EQUITY – COMPANY LAW - Representation and Advice for Commercial Clients

EQUITY – COMPANY LAW

FIDUCIARY DUTY : BREACH : DIRECTORS DUTIES : NOTICES : RESIGNATION : CONFLICT OF INTEREST : ACCOUNT : MISTAKE : FIDUCIARY RELATIONSHIP : INTENTION OF NOTICE OF RESIGNATION : PROFIT FROM FIDUCIARY POSITION : COMPANY PROPERTY : MISUSE : ACCOUNT OF PROFITS

Where there was a dispute over the meaning of a resignation notice, the test was whether a reasonable recipient would have been left in no reasonable doubt as to its meaning. The claimant company’s directors had not resigned their directorships and had breached their fiduciary duties by acting in conflict with the interests of the company by diverting its business to another company controlled by them and by using its property without its consent.

The claimant (Q) sought an account of profits against two of its directors, the first defendant (P) and the second defendant (N), for breach of their fiduciary duties. P and N were also directors of the third defendant (X). the companies worked together in the licensed trade with Q carrying on a group buying business and X providing a funds transfer business to Q. Q and X had a trading agreement with Carlsberg-Tetley (CT) for the supply of beverages. In 2001 N and P transferred their shares in Q to a group holding company (G) in return for shares and directorships in G. As part of this arrangement X sold the goodwill in its funds transfer business relating to the brewing industry to Q.

There continued to be an arrangement with CT under which X acted as agent for Q in relation to the funds transfer to enable the passing of commission to Q. The group began to suffer financial difficulties. On December 12, 2001 N and P sent notices of their resignation as directors to G’s board. At a meeting on December 14, 2001 CT asked N and P on behalf of X to continue to service CT customers in return for a management fee payable to X. Thereafter, X continued the funds transfer business but no longer passed on commission to Q. X also employed some staff that had been laid off by Q and began to carry on a group-buying business as well as a funds transfer business.

Q submitted that N and P had breached their fiduciary duties as directors of Q by personally exploiting the benefits of the CT contract by arranging for the business previously carried on by Q to be carried on by X and sought an account of profits. N and P contended that they had ceased to be directors of Q on service of their notices of resignation so that they were not in a fiduciary relationship with Q at the time of the meeting with CT. Q submitted that the notices of resignation related to N and P’s directorships of G and not Q.

HELD:

(1) There was no indication in the resignation notices of an intention to resign from Q as well as G. The notices were addressed to G’s board and referred to directorship in the singular. Whether there had been a mistake in the information contained in the notice of resignation was an objective question, Mannai Investment Co Ltd v Eagle Star Assurance (1997) AC 749 applied. On the true construction of the resignation notices and against the relevant factual background it would not have been adequately clear to a recipient that there was a mistake in the information contained in the notices. Further, a reasonable recipient would either think there was no doubt that the notices referred to G only or they would have been left in real and reasonable doubt whether N and P intended to resign from Q also. Therefore, N and P had remained directors of Q.

(2) At the meeting on December 14, 2001 there had been a clear conflict of interest between N and P as directors of Q and N and P as directors of X and they had failed to obtain the informed consent of Q to the arrangements made by them on behalf of X. N and P had through their control of X made use of the property of Q in that they had used the information and goodwill of Q in making the new arrangements with CT, in which X carried on both the funds transfer business and the group buying business. N and P were therefore in breach of their fiduciary duties to Q and were liable to account for personal profits made by them and for profits made by X as a result of that breach.

On the facts, the fundamental principle would prevail that a director was not to benefit from his breach of fiduciary duty and no allowance was to be made to reflect N and P’s efforts in earning the profits in issue. Guinness plc v Saunders (1990) 2 AC 663 applied.

Judgment for claimant.

QUARTER MASTER UK LTD v (1) JOHN FREDERICK PYKE (2) MICHAEL BARRIE NEWSON (3) AFFINITY LTD (2004)

Ch D (Paul Morgan QC) 16/7/2004

“Lawtel”: 6th September 2004

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