Author
Nick Moser

Nick Moser

Partner

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Author
Nick Moser

Nick Moser

Partner

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11 May 2020

R&I update - May 2020 – 4 of 5 Insights

UK legal update: director duty to avoid conflicts of interest when a company is in financial distress

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Davies v Ford [2020] EWHC 686 (Ch)

Background

A director diverted a business opportunity to another company. The director argued that the diversion was not in breach of his duty to avoid conflicts of interest. As the company was close to insolvency (or was insolvent), the company was not able to trade and was therefore incapable of exploiting the business opportunity. Therefore, directors cannot be subject to duties which require them to cause the company to continue trading, and hence there was no conflict of interest. 

The court rejected such arguments. As a fiduciary of the company, the director must not profit from the position of trust, even if that profit could not have been made by the company. This stringent approach is even more appropriate when the company is near insolvent or is insolvent because such companies have a greater need for protection. 

Additional practical considerations for directors

  • Directors should, especially when the companies may face financial difficulties, ensure proper documentations of decision makings. The court commented that it struggled to identify key issues due to the "high degree of informality" in the company's management. 
  • Directors can apply for relief from breach of duty from the court on the ground that directors had acted "honestly and reasonably".
  • When found liable to account for profits made in breach of duty, directors who have acted innocently and in good faith may apply for court's discretion to grant compensations for their efforts in yielding such profits.
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