Directors’ duties after resignation

Duty to avoid conflicts

Directors should avoid situations where they have a direct or indirect interest that conflicts (or may possibly conflict) with the interests of the company.

Typical examples of possible conflicts would include transactions between the company and the director or a company connected to the director. The issue the Court was asked to decide in Burnell v Trans-Tag Ltd revolved around information and knowledge gained while the individual was a director.

What happened?

The facts of the case are complicated, but, in short, revolved around a dispute between two companies and a financial investor, Mr Burnell. Mr Burnell had injected funds into a UK company, Trans Tag Limited (TTL) which manufactured, distributed and sold products under licence from Trans-Tag Systems Oü (TTS) (an Estonian company).

Mr Burnell was appointed CEO of TTL although he was never formally appointed to its board of directors. The venture was not as successful as initially hoped and Mr Burnell resigned as CEO of TTL. Mr Burnell subsequently acquired shares in TTS, the Estonian company, and became its sole director following which he terminated the licence arrangements with TTL and commenced legal proceedings against it to recover his initial financial investment.

Allegation of breach of duty

During the ensuing litigation, TTL counterclaimed against Mr Burnell and alleged that he had breached several of his statutory duties by assuming control of TTS and commencing the proceedings against TTL. The claim focused on a number of duties, but it was the allegation that Mr Burnell had breached his duty to avoid a conflict of interest in section 175 of the Companies Act 2006 that is of most interest.

Under section 175(1), a director must ‘avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’. Under section 175(2), this applies in particular to ‘the exploitation of any property, information or opportunity’, whether or not the company could take advantage of that property, information or opportunity.

As already noted, when a person ceases to be a director of a company, the general rule is they cease to owe any duties to the company. However, section 170(2) states that certain duties continue to apply after a person ceases to be a director. 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 alleged that the duty to avoid conflicts of interest continued to apply to Mr Burnell after he had resigned, and he had breached this duty by acquiring shares in TTS and using the information he had acquired while a director of TTL to its detriment.

Court decision

The Court decided that Mr Burnell had not breached his duties in most respects to TTL. Simply acquiring the shares in TTS did not constitute a breach of duty to TTL, but his subsequent use of knowledge gained while a director of TTL to end the contractual arrangements between the two companies and pursue litigation against TTL did amount to a failure to avoid conflicts of interest.

Of particular importance to the judgement was section 170(2) which imposes a duty of a continuing nature, with the necessary implication that a claim for breach may be established on acts taking place after a person has ceased to hold office. For this reason, Mr Burnell was found to have breached a continuing duty to avoid conflicts of interest.

Key learnings

For company directors, the key point to take away from this case is that they will not automatically be in breach of their duties by exploiting a competing opportunity after they have resigned, but the context must be considered to ascertain whether the director is abusing the trust of the company which they serve. If a director identifies a potential opportunity which could be exploited by his or her company, but instead that director resigns and exploits it personally, then this is likely to constitute a breach of duty.