Director's Fiduciary Duty not to divert a 'Maturing business Opportunity' which his company is actively pursuing

[1] Cockerill J in Recovery Partners GP Ltd v Rukhadze [2018] EWHC 2918 (Comm) [2019] Bus LR 1166 ('Rukhadze 2918') went on the explain the law in relation to the duration of fiduciary duties. Under the hearing 'Duration of fiduciary duties', at paragraphs 70 to 84, Cockerill J said:

'70. The starting point...is that:

(i) It is not a breach of fiduciary duty for a fiduciary to resign from his post, regardless of how much damage it causes the company: see the CMS Dolphin Ltd case, paras 87 and 95; British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523, para 89; Shepherds Investments Ltd v Walters [2007] 2 BCLC 202; Balston Ltd v Headline Filters Ltd [1990] FSR 385, 412.

(ii) In general, fiduciary duties do not extend beyond the end of the relevant relationship:

“We do not recognise the concept of a fiduciary obligation which continues notwithstanding the determination of the particular relationship which gives rise to it. Equity does not demand a duty of undivided loyalty from a former employee to his former employer”: Attorney General v Blake [1998] Ch 439, 453.

(iii) As Snell's Equity puts it at para 7-013, a fiduciary is not barred from

“resigning and exploiting opportunities within the market in which his principal operates, where he did not resign from his fiduciary position with a view to exploiting such opportunities and where the opportunity was not one which his principal was pursuing at the time of resignation or thereafter”.

71. This rule prevents what would otherwise be an unattractive situation: that, purely by virtue of having been a fiduciary of a company and having become aware of a business opportunity in that capacity, a director is the only person in the whole world who is forever prohibited from taking up that opportunity.

72. None the less, in order to prevent the emasculation of fiduciary duties, a fiduciary may be found to have breached fiduciary duties by reference to what he later does. Resignation will not avoid liability where the fiduciary uses for their own benefit property or information which they have acquired while a fiduciary; this will be a breach of the “no profit rule”: see Snell's Equity, para 7-013 and Ultraframe (UK) Ltd v Fielding [2006] FSR 17, para 309. This ensures that he does not resign the fiduciary position in order to do what the fiduciary doctrine would otherwise bar the fiduciary from doing: see Snell's Equity, para 7-013 and In re Boles and British Land Company's Contract [1902] 1 Ch 244, 246 - or that if he does do so, he pays the price for so doing.

73. The underlying basis of the liability of a fiduciary who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were property of the company in relation to which the fiduciary owed fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating for himself that property: the CMS Dolphin Ltd case [2001] 2 BCLC 704, para 96.

74. How the rules regarding breaches and post-resignation actions are best to be regarded appeared to be in issue between the parties. The claimants’ position appeared at some points to be that post-resignation conduct can amount to a breach of fiduciary duty; they pointed to the decision in Hunter Kane Ltd v Watkins [2003] EWHC 186 (Ch) at [25], applying the earlier decision of the High Court in the CMS Dolphin Ltd case:

“A director is however precluded from acting in breach of the requirement [to avoid conflict of duty and acting in self interest], even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.”

75. The defendants’ position is that post-resignation conduct is not capable of amounting to a breach of fiduciary duty. This is on the basis that resignation has the effect of terminating the fiduciary relationship and, upon termination, all fiduciary obligations cease. Therefore, it cannot be said that anything done post resignation amounts to a breach of fiduciary duty. The defendants rely on the decision of the Court of Appeal in Foster Bryant Surveying Ltd v Bryant [2007] Bus LR 1565, para 69 where Rix LJ clarified the reasoning in the CMS Dolphin Ltd case saying that

“In my judgment, Lawrence Collins J was not saying that the fiduciary duty survived the end of the relationship as director, but that the lack of good faith with which the future exploitation was planned while still a director, and the resignation which was part of that dishonest plan, meant that there was already then a breach of fiduciary duty, which resulted in the liability to account for the profits which, albeit subsequently, but causally connected with that earlier fiduciary breach, were obtained from the diversion of the company's business property to the defendant's new enterprise.”

76. In my judgment the defendants are right about this as a matter of analysis and authority. Where liability arises from post resignation conduct it arises not because duties persist post resignation, but because of breaches of fiduciary duties prior to resignation which manifest only post resignation. However, in many ways this is a distinction without a difference, albeit that it alerts one to the necessity of rigorous analysis of the breach in question.

77. The second point at issue by reference to the same authorities was the question of whether resignation alone can be a breach.

