Duty to avoid conflicts of interest - where does it end?

Posted: 13/10/2021

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A recent judgement in Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) looked at the scope of the duty to avoid conflicts of interest owed by former directors.

Continuing the duty – a recap

It is well known that while directors and board members are acting as such, they owe a duty to avoid conflicts of interest to their organisations. This means they should avoid any situation in which they have an interest that conflicts, or has the potential to conflict, with the interests of the organisation. For companies, this duty is set out in section 175 of the Companies Act 2006 (the Act). The Act codified many duties that were, prior to the Act coming into force, established in common law.

It had previously been recognised in common law that the duty to avoid conflicts of interest could not be escaped simply by a director resigning from their position. Directors would not be able to exploit any property, information or opportunities they became aware of whilst acting as a director.

However, the conduct of a person after leaving office could not by itself have amounted to a breach of duty. There needed to be some kind of link between ceasing to be a director and the exploitation of the property, information and/or opportunity that the former director became aware of during their time in office.

Section 170(2)(a) of the Act codified this position and confirmed that the section 175 duty to avoid conflicts of interest continues after a person ceases to be a director in certain circumstances and expressly in regard to the exploitation of any property, information, or opportunity of which they became aware at a time when they were a director.

The decision

In this decision, the court determined that the wording of section 170(2)(a) meant that a claim for breach of the duty to avoid conflicts of interest may be founded on acts taking place after a person has ceased to hold office. However, unlike the previous position under common law, this was irrespective of the reason why the director left the company.

The case involved a de facto director of a company who, after he had ceased to hold office, had put himself in a position in which his personal interests conflicted with the interests of the company as regards the exploitation of property (the company's rights under a particular licence agreement) of which he had been aware as a director.

What may seem particularly onerous is the fact that the individual concerned only acted as a de facto director for around a month and his reason for leaving was unrelated to the conflict.

Are we opening the floodgates?

The case raises concerns about where the line falls for when the duty to avoid conflicts of interest will no longer apply and what time periods are relevant. Questions have also been raised as to whether the decision will mean that we see an increase in companies bringing claims against former directors who might have acquired knowledge during their time in office but then used this specific knowledge in their later roles.

Former directors may also be concerned if their actions will be further scrutinised once they leave a position and to what extent they will need to continue to be mindful of their duties to their previous organisations. Former directors who take up positions in competing organisations might need to be careful of how they use any information and opportunities that they became aware of in their previous roles.

The decision does provide some reassurance that we are not opening the floodgates to further claims as the continuing duty is limited to the exploitation of "any property, information or opportunity" of which the director became aware while a director, and that this phrase is given a narrow interpretation in case law. Importantly, the exploitation must be in the context of a maturing business opportunity.

What does this mean?

If you have any companies within your group structure, any directors should already be aware of their duties in respect of conflicts of interest. However, you may need to update any training, policies and so on to take into account this judgment and bring the implications to the directors’ attention.

Many housing associations are community benefit societies, and whilst the Act does not expressly apply to community benefit societies, the general principles of company law are useful in interpreting board members’ duties and the common law duties will apply to your board members.

If you’d like further information or advice on the implications of this decision, or further information on training we offer on directors’ duties and responsibilities, please do contact the Housing Corporate and Governance Team.

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