Distressed companies, directors' duties and conflicts of interest

Background

A director diverted a business opportunity from Company A to Company B. The director argued that the diversion was not in breach of his duty to avoid conflicts of interest.

As Company A was close to insolvency (or was insolvent), it was not able to trade and was therefore incapable of exploiting the business opportunity. The director argued that he could not be subject to duties which required him to compel Company A to continue to trade, and hence there was no conflict of interest.

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

Additional practical considerations for directors

• Directors should, especially when the relevant company faces financial difficulties, ensure proper documentation of decision-making. 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 they had acted "honestly and reasonably".
• When found liable to account for profit made in breach of duty, a director who has acted innocently and in good faith may ask the court to exercise its discretion to grant compensation for his efforts in generating that profit.

Davies v Ford [2020] EWHC 686 (Ch)