78. The defendants reject the proposition that at the moment the fiduciary resigns, if his motivation for doing so is to take up an opportunity, then that is a wrongful diversion as being unprincipled, and contrary to subsequent authority. The defendants point to British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 and Shepherds Investments Ltd v Walters [2007] 2 BCLC 202 where the directors were found to have breached their fiduciary duties by reason of what they actually did whilst still directors in anticipation of the competition they planned. They submit by reference to these authorities that a director is not precluded from laying the groundwork for a new competing business if he does not do anything relevant to diversion of a maturing business opportunity.

79. The claimants for their part point to the CMS Dolphin Ltd case [2001] 2 BCLC 704 where the issue was defined by Lawrence Collins J thus:

“The case raises (among other questions) the existence and applicability of the principle … that a director is disqualified from usurping for himself or diverting to a company with which he is associated a maturing business opportunity of his company not only while he is still a director, but also even after his resignation, when the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company.”

80. They also point to:

(i) Hunter Kane Ltd v Watkins [2003] EWHC 186 (Ch) at [25]:

“A director is however precluded from [obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage either belonging to the company or for which it has been negotiating], even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.”

(ii) Jackson & Powell on Professional Liability, 8th ed (2017), para 2-157:

“a fiduciary who resigns from the position which gave rise to his fiduciary obligations and then exploits for himself an opportunity of which he learnt from his fiduciary position will be liable to account for the profits he makes, as will a company which he forms in order to exploit the opportunity.”

(iii) Bowstead & Reynolds on Agency, 21st ed (2017), para 6-067: “An agent who resigns in order to exploit an appropriate opportunity remains subject to fiduciary obligations at any rate in respect of that matter.” (And, to similar effect: Snell's Equity, para 7-013.)

81. On this issue it seems to me that there is some force in what the claimants say, but that the position is not quite as clear as they suggest. To my mind Rix LJ, in a characteristically rigorous analysis of the principles in his judgment in Foster Bryant Surveying Ltd v Bryant [2007] Bus LR 1565, paras 76–77 has sounded a warning about over-constraining the doctrine, refusing to endorse the analysis in the Hunter Kane Ltd case [2003] EWHC 186 (Ch) because of the fact-sensitive nature of the cases in which the issue arises and the need to take account of nuanced cases between the extremes. He stated, at para 76:

“The jurisprudence has shown that, while the principles remain unamended, their application in different circumstances has required care and sensitivity both to the facts and to other principles, such as that of personal freedom to compete, where that does not intrude on the misuse of the company's property whether in the form of business opportunities or trade secrets. For reasons such as these, there has been some flexibility, both in the reach and extent of the duties imposed and in the findings of liability or non-liability. The jurisprudence also demonstrates, to my mind, that in the present context of retiring directors, where the critical line between a defendant being or not being a director becomes hard to police, the courts have adopted pragmatic solutions based on a commonsense and merits-based approach.”

82. It is also apparent from his consideration of the cases that he regarded the question of fact-specific disloyalty as being likely to be of significant importance in delineating cases on the borders of the doctrine. This approach is also clear from the passage at Shepherds Investments Ltd v Walters [2007] 2 BCLC 202, para 108:

“What the cases show … is that the precise point at which preparations for the establishment of a competing business by a director become unlawful will turn on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties … or, in the case of an employee, will be in breach of the obligation of fidelity. It is obvious, for example, that merely making a decision to set up a competing business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the company and the employer. The consulting of lawyers and other professionals may, depending on all the circumstances, equally be consistent with a director's fiduciary duties and the employee's obligation of loyalty. At the other end of the spectrum, it is plain that soliciting customers of the company and the employer or the actual carrying on of trade by a competing business would be in breach of the duties of the director and the obligations of the employee. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in every case.”

83. The turning point in any case will thus depend upon whether what has in fact been done is inconsistent with the fiduciary duty of a director to act in good faith in the best interests of the company ie to do his best to promote its interests and to act with complete good faith towards it, and not to place himself in a position in which his own interests conflict with those of the company (or equally with the duty of fidelity of an employee).

84. Thus, it is quite possible that a “bad faith resignation” in breach of fiduciary duty may exist unaccompanied by any preparatory steps which qualify as separate breaches. That seems in the abstract to be consistent with the approach of regarding business opportunities as the property of the company, so that a resignation specifically to exploit such an opportunity can be seen both as a breach of a duty of loyalty and as a breach of the no profits rule. In British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 it is noteworthy that evidence of specific business opportunities was lacking. However, I do not consider that the authorities to date justify a firm conclusion that a resignation with an intention to compete is necessarily by itself a breach. Further it will be a rare case where there is literally nothing more to assist in discerning which side of the line a particular case falls.'

