Can directors personally benefit from the positions they hold?

For centuries the law has placed obligations on directors to behave in a certain manner to protect, amongst others, the company, its employees, its creditors and the wider economy. Helpfully, the Companies Act 2006 (Act) codified many of these duties. There are now seven general duties under the Act, but there are still numerous pitfalls to be aware of.

The following two cases concerning directors’ duties highlight some of the issues faced by directors, the outcomes of each case contrasted significantly.

The cases of Towers v Premier Waste Management Limited and Anthony Kleanthous v Theodoros Paphitis & others show the impact of adhering to directors’ duties. These cases looked at the following directors duties:

• duty to promote the success of the Company (sections 172);
• duty to avoid conflict of interest (sections 175); and
• duty not to accept benefits from third parties (sections 176).

The facts of first case, Towers v Premier Waste Management Limited, were that Mr T, who was a director of Premier, borrowed equipment from one of the Company’s customers to help with work he was carrying out at one of his personal properties. Mr T was not charged for borrowing the equipment and clearly derived a personal benefit from the position he held as a director of company. Mr T had not disclosed his interest to the board.

It was held that Mr T had breached section 175 of the Act and put himself in a position of conflict. He had also breached section 176 of the Act as Mr T had accepted a benefit from a third party. Mr T was ordered to pay the rental costs for the relevant period.

The second case involved the use of information a director acquired during the course of negotiations to purchase a business. In the case of Anthony Kleanthous v Theodoros Paphitis & others, negotiations had taken place in respect of the proposed acquisition of the lingerie chain La Senza. Mr P was a director of the group which was looking to acquire La Senza, but it was decided not to proceed.

Following the group’s decision, Mr P and a number of his co-directors of the group decided to incorporate a new company and proceed with the purchase separately. This action was discussed at a number of group’s board meetings, which approved Mr P’s proposal. The new company then proceeded with the acquisition, and then later sold La Senza.

Mr K then sought to bring a derivative action on behalf of the group against Mr P as he had derived a benefit in contravention of section 176. The High Court refused to allow Mr K to bring a derivative claim. The reason being the transaction had been approved by the directors of the group and there was nothing to show that the decision to approve the transaction was done so on other than proper grounds.

How can you as a director protect yourself?

Ultimately all directors should consider whether their actions will breach their fiduciary duties owed to the company under which the directorship is held. It is therefore, imperative to keep accurate records of decisions made and approved by the board. It is important to be clear and transparent in areas where there is a shade of grey, avoiding situations where there is a direct or indirect conflict of interest, but if there is such a conflict of interest, then obtain directors consent before proceeding.

Directors will need to look at more practical points as well, as some companies’ articles of association, especially those based on the standard model articles, do not allow a director to vote at a meeting in which he has an interest. These will need to be amended to allow conflicted directors to vote and be part of qurom for meetings.

For more information on your duties as a director or if you would like us to review your company articles please contact us.

Holmes & Hills Solicitors has a team of corporate and commercial lawyers in Essex and Suffolk which advises business across the region.