Towers case shows how important company directors' duties are under English law

The recent decision of the Court of Appeal for England and Wales in Towers v Premier Waste Management Limited, [2011] EWCA Civ 923, serves as a warning to directors of English companies who are not wholly cognizant of their duties under English law. In this case, the Court of Appeal held that the director had breached the duties of loyalty and the duty to avoid conflicts of interest that he owed to the company.

In the words of Lord Justice Mummery:

"A director of a company is appointed to direct its affairs. In doing so it is his duty to use his position in the company to promote its success and to protect its interests. In accordance with equitable principles the special relationship with the company generated fiduciary duties on the part of a director. His fiduciary commitments to the company took the form of a duty of loyalty and a duty to avoid a conflict between his personal interests and his duty to the company."

"Those duties, which were simple, strict and salutary, were the basis of the respondent company's claim against the appellant director that he had breached his duties by accepting personal benefits from one of the company's customers. He did not disclose the benefits to his fellow directors or seek or obtain their approval on behalf of the company."

"I have described the equitable principles and duties in the past tense because, under codification measures in Chapter 2 of the Companies Act 2006, a director's general duties to the company are now statutory. The codified duties are expressly derived from common law rules and equitable principles as they apply to directors."

In this case, a company director had accepted a loan from one of the company's customers of materials and equipment to be used ostensibly without charge in the renovation of his home. The director did not disclose this arrangement to his fellow directors at any time over the intervening five years. Following a dispute with the customer the situation came to light, and the company brought an action against the director. The director claimed in his defence that this arrangement was "private, informal, ad hoc and amongst friends" and really had nothing to do with the company's business and was therefore not in conflict with the company's interests.

The Court of Appeal found the director's argument unpersuasive, and held that the director had breached the duties of loyalty and the duty to avoid conflicts of interest that he owed to the company. In the court's opinion the director had disloyally deprived the company of the opportunity to consider whether or not it objected to the diversion to personal use of an opportunity arising from the company's relationship with its customer. It was simply irrelevant as far as the court was concerned that the company had not suffered loss, that the director had acted in good faith and not made a profit of any significance, or that, had the customer not offered the loan of equipment, the director would not even have hired the equipment at market rates. The director was ordered to pay to the company an amount representing what it would have cost him to hire the equipment on the open market, along with the costs of the action.

Also worth noting is that the director sought to rely on section 1157 of the Companies Act 2006, which provides the court with the discretion to grant relief in proceedings for negligence, default, breach of duty or breach of trust where it appears to the court that, whilst the respondent may be liable, he acted fairly and reasonably and, having regard to the facts of the case, the respondent ought fairly to be excused. The court found that Mr. Towers had not acted reasonably and as such it was not in a position to consider the exercise of the discretion of the court under that section.

It appears clear from this decision that, whether measured against the common law or statutory duties, typical commercial defences will not serve to relieve directors of their strict duties to their company. Directors must avoid placing themselves in situations which may give rise to a breach of their fiduciary duties, and in the event that they find themselves in a questionable position, should at a minimum make full disclosure to their fellow directors.