Then, under the subheading 'The death of fiduciary duties', Cockerill J in Rukhadze 2918 said, at paragraphs 85 to 91:

'85. The defendants also rely on the proposition that fiduciary duties can cease to exist, or be reduced in scope, if the relationship on which they are based effectively breaks down (even if formally it remains in place). In so doing they point me to In Plus Group Ltd v Pyke [2002] 2 BCLC 201 and Halcyon House Ltd v Baines [2014] EWHC 2216 (QB).

86. In the In Plus Group Ltd case, Mr Pyke was a director of a company. He suffered a stroke, followed by a period of illness which led to his spending six months unable to concentrate on the firm's business. His relationship with his co-shareholder “became icy” and In Plus Group Ltd sought to force him to resign. Mr Pyke was deprived of any remuneration or information about the company. His office was moved. He was also refused repayment of loans he had made to the company. After six months of having been effectively excluded from the company, but while still a director, Mr Pyke set up his own company. That company then secured a contract with In Plus Group Ltd's major client. The Court of Appeal upheld the decision of the trial judge that there had been no breach of fiduciary duty. In the words of Sedley LJ, at para 90, Mr Pyke's duty to In Plus Group Ltd “had been reduced to vanishing point by the acts (explicable and even justifiable as they may have been) of his sole fellow director”.

87. The claimants assert that these cases do not establish any general principle that fiduciary duties cease to exist if a relationship breaks down, but only a rather narrower point; namely that there may be cases where fiduciary duties cease to be owed because the relationship has come to an end in all but name, even if the formal arrangements have not yet caught up with the reality. In the In Plus Group Ltd case [2002] 2 BCLC 201 the key findings were that Mr Pyke's “working relationships” with the companies were “at an end” and that he “remained, in name only, a director of each company”.

88. As for the Halcyon House Ltd case [2014] EWHC 2216 (QB) this is not said to establish any distinct principle.

89. To the extent that it is contended for the defendants that these authorities do establish any broad principle, I do not accept that proposition. The Halcyon House Ltd case really goes nowhere, in that the decision in that case was based on another point, the judge preferring not to decide the case on the In Plus Group Ltd point. All it provides is an endorsement of the In Plus Group Ltd judgment and a tentative suggestion that the principle might well have been applicable on the facts of the case.

90. However, it seems to me that the judge's refusal to decide that case on that basis actually reflects the fact that the In Plus Group Ltd case was an exceptional one. This is plain from the following passage of Sedley LJ's judgment, at para 90:

“Quite exceptionally, the defendant's duty to the claimants had been reduced to vanishing point by the acts (explicable and even justifiable though they may have been) of his sole fellow director and fellow shareholder Mr Plank … the claimants’ relationship with Constructive was consistent with successful poaching on Mr Pyke's part, [but] the critical fact is that it was done in a situation in which the dual role which is the necessary predicate of Mr Yell's case is absent. The defendant's role as a director of the claimants was throughout the relevant period entirely nominal, not in the sense in which a nonexecutive director's position might (probably wrongly) be called nominal but in the concrete sense that he was entirely excluded from all decision-making and all participation in the claimant company's affairs. For all the influence he had, he might as well have resigned.”

91. Three points are apparent from this: (i) it was an exceptional case (ii) the presence or absence of a dual role was key and (iii) that was because for all of the relevant period there was a full exclusion from decision-making and participation (at para 76 Brooke LJ notes that this had pre-dated the relevant events by more than six months). I conclude that it is on these points that focus must be turned when the question of exclusion is considered.'

[2] In Burnell v Trans-Tag Ltd [2024] EWHC 261 (Comm), Ashley Greenbank KC sitting as a deputy High Court Judge, considered these areas - that is, the existence/termination of the fiduciary relationship which comes with being a director of a company - and in particular, consideration of the duty to avoid conflict of interest which binds the director beyond the date of resignation of that director (the wording of section 170(2) of the Companies Act 2006 is provided at the end of this footnote). At paragraphs 404 to 413, the deputy Judge said:

'404...although the general principle is that a director ceases to be subject to fiduciary duties associated with his or her position as a director when the relationship ceases, s170(2)(a) extends the application of the duty to avoid conflicts (in s175) to former directors in certain circumstances (i.e. those involving the exploitation of any property, information or opportunity of which the director was aware when he or she was a director). My starting point for determining the scope of this provision in accordance with s170(4) is ... the pre-existing case law governing the circumstances in which a former director might be regarded as being in breach of duty by reference to acts which took place after he or she ceased to be a director.

