.