UK: England and Wales: reasserting the strictness of directors' fiduciary duties

The Court of Appeal has given judgment today in O'Donnell v Shanahan & Anor [2009] EWCA Civ 751, one of the most important recent decisions concerning directors' fiduciary duties. The case concerned a petition under Section 459 of the Companies Act (1985) - now Section 994 of the Companies Act (2006) - in which it was alleged that breaches of fiduciary duty were unfairly prejudicial under Section 459. The company's business was the provision of financial and business advice and assistance. Two of its directors bought an investment property of which they became aware whilst acting as directors. They did this through another company in which they together held half the shares. 

At first instance - see [2008] EWHC 1873 (Ch) - the judge held that the acquisition of properties for investment was not within the scope of the company's business and that, as such, the directors did not breach the fiduciary no-conflict rule where such properties were acquired. There was, the trial judge observed, no real sensible possibility of conflict (para. [208]). Moreover, the trial judge held that notwithstanding that the opportunity came to the directors' attention in their capacity as directors of the company, because it was outside of the scope of the company's business their exploitation of the opportunity did not breach the no-profit rule.

A unanimous Court of Appeal has disagreed with the trial judge's findings. Rimer LJ, delivering the only reasoned opinion (with which Waller and Aikens LJJ agreed) held that the directors had breached the no-profit and no-conflict rules and, in a judgment stressing the strictness of directors' fiduciary duties, his Lordship observed (para. [55]):

The authorities relating to trustees' and directors' duties to account for profit earned in consequence of a breach of the 'no profit' rule are legion, they all appear to me to point to the same conclusion and none appears to qualify the liability to account by reference to whether the impugned transaction was (in the case of an alleged breach by a director) within or without the scope of the company's business ... the rationale of the 'no conflict' and 'no profit' rules is to underpin the fiduciary's duty of undivided loyalty to his beneficiary. If an opportunity comes to him in his capacity as a fiduciary, his principal is entitled to know about it. The director cannot be left to make the decision as to whether he is allowed to help himself to its benefit".

Update (24 July 2009): Some comment to follow in the next few days. Meanwhile, a summary of the decision has been provided here by the ICLR as part of its WLR(D) service.