Directors be aware – your duties will be owed after you leave

08/06/2021

It is well established that directors owe duties to their company during their time in office. But the recent case of Burnell v Trans-Tag Ltd and others [2021] EWHC 1457 (Ch) (28 May 2021) has highlighted that those duties last long after an exit and clarified the difficult law in this area.

Statuatory Obligations

A significant aspect of the implementation of the Companies Act 2006 was to establish that directors owe statutory duties to their company. This was a major change from previous legislation as prior to this, duties were derived from common law and refined by judges over time. As such, obligations to avoid conflicts of duty, to act in good faith to promote the success of the company, and to exercise reasonable care, skill, and diligence, can easily be reviewed in the statute books.

Duty to avoid conflicts

Clearly a conscientious director should avoid conflicts of interest throughout his tenure. Although this is often commercially difficult to avoid, and mechanisms exist to permit directors to do so following disclosure, there is much sense in requiring officers to dedicate themselves to the success of their corporation. Section 175 of the 2006 Act says as much and paves the way to require directors to act in a company’s best interests.

Duties continue longer than you think

In considering the case in hand, the deputy judge Ashley Greenbank explained the pre 2006 Act case law as providing that the conduct of a person after leaving office could not by itself amount to a breach of duty. But this is in contrast to the current position given that section 170 of the 2006 Act extends the duration of the section 175 obligation after the directorship ceases in certain circumstances.

For the case in hand these circumstances were the exploitation of property, information, or opportunities which the person became aware of when in office. Such breach, found the deputy High Court judge, can occur even when the acts causing the breach took place after leaving office.This was the crucial part of the judgement and consequently the former director was in breach of his director duties.

No alternative to covenants

Ultimately the case turned on its own specific facts. Although the concept is clear, the extended nature of statutory director duties should not be viewed as an alternative to a well drafted director service agreement containing carefully prepared restrictive covenants. Whereas provisions in the 2006 Act are relatively narrow, restrictive covenants have the potential to be wider and thereby offering a far better opportunity to concentrate on particularly risky areas. The corporate and commercial team at Pinney Talfourd is ideally placed to advise on how best to protect your company from any such unwanted post termination developments.

More information

If you require any assistance in this area, please contact our corporate and commercial team here.

This article was written by Edward Garston, Partner in our Coompany & Commerical Team. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2021.

08/06/2021

Authors

Edward Garston

Partner

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