The Companies Act 2006 imposes specific duties on directors. These duties are there to ensure that directors can be held accountable during their stewardship of a company by their shareholders and the company’s creditors. 

Most directors assume that these duties end when they resign. However, they should be careful to avoid conflicts of interest, post-termination, as the case of Burnell v Trans-Tag Limited [2021] EWHC 1457(Ch) illustrates.

Broadly, the facts of the case are complicated, but directors should avoid situations where they have a direct or indirect interest that conflicts (or may conflict) with the interests of their former company. In Burnell v Trans-Tag Limited [2021] EWHC 1457(Ch) the case involved information and knowledge gained while the individual was a director.

Background

Mr Burnell had invested in a UK company – Trans-Tag Limited (TTL). This company manufactured, distributed and sold products under licence from Trans-Tag Systems OÜ (TTS). Mr Burnell was CEO of TTL, but was never formally appointed to its board of directors. 

Things did not go as Mr Burnell had hoped, and he resigned as CEO of TTL.

Mr Burnell subsequently bought shares in TTS and became its sole director. He then terminated TTS’ licence with TTL and commenced legal proceedings to recover his investment in TTL.

Breach of duty

During the litigation TTL counterclaimed, they were alleging that Mr Burnell breached a number of his statutory duties by his actions. However, the claim focussed on the allegation that Mr Burnell had breached his duty to avoid a conflict of interest – pursuant to section 175 of the Companies Act 2006.

Section 175(1) states that a director must ‘avoid a situation in which they have or can have, a direct or indirect interest that conflicts or may possibly conflict, with the interests of the company’.

Section 175(2) states that this particularly applies to ‘the exploitation of any property, information or opportunity’, whether or not the company could take advantage of that property, information or opportunity.

Section 170(2) of the Companies Act 2006 states that certain directors’ duties continue to apply after termination. 

These include the duty to avoid a conflict of interest in section 175, but only ‘as regards the exploitation of any property, information or opportunity of which the person became aware at a time when they were a director’.

TTL argued the conflict of interest point continued to apply to Mr Burnell post-resignation and that he was in breach of it by acquiring shares in TTS and using information that he had acquired while a director of TTL to its detriment.

Decision

The Court decided that Mr Burnell had, in most respects, not breached his duties to TTL by acquiring shares in TTS. 

However, his subsequent use of knowledge gained while a director of TTS to end the licence between the two companies and pursue litigation against TTL did amount to a failure to avoid conflicts of interest. It is of significant importance that the Court found that section 170(2) applied, which imposes the continuing element for the necessary result the claim for breach may be established on actions taking place post-termination.

In Conclusion

Directors will not automatically breach their duties by exploiting an opportunity post-resignation. 

However, any such opportunity must be carefully considered, to avoid the allegation that there has been any abuse of the trust of the company, which they served. A director who spots an opportunity which could be exploited by the company, but instead resigns and chooses to exploit it themselves, is likely to be considered in breach of their duty to their former company.

Directors should consider their position carefully and it would be worth their taking legal advice at the earliest opportunity to ensure that what they plan is legitimate. Companies that have a director issue of this type may be able to act.

Please contact Graham Mead, the author of this article, for any further advice at 01473 298234 or gmead@prettys.co.uk.