405. On this subject, I have been referred by the parties to a number of cases. These include Boardman v Phipps [1967] 2 AC 46, Canaero, CMS, Hunter Kane, Bhullar v Bhullar [2003] BCLC 241, Foster Bryant, and Recovery Partners GP Limited v Rukhadze [2018] EWHC 2918 (Comm) ("Recovery Partners"). I do not intend to embark upon a comprehensive summary of the case law in this judgment. Extensive summaries of the case law and principles in this area can be found in the judgment of Rix LJ in Foster Bryant and in the judgment of Cockerill J in Recovery Partners.

406. The principles that I have drawn from the case law so far as relevant to this and the other issues before me are as follows.

(a) The classic statements of the circumstances in which a former director may be found liable for a breach of duty giving rise to liability to account for profits refer to cases in which a former director has obtained for him or herself, without the informed approval of the company, a profit from the exploitation of property or a maturing business opportunity of the company where his or her resignation can be fairly said to have been prompted or influenced by a wish to acquire that opportunity for himself or herself and where it was the former director's position with the company rather than some fresh initiative which led to the opportunity which the former director later acquired (Hunter Kane [25], CMS [96]).

(b) In these cases, the courts have had to balance the need to prevent the emasculation of fiduciary duties, which might occur if a fiduciary was free to exploit opportunities which arose during the course of the fiduciary relationship by the simple expedient of resigning, with public policy issues in relation to the restraint of trade. The result is that the courts have adopted a merits-based approach and the circumstances in which a former director has been found to have breached his or her fiduciary duty are highly fact-sensitive (Rix LJ, Foster Bryant [76]).

(c) The basis of the liability imposed on a former director for breach of fiduciary duty is not that the fiduciary duty survived the termination of the relationship as director, but that a breach of fiduciary duty prior to or at the termination of the relationship resulted in a liability to account for a profit which was realized after the termination of the relationship but causally connected to the breach (Rix LJ, Foster Bryant [69]; Cockerill J, Recovery Partners [75], [76]).

(d) Unless other factors are involved, it will not ordinarily be a breach of duty for a director to resign with the intention of setting up in business to compete with the business of the company of which the individual was formerly a director (Balston Limited v Headline Filters Limited [1990] FSR 285, per Falconer J at page 412; Foster Bryant [60]; Recovery Partners [84]). There will need to have been some additional element amounting to a breach of the obligation of loyalty owed by the director before or at the time of resignation.

(e) The underlying basis of the liability of a former director who exploits a business opportunity of the company is that the opportunity was of such a nature as to be treated as the property of the company at the time at which he or she was a director. The courts have employed the term "maturing business opportunity" - which is derived from the judgment of Laskin J in Canaero - to identify an opportunity which is sufficiently developed that the subsequent exploitation of the opportunity by a director following his or her resignation can be regarded as giving rise to a breach.

(f) For an opportunity to be regarded as "maturing", it is not necessary for it to have developed into a contract between the company and a third party. It may suffice that there has been contact between the company and a third party with regard to future business such that "some outlines of future contractual relations are in play" (Cockerill J, Recovery Partners [60]). However, the opportunity must (i) have come to the former director by reason of his position as a director and (ii) be an opportunity which the company was "actively pursuing" (Don King Productions Inc v Warren & others [2000] Ch 291 [40], [43]; Queensland Mines Limited v Hudson (1978) 18 ALR 1; Recovery Partners [65], [66]).

407. The fiduciary duties which form the general duties in Chapter 2 Part 10 CA 2006 are now part of a statutory code. There was broad agreement between the parties that the extension of the duty to avoid conflicts of interest in s175 CA 2006 by s170(2)(a) is intended to "extract the essence" of the principles which underlie the case law governing the circumstances in which a former director may be found to be in breach of duty by reference to post-resignation acts. However, the question remains whether the codification has had any material effect on the scope of the duty that it is intended to "replace".

