Chapter 7 Directors' Duties - alastairhudson.com

Disclosure of directors' interests in corporate transactions under the self-dealing rule
Before the 2006 Act was passed, the application of fiduciary principles to directors allowed a
company automatically to avoid any contract which the board entered into on its behalf in
which one or more of the directors had an interest, unless that interest had been disclosed to
the company and approved by the general meeting. 169 This was so, whether or not the director
was acting bona fide for the benefit of the company. Any benefit derived by the director from
such a contract could also be recovered. 170 This is, broadly speaking, the effect of s.177 as
discussed above. This need to disclose an interest was extended to include not only contracts
made directly with a director (such as a director‟s service contract) but also those in which he
had an interest (for example as a shareholder 171 or as a partner 172 of the other contracting
party). It does not apply to interests of a director's spouse or other personal contacts. In such a
case only the usual fiduciary duty will apply but it has been suggested that the burden of
proving good faith and so forth should be placed on the directors. 173
What constitutes an interest which must be disclosed
Another difficult issue in the case law related to the sorts of material which would amount to
an interest which must be disclosed. In Cowan de Groot Properties Ltd v Eagle Trust, 174 the
question arose as to whether in a contract of sale between A Ltd and B Ltd a director of A
who was either a creditor of B, or of shareholders of B, had a disclosable interest. The judge
was of the opinion that in most cases that would not amount to a disclosable interest but that
circumstances could exist where the director would have an interest in B making that
contract. He did, however, state that a director who was a bare trustee for another would not
have a disclosable interest. In Runciman v Walter Runciman plc, 175 this was expressly
decided despite the “apparent absurdity" of requiring such a disclosure where it is patently
obvious that the director has an interest.
Whether disclosure can be implied in the circumstances
Situations in which a director has an interest in a transaction but in which it is contended that
the other directors ought to have known that fact, however, raise the further question of
168
Ferraby v Hobson (1847) 2 Ph 255; Burrell v Burrell‟s Trustee 1915 SC 333.
169
Aberdeen Ry. Co. v Blaikie Bros. (1854) 1 Macq. 461. The right to avoid a contract for non-disclosure is not
affected by the provisions of the first E.C. directive: Coöperative Rabobank „Vecht en Plassengerbeid' BA v
Minderhoud [1998] 2 B.C.L.C. 507, ECJ.
170
Parker v McKenna (1874) L.R. 10 Ch.App. 96 at p.118, per Lord Cairns L.C.
171
Transvaal Lands Co. v New Belgium (Transvaal) Land, Co. [1914] 2 Ch. 488, CA.
172
Costa Rica Ry. v Forwood [1901] 1 Ch. 746, CA.
173
Newgate Stud Company v Penfold [2004] EWHC 2993 (Ch).
174
[1991] B.C.L.C. 1045.
175
[1992] B.C.L.C. 1084. See also Re Neptune (Vehicle Washing Equipment) Ltd (No. 1) [1995] 1 B.C.L.C.
352.
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