286 18: Company directors Part F Management, administration and regulation of companies
Re D' Jan of London Ltd 1993
The facts: D, a director of the company, signed an insurance proposal form without reading it. The form
was filled in by D's broker. An answer given to one of the questions on the form was incorrect and the
insurance company rightly repudiated liability for a fire at the company's premises in which stock worth
some £174,000 was lost. The company became insolvent and the liquidator brought this action under s
212 of the Insolvency Act 1986 alleging D was negligent.
Decision: In failing to read the form D was negligent. However, he had acted honestly and reasonably and
ought therefore to be partly relieved from liability by the court.9.4.5 Duty to avoid conflicts of interest (s 175)
Directors have a duty to avoid circumstances where their personal interests conflict, or may possibly
conflict, with the company's interests. It may occur when a director makes personal use of information,
property or opportunities belonging to the company, whether or not the company was able to take
advantage of them at the time. Therefore directors must be careful not to breach this duty when they enter
into a contract with their company or if they make a profit in the course of being a director.
This duty does not apply to a conflict of interest in relation to a transaction or arrangement with the
company, provided the director declared an interest.
As agents, directors have a duty to avoid a conflict of interest. In particular:
The directors must retain their freedom of action and not fetter their discretion by agreeing to
vote as some other person may direct.
The directors owe a fiduciary duty to avoid a conflict of duty and personal interest.
The directors must not obtain any personal advantage from their position as directors without the
consent of the company for whatever gain or profit they have obtained.
The following cases are important in the area of conflict of interest.Regal (Hastings) Ltd v Gulliver 1942
The facts: The company owned a cinema. It had the opportunity of acquiring two more cinemas through a
subsidiary to be formed with an issued capital of £5,000. However the company could not proceed with
this scheme since it only had £2,000 available for investment in the subsidiary.
The directors and their friends therefore subscribed £3,000 for shares of the new company to make up the
required £5,000. The chairman acquired his shares not for himself but as nominee of other persons. The
company's solicitor also subscribed for shares. The share capital of the two companies (which then
owned three cinemas) was sold at a price which yielded a profit of £2.80 per share of the new company in
which the directors had invested. The new controlling shareholder of the company caused it to sue the
directors to recover the profit which they had made.
Decision:
(a) The directors were accountable to the company for their profit since they had obtained it from an
opportunity which came to them as directors.
(b) It was immaterial that the company had lost nothing since it had been unable to make the
investment itself.
(c) The directors might have kept their profit if the company had agreed by resolution passed in
general meeting that they should do so. The directors might have used their votes to approve their
action since it was not fraudulent (there was no misappropriation of the company's property).
(d) The chairman was not accountable for the profit on his shares since he did not obtain it for himself.
The solicitor was not accountable for his profit since he was not a director and so was not subject
to the rule of accountability as a director for personal profits obtained in that capacity.