Directors in the Dragon's Den

16 October 2012

Worthingtons Solicitors Belfast advise on the importance of reminding Directors of the statutory code regulating their duties as set out in the Companies Act 2006.

Recent case law is an important reminder to directors of the statutory code regulating their duties as set out in the Companies Act 2006. This code applies not only to properly appointed directors but also to persons who are “de facto” or “shadow” directors. 

A person could be a de facto director if they were the sole person directing the affairs of the company or, if there were other true directors, that he or she was acting on an equal footing in directing the affairs of the company. 

A shadow director, on the other hand, does not purport to act as a director and nor does he or she claim to be a director.  Shadow directors are persons in accordance with whose instructions the directors are accustomed to act (excluding professional advice).

In the case of Philip Towers v Premier Waste Management Ltd, the Court of Appeal upheld the decision of the High Court which found that Mr Towers, a director of Premier Waste, had breached his duty of loyalty to Premier because he had entered into a personal arrangement with one of the Company’s customers in relation to the free hire of a piece of equipment to be used in the renovation of his farmhouse.  Although Towers argued that the benefit to him was negligible, the equipment was of no commercial value, he hadn’t negotiated the terms of the loan himself (this was handled by another company employee), the company wasn’t interested in hiring the equipment, the company suffered no loss, his motives weren’t improper and the customer didn’t receive any favours as a result of the deal, the Court found in favour of the company.The director had received a benefit in breach of his duties and he was required to account for that benefit.

Another case concerning director’s duties involved the Dragon’s Den star, Theo Paphitis who was a director and majority shareholder in Ryman Group Limited (Kleanthous v Pahphitis & Ors).  Mr Kleanthous, a shareholder in Ryman Group, sought permission to bring an action in the name of the company against Paphitis and other directors in relation to the purchase some years before by Paphitis of the lingerie business ‘La Senza’.  Ryman Group had an opportunity to purchase La Senza but had not done so and the opportunity and funding was then provided to Paphitis and others who acquired the company. The entire transaction had been approved by the board of Ryman Group. Kleanthouos hoped to take the action on behalf of the company because he disputed the events surrounding the disclosure and approval. He was alleging that Paphitis and the other directors had used company assets for their own benefit and had diverted a business opportunity away from the company.  Kleanthous’s case to bring the action was unsuccessful as the Judge did not consider the claim to be of sufficient strength mainly because the transaction had been approved by the Ryan Board and there were detailed records of meetings.

Directors need to be aware of their statutory duties:

  • to act within the company’s powers;
  • to promote the success of the company;
  • to exercise independent judgment;
  • to exercise reasonable care, skill and diligence;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties
  • to declare interest in proposed transactions.

The Towers case illustrates that the Courts may take a hard line on breach of duties even where the company’s loss could be held to be minimal. The Paphitis case illustrates the need to comply with company act provisions regarding declaration of interest, to follow the company’s constitutional rules and keep an accurate written record of matters.

Celia Worthington is senior partner of the Commercial Department of Worthingtons Solicitors Belfast Office.  Celia specialises in commercial property, banking, telecoms and corporate and commercial law. She advises a number of UK wide corporate clients and well known local charities and is currently Chairperson of Abbeyfield (NI) a local housing association.

 

 

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