Olympus scorched: Directors’ duties and conflicts of interest

THE OLYMPUS false accounting scandal has turned the spotlight once again on directors’ duties. Olympus was an extreme example, but there are a number of situations that company directors face which could expose them to risk of personal liability for breach of their duties.

Three recent and very different cases offer a reminder of such duties and the views taken by the courts in enforcing them.

Secret profit
Towers v Premier Waste Management (July 2011)

In this case, Mr Towers, a director of Premier, borrowed machinery at no cost from Mr Ford, a customer of Premier, for a personal project. Towers did not disclose this private arrangement to the company. When this arrangement came to light, Premier claimed against Towers for breach of his duties to promote the best interests of Premier and not to make secret personal profits in relation to Premier’s business.

It was held that Towers had obtained a personal benefit by way of the free loan of equipment. It was considered irrelevant that Premier was not a party to the arrangement (Towers had not entered into it in the company’s name) and that Premier had not suffered a loss. The absence of any corrupt motive was also irrelevant. Towers was ordered to pay Premier the market rate of hiring the machinery (approximately £5,000 plus interest and the cost of the action).

This case shows the court’s strict approach in enforcing compliance by directors with their duties and its willingness to conclude that such a duty applies and has been breached.

Transaction conflicts
Kleanthous v Paphitis & Others (October 2011)

A case with much larger sums involved is a perfect illustration of the principle that disclosure to the rest of the board and approval of the conflict will go a long way to protecting directors from breaching their duties. Mr Paphitis was a director and shareholder of Ryman Group. In early 1998 Ryman considered the acquisition of La Senza, but it decided against the purchase for various reasons. Paphitis and a number of his co-directors decided to buy La Senza using an off the shelf company, aided by loans and other assistance from Ryman. Ryman’s board approved these arrangements.

In 2006 La Senza was sold to a private equity firm for more than £100m. A Ryman shareholder (who had previously queried why Ryman did not purchase La Senza) brought a derivative claim against the directors of Ryman, claiming that Paphitis and the other directors had a conflict of interest in the La Senza acquisition, from which some of them had obtained personal benefit, using Ryman’s assets to do so. The derivative claim was refused. One of the key grounds for this was that all the transactions had been approved by Ryman’s board. The board minutes recorded the decision of the board not to proceed with the purchase and that they had supported the proposal that Paphitis and his co-directors acquire La Senza instead.

In this case a strong factor in not allowing the derivative claim to go ahead was the fact that the directors of Ryman, other than those involved in purchasing La Senza, were fully aware of and approved the conflict of interest.

Enduring obligations
Killen v Horseworld Ltd and others (February 2012)

It is also worth remembering that these duties still apply to directors after their directorship with a company has ceased as regards the exploitation of any property, information or opportunity of which a director becomes aware whilst in office. This case involved an ex-director who exploited a media broadcasting opportunity which arose whilst she was on the board of Horseworld Ltd. Despite no longer being a director, Ms Killen was ordered to make a payment to Horseworld Ltd representing the profits she made by exploiting the information gained during her directorship. The judge highlighted the fact that the statutory duty to avoid conflicts of interest under section 175 of the Companies Act 2006 continues after the resignation of the director.

Lessons learned

• Situations where a director has interests different to, or over and above those of the company, will almost always need to be disclosed and may require approval.
• If concerned, check the requirements of the company’s articles of association and any other internal policy in relation to conflicts of interest.
• Declare the relevant interest.
• Obtain permission from the board and/or the shareholders of the company to proceed.
• Ensure that minutes of any board and shareholder meetings are comprehensive in recording any decisions made, interests disclosed and, where relevant, conflicts approved.
• Take independent legal advice where appropriate.

Joe Bedford is a partner, and Francesca Messina is an associate in the corporate department at Stevens & Bolton