Facts

Mr Eric Watson (E) was the founder and chairman of Cullen Investments Limited (Cullen), a private investment company incorporated in New Zealand. E brought various claims against Mr Julian Brown (J) and Mr Quentin Brown (Q) for, among other things, (i) a breach of their obligations as directors of Kauri Investments Limited (KIL) and (ii) a breach of fiduciary duty owed to E and Cullen.

Cullen and J were 50:50 beneficial owners of KIL pursuant to a joint venture agreement (the Joint Venture) embodied in the Draft Heads of Agreement (the Heads). The Heads stated that the purpose of the joint venture was to exploit property development opportunities in the UK and Europe, using KIL as an investment vehicle. Q (together with J and E) was a director of KIL. The relationship between E, J and Q broke down when J made a personal investment in a new joint venture with a partner in Germany (the German Opportunity).

The Heads stated that where funding for future property deals could not be sourced from third party funders, Cullen would consider providing any shortfall funding required by way of a loan to KIL. In the event that Cullen decided not to invest, J had the right to invest in his own capacity (including in UK and European property transactions) provided that:

  • KIL was given the first right of refusal; and
  • KIL declined; and
  • with the prior written consent of Cullen, where the transactions being considered would materially affect J’s duties as CEO of KIL or result in a conflict with KIL.

Cullen did not provide the shortfall funding in respect of the German Opportunity. J neither disclosed the German Opportunity to Cullen or KIL, nor obtained the consent of either. In relation to directors’ duties, Barling J considered whether J’s personal investment in the German Opportunity materially affected his duties as CEO of KIL, or would result in a conflict with KIL.

Judgment

The Judge considered sections 171 to 177 (inclusive), particularly section 175 of the Companies Act 2006; and the pre-2006 common law ‘no conflict’ and ‘no profit’ rules.

As CEO of KIL, J also owed KIL a duty of fidelity and loyalty. However, on the specific facts, fiduciary duties were not relevant given the commercial nature of the Joint Venture. Barling J referred to Murad v Al Saraj [2004] EWHC 1235 (Ch) noting that ‘special features’ need to be considered where there were two commercial joint venturers. Justice Barling found that J was in breach of his contractual obligations under the Heads.

The Court found that J had acted in breach of both his statutory and common law duties as a director.

J’s personal investment in the German Opportunity was held to be an obvious conflict of interest. The German Opportunity was in the same market, competing with KIL in obtaining, for example, management fees in relation to property deals. Julian, KIL’s CEO, ‘had a personal stake in a separate project for which the company (through the CEO as well as by other employees) was providing services and other benefits’.

Barling J acknowledged that ‘duties [a]re capable of being modified by the overarching contractual relationship between Cullen and Julian, which govern[s] the Joint Venture’. Given the absence of a specific provision in the joint venture arrangement, however, he concluded that there was no reason in principle why the ordinary directors’ duties should not apply in respect of J. Even though J wore ‘a number of hats’ including as a director, joint venture partner and an employee, the standard directors’ duties could not be disregarded. He pointed out that:

  • in IDC v Colley, Justice Roskill confirmed that an opportunity arising while an individual was managing director could not be regarded as coming to that individual ‘privately’ to enable him to avoid the fiduciary duty he was under as a director;
  • in Bhullar v Bhullar, the Court of Appeal (inter alia) confirmed that an opportunity which came to the defendant’s attention while taking leave from work did not constitute an opportunity which had arisen ‘privately’. Nor could it enable the director to avoid consideration of his fiduciary duties;
  • Justice Rimer in Re Allied Business and Financial Consultants Ltd went further to confirm that a breach of director duties could not be avoided just by virtue of the relevant business opportunity being outside the scope of the company’s business.

A point of focus in Justice Barling’s judgment was J’s concealment of his personal investment from Cullen. The investment in the German Opportunity might have been better managed by proper disclosure and informed consent from Cullen.

In summary, in addition to breaches of various contractual obligations, Barling J concluded that J was in breach of the following directors’ duties:

  • sections 172 and 177 of the Companies Act 2006, by reason of the failure to disclose his interest;
  • section 175 of the Companies Act 2006 (and the corresponding pre-existing common law duties) due to the conflict of interest;
  • section 176 of the Companies Act 2006, as J had used an opportunity / knowledge from his position as a director.

The German Opportunity was a clear opportunity for KIL; KIL was the ‘embodiment and engine’ of the Joint Venture, regardless of any specific equity or proprietary interest when assessing which duties were owed to KIL.

Comment

It is abundantly clear that it is not sufficient for a director to assert that an opportunity is outside the scope of the company’s business to avoid considering his duties.

If a director has, or is planning to take, a personal interest which would or might give rise to a potential conflict, he is under a duty to inform the company, and to obtain the company’s informed consent. Concealment of a private interest could be determinative when considering if there is a conflict with his duties as a director.

Cullen Investments Limited & Ors v Brown & Ors [2017] EWHC 1586 (Ch)