408. The extension of the duty to avoid conflicts of interest in s175 by section 170(2)(a) is limited to cases involving the exploitation of "any property, information, or opportunity" of which a director became aware whilst he or she was a director. The phrase "any property, information, or opportunity" appears in s175(2). The interpretation of that phrase in the context of a breach of the duty in s175 during the existence of the fiduciary relationship would naturally have a broader meaning than would be accommodated by the pre-existing case law governing liability for breach of duty arising from post-resignation acts. However, it was common ground between the parties that the phrase "any property, information or opportunity" in s170(2) (a) (and accordingly when applying s175 in accordance with s170(2)(a)) should be given a narrower meaning consistent with the existing case law and, in particular, the case law concerning the need for a "maturing business opportunity" (such as Canaero and CMS). To my mind, that is the correct approach; it is consistent with the interpretation of the scope of the duty in s175 as extended by s170(2)(a) in accordance with the principles of s170(4) and permitted by the application of s175 in those circumstances with "necessary adaptations" in accordance with s170(2).

409. There was however a difference between the parties on the question of whether the effect of s170(2)(a) is that the duty continues after the termination of the directorship and accordingly whether a breach of duty could be founded solely on post resignation acts and so, for example, without a requirement to show that the resignation of the director was prompted or influenced by the director's desire to exploit a business opportunity for his or her own benefit.

410. On this point, as I have mentioned above, the better explanation of the pre- existing case law is, in my view, that conduct of a director after he or she has left office cannot of itself amount to a breach of duty. This is on the basis that a fiduciary duty must terminate with the fiduciary relationship from which it is derived. A claim of a breach of duty must therefore be based on actions of the director before or at the time of resignation. This is the approach adopted by Rix LJ in Foster Bryant, where, in analysing the decision of Lawrence Collins J in CMS, he took the view that the rationale of Lawrence Collins J's judgment was not that the fiduciary duty survived the end of the relationship as a director, but rather that the lack of good faith with which the further exploitation of the relevant property was planned whilst the defendant was a director constituted the breach of duty which ultimately (and with the relevant causal link) was diverted to the defendant's future enterprise (Foster Bryant [69]). A similar approach was taken by Cockerill J in Recovery Partners at [75] to [77].

411. The difficulty with that analysis in the context of the provisions of CA 2006 is that s170(2)(a) expressly provides that the duty in s175 to avoid conflicts of interest "continues" after the relevant person ceases to be a director. The implication is that conduct of a director after his or her resignation can give rise to a breach of that duty. Notwithstanding the instruction in s170(4) and the ability to apply s175 with "necessary adaptations", in my view, it is not permissible as a matter of construction to ignore the plain words of the statute. Accordingly, ... the extended duty imposed by s170(2)(a) is a continuing duty and that it must therefore be possible for a breach of that continuing duty to be founded on acts which take place after a director has resigned his or her directorship. It follows that, following the introduction of the general duties by CA 2006, it cannot be an absolute requirement for a breach of the extended duty that a director's resignation must have been prompted or influenced by his or her wish to acquire a business opportunity of the company.

412. Such a conclusion is of course contrary to the reasoning in some of the cases which discuss the common law rules and equitable principles on which the general duty in s175 is based, in particular, that of Rix LJ in Foster Bryant and Cockerill J in Recovery Partners to which I have just referred. However, the courts did not have to address in Foster Bryant or Recovery Partners the question of the interaction of the existing case law principles with the statutory code. My conclusion also, in theory, risks creating circumstances in which duties are extended beyond the scope of the duties imposed by common law rules and equitable principles on which the general duty is based and imposing liabilities for breach in cases where liability might not arise based on those principles. However, it is, in my view, an inevitable result of the codification.

413. It might be said that this interpretation also threatens the delicate balance which the courts (in the cases to which I have referred, and others) have sought to maintain between the protection of the fiduciary relationship (by preventing a director from resigning his or her position in order to make a profit at the expense of the company) and avoiding a regime which acts as a restraint on trade (by barring a former director from competing with a company of which he or she was formerly a director). However, I would not expect that to be the case for two reasons:

(a) First, the circumstances in which the extended duty can apply are limited to cases involving the exploitation of "any property, information or opportunity" of which the director became aware at a time when he or she was a director. For the reasons that I have given, this phrase remains to be interpreted in accordance with the existing case law principles.

(b) Second, it remains necessary – and consistent with the requirements of s170(4) – to give effect to the extended duty in accordance with the case law applicable to the common law rules and equitable principles underlying the relevant general duty to the extent possible (and so far as consistent with the words of the statute). So, for example, in deciding whether a breach of duty has occurred and the consequences of that breach, the court may take into account the nature of any pre-resignation and post-resignation conduct as part of the merits-based assessment approved by the Court of Appeal in Foster Bryant.'

Section 170(2) of the Companies Act 2006 provides:

'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.’