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Law for Business

Knowhow - guidance - precedents

17 JUN 2016

Did you know ... that the rule against exploiting corporate opportunities continues to apply to former directors?

Did you know ... that the rule against exploiting corporate opportunities continues to apply to former directors?
Directors will be well aware that, amongst the statutory duties which they owe to their company, is a duty to avoid conflicts of interest. They will also be aware that the duty requires them to refrain from exploiting corporate opportunities for their own benefit. They might now, however, realise that they will continue to be subject to a modified version of the rule against taking corporate opportunities even after they leave office.

Corporate opportunities

The duty to avoid situations of conflict is contained in s 175 of the Companies Act 2006, and is regarded as one of the core statutory duties. Indeed, so important is it to the role of a director that we considered its nature and scope in the seventh episode in our recent series of articles entitled 'Ten things every director needs to know'.

Based on the underlying obligation of directors to be loyal to their company, the duty requires a director to avoid entering into a situation in which his own interests may conflict with those of the company. A director will breach s 175 if, for example, he buys a large stake in a rival company or takes a seat on the board of such a company.

The duty will also be breached if a director takes for himself an opportunity which is regarded in law as belonging to the company. In essence, an opportunity will be regarded as belonging to the company if it would be of interest to the company. By way of illustration, if a director of a company which owns luxury hotels in central London leans that a developer is seeking investment for a new five-star hotel near Trafalgar Square, he will be prohibited from putting his own funds into the venture; the opportunity is clearly of interest to his company and, as such, he is not permitted to exploit it for his own benefit.

Former directors

Naturally, a director will, in general, be subject to the statutory directors' duties as soon as he leaves office. It would, after all, make no sense for a former director to be obliged to act in accordance with the company's articles or to try to promote the company's success. However, the law derogates from this general rule in two respects. According to s 170(2):

'A person who ceases to be a director continues to be subject-

(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and

(b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.

To that extent, those duties apply to a former director as to a director, subject to any necessary adaptations.'

Section 170(2)(a) does not subject former directors to the full force of s 175. The director of the hotel company in our example would not be able to take a seat on the board of another luxury hotel company operating in central London while he remains in office, but he would be free to do so after his departure from the company. Even the law on corporate opportunities does not apply to former directors in its entirety: a former director is perfectly entitled to take an opportunity which would be of interest to the company, but which arose after he left the board.

Section 170(2)(a) deals with the particular issue of the position of a former director who exploits an opportunity of which he became aware while he was still in office. As to the precise scope of such a director's duty, it is certainly the case that a director who resigns specifically in order to take advantage of an existing opportunity will breach the duty. The position is less clear where a director leaves the company for, say, reasons of ill-health and is subsequently, upon his recovery, offered an opportunity which the company had been pursuing since before his departure. At common law, such a director would probably have been permitted to take the opportunity, on the basis that his conduct was not tainted by any disloyalty to the company (Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200), but a literal reading of s 170(2)(a) would suggest that the mere fact that he became aware of the opportunity while he was a director would be sufficient to render his exploitation of it a breach of duty. Unfortunately, there has not been as yet much judicial consideration of the implications of s 170(2)(a), and, at present, it is not clear whether it should be interpreted in such a way as to reflect the common law position in this regard.


From time to time, a judge comments that a director in the case before the court was not fully aware of the extent of his or her responsibilities to the company. Thus, in Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, Mummery LJ noted that the judge in the lower court 'commented that Mr Towers was someone who did not really seem to appreciate the trust and confidence imposed upon him by his position as a director'. Similarly, in Sharma v Sharma [2013] EWCA Civ 1287, Jackson LJ (referring to an answer given by a director during cross-examination) commented: 'It ... reflects her ignorance of the law concerning directors' duties'.

In this day and age, there really is no excuse for a director not to be aware of at least the broad scope of his duties. One has, perhaps, a degree of sympathy with a director who does not realise that some of his duties will extend beyond his time in office, but even here the broad implications of s 170(2)(a) are clear. A director who takes his role seriously should at some point have discovered that certain aspects of his duty to avoid conflicts and his duty not to accept benefits from third parties will survive his departure from the company.

Assuming a former director is aware of his continuing duties, how should he go about complying with his obligations concerning corporate opportunities in particular? In a sense, the position is straightforward: if it is an opportunity which he is not permitted to exploit, he must either obtain authorisation (whether from the board of directors or the shareholders) to take it, or he must refrain from taking it altogether.

In some cases, it may not be entirely clear whether the opportunity is, in fact, one which he is barred from taking. In some cases, too, a former director will be reluctant to approach the company with a request for authorisation. If he left his post in acrimonious circumstances, for example, he may fear that the company will refuse his request not because it wishes to take the opportunity, but simply to spite him. What is the best course to adopt in such situations? The fact is that the courts have always taken a strict view of directors' conflicts duties, and the consequences of breaching s 175 are potentially serious. A former director who is not sure whether he needs the company's authorisation to take a particular opportunity should, therefore, err on the side of caution. If his relationship with the company is good, he should seek authorisation just to be on the safe side; if his relationship with the company is strained, such that he wants to avoid seeking authorisation, he should consider taking legal advice before he deices whether to risk exploiting the opportunity without permission.
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