Chapter 7 Directors' Duties - alastairhudson.com

the fundamental rule of equity that a person in a fiduciary capacity must not make a
profit out of his trust which is part of the wider rule that a trustee must not place
himself in a position where his duty and his interest may conflict.‟
These dicta contained the central statement of principle to the effect that the constructive trust
in this case is predicated on the need to prevent conflicts of interest.
The House of Lords in Regal v Gulliver 119 considered a situation in which four directors of a
company which operated a cinema sought to divert a business opportunity to acquire two
further cinemas to a separate company which they controlled. The first company could not
afford to acquire the rights to all of the cinemas out of its own resources and its directors
were reluctant to give personal guarantees for the extra sums needed. Therefore, the four
directors of the plaintiff company and a solicitor subscribed for shares in the second company
which took up the opportunity. Control of the original company passed into new hands and so
that company brought proceedings against the four directors to account for the profits which
they had realised from these transactions. It was held that the directors‟ profits on these
shares were profits made from their fiduciary offices as directors. Therefore, they were
required to account for those profits to the company. Lord Russell was clear that the
obligation to account for profits was in no way predicated on proof of fraud or mala fides on
the part of the directors. “The liability arises from the mere fact of a profit having, in the
stated circumstances, been made”, in the words of Lord Russell, by a fiduciary. Because the
four directors were acting as directors of the plaintiff company at the time they entered into
this transaction and made their profits, they were liable to account for them to the plaintiff
company. Lord Russell relied on the principle in Keech v Sandford and the other cases
referred to above in finding that this was intended to be a strict rule. All of their lordships
delivered concurring speeches affirming the importance of the strict principle that fiduciaries
may not earn unauthorised profits from their fiduciary offices. The four directors were not
able to rely on their purported grant of authorisation to themselves to pursue this opportunity
on their own account. Equally, if a director seeking authorisation from the other directors
fails to make sufficiently full disclosure of all the relevant facts, then that director will not be
taken to have acquired authorisation to earn personal profits. 120 It was held by Lord Russell
that the directors could have acquired authorisation by seeking a vote of the general meeting
of the company‟s shareholders to agree to the transaction. Under s.175(4) and (5) of the CA
2006, that would no longer be required, as discussed above.
The general principle that the profit must relate to a conflict of interest
The general principle is predicated on the need for any person acting in a fiduciary capacity
to avoid conflicts of interest, and will therefore not be excluded where the fiduciary suggests
119 [1942] 1 All ER 378.
120 IDC v Cooley [1972] 1 WLR 443; Gwembe Valley Development Co Ltd v Koshy (No 3) [2004] 1 BCLC 131,
where the managing director of a company formed to farm in Zambia failed to disclose his personal interest in
activities in which the company was engaged and therefore was held to be liable to account to the company for
the profits which he had made.
34