Directors’ Diversion Of Commercial Opportunity For Their Own Benefit Was A Breach Of Their Duties

Company directors who diverted an opportunity to develop farmland to another business they owned, and had set up for the purpose, were in breach of the fiduciary duties they owed to their company.

In a complex dispute, two directors of a company diverted a contract for the conditional acquisition of a farm to another business they owned and had set up for the purpose. The first company claimed they were in breach of their fiduciary duties owed to it as directors.

The court ruled that the actions of the directors conflicted with the interests of their company and they were in breach of their fiduciary duties to the company. They did not have informed consent for their actions from the shareholders of their company, which would have excused them from their breach.

The situation was made worse because they had tried to hide what they were doing – for example, by giving their new business a very similar name to that of the company.

The fact that they used a new business to take advantage of the opportunity rather than doing so in person made no difference, as the new business was holding the benefit of the contract on trust for them. They were still personally in breach of their fiduciary duties.

Recommendation

Directors and shareholders should ensure they know enough about directors’ duties to know when a proposed act or omission by one or more directors may amount to a breach of directors’ duties. They can then either stop or decide whether to seek informed shareholder consent.

Case ref: Pennyfeathers Ltd and Others v Pennyfeathers Property Company Ltd and Others [2013] EWHC 3530 (Ch)