Queen's Bench Considers Companies Act 2006 s 175 - Duty to Avoid a Conflict of Interest

The Queen's Bench Division recently passed judgment in Cambridge v Makin [2011] EWHC 12 (QB) available here. The case made reference to but did not decide upon a director's conflict of interest including a conflict of duties.

An overview of the complaint by the company (NRPSI) in relation to s175 was:

"Two NRPSI Board Directors, ... and Janet Cambridge had interests in CINTRA Ltd, an agency which obtained our data ... Janet Cambridge worked as a trainer for CINTRA at the time our data were sold. There is evidence in the Coventry Partnership Project, the Lincolnshire Business Case Study, the East Midlands Delivery Plan and CINTRA's Training Manual from 2005 that CINTRA used its connections with the CIOL [Chartered Institute of Linguistics] and NRPSI, through the two directors, to obtain a contract with five East Midlands constabularies and Norfolk."

A Ms Glegg owed duties as an executive to NRPSI and non-executive of CINTRA and the court observed there was little comparable facts to previous case law. The judge - citing Company Directors Law and Liability (Sinclair, Vogel and Snowden Sweet & Maxwell, 2005 ed, updated April 2008) at para 3.86 - stated:

"Although it is clear that an executive director (ie a director who carries out a management function on behalf of a company, often employed pursuant to a service contract) is prohibited from competing with a company of which he is a director..., it does not appear that non-executive directors are prohibited from competing with the company or from taking directorships of competing companies. This stems from the difference in function between an executive and non-executive director. A non-executive director's role is usually limited to a supervisory one, effectively a policing function. By contrast executive directors actively manage its business".

Since Ms Glegg was not a party to the action and the court stated it was not equipped to make rulings on conflicts of interest. The court mentioned though that Ms Glegg's relationship with CINTRA was well known by NRSPI. The law on conflicts of interest under s175 is well settled though, at least on the following point. Nothing short of full authorisation will avail Ms Glegg of this type of conflict. The claimant's knowledge of the conflict under s175 is not an adequate defence for a defendant. The case would be different under a s177 conflict where the director has an interest in a proposed transaction or arrangement with the company. In such a scenario, disclosure or knowledge of the conflict will allow the company to proceed with all the knowledge and facts to make an informed decision.

It is unfortunate that no ruling was able to be given in relation to Ms Glegg. The difference in conflict of interests between executive and non-executive directorships (as opposed to executive-executive directorships) highlighted by the Tugendhat J seems to suggest that a conflict may not arise where the companies are competing, at least not automatically. Tugendhat J stated that this case "illustrates how non-executive directors, who are chosen because of their experience, may find themselves in a position where they are at least open to criticism (whether well founded or not) for acting in pursuit of an interest when that may be said to in conflict with a duty".

The acclaimed conflict of interest against Cambridge however was unfounded since it was evidenced that Cambridge had no personal interest in CINTRA at the time leading up to and awarding of the licence to them. The court did provide some opinion on whether a conflict may arise in a situation where a person is a director of one company and employed by another. Citing again Company Directors Law and Liability (Sinclair, Vogel and Snowden Sweet & Maxwell, 2005 ed, updated April 2008) at para 3.54:

"It is not clear what is required in order for a director to be considered as having an interest in a contract. ... A direct financial interest will clearly be sufficient... Similarly, a director will be considered as being interested in a contract in which he has an indirect financial interest, such as a contract entered into by a company in which he holds shares (whether beneficially or as trustee) or a partnership of which he [is] a partner ... In certain circumstances, a director would be considered as being interested in a contract between the company of which he is a director and a second company by which he is employed. This will largely depend upon the role that the director has within the company by which he is employed and the extent to which he benefits as a result of the relevant contract".

It is unclear exactly how such a scenario may give rise to a conflict. For example, in Bhullar v Bhullar the directors came across an opportunity in their free time and pursued it personally and where liable for a secret profit to the company for a conflict of interest.

However, in this scenario the employee is not the one pursuing the contract. If they come across the information there is no separate fiduciary duty of disclosure. In their capacity as director they may be liable under s172 for failing to promote the best interests of the company. This would be because the information is clearly something the company would be interested in knowing. This test is subjective though and it would have to be demonstrated that he did not honestly believe, or no reasonable man could believe, that the information was not going to be of interest to the company. See for example the case of Fassihi.

There is no breach of s175 by simply failing to disclose. The company which the director works for would have to show that the director omitted or actively did something to divert the opportunity away from the company to the company which employs him. This may result in a claim for equitable compensation. They could also attempt to show that they did in fact have some interest in the opportunity, i.e. increased opportunities for offering interpretation services to the public sector by being able to charge lower rates and may be able to claim secret profits.  

For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.