Towers v Premier Waste Management Ltd

A director of a company is appointed to direct its affairs. In doing so it is his duty to use his position in the company to promote its success and to protect its interests. In accordance with equitable principles the special relationship with the company generated fiduciary duties on the part of a director. His fiduciary commitments to the company took the form of a duty of loyalty and a duty to avoid a conflict between his personal interests and his duty to the company.

Those duties, which were simple, strict and salutary, were the basis of the respondent company’s claim against the appellant director that he had breached his duties by accepting personal benefits from one of the company’s customers. He did not disclose the benefits to his fellow directors or seek or obtain their approval on behalf of the company.

I have described the equitable principles and duties in the past tense because, under codification measures in Chapter 2 of the Companies Act 2006, a director’s general duties to the company are now statutory. The codified duties are expressly derived from common law rules and equitable principles as they apply to directors. The relevant events in this litigation occurred in 2003, well before those provisions of the 2006 Act were brought into force. Although the pre-2006 Act common law rules and equitable principles continue to apply to a pre-2006 Act case, it is unrealistic to ignore the terms in which the general statutory duties have been framed for post-2006 Act cases. They extract and express the essence of the rules and principles which they have replaced.

Section 170 (3) provides that those general duties-

“…have effect in place of those rules and principles as regards the duties owed to a company by a director.”

That did not consign the replaced rules and principles to legal history because s. 170 (4) provides that-

“The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”

Three of the general statutory duties would be potentially applicable to the facts of a case like this occurring after the relevant provisions of the 2006 Act had come into effect:-

What are the equitable principles and duties that apply to the facts of this case and are available for the interpretation and application of the general statutory duties?

Lord Cranworth LC in Aberdeen Railway Co v. Blaikie 1 Macq 461 at 471 explained how potential conflicts of interest are to be avoided by those who are committed as directors to be loyal to the company:-

“ And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interest of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.”

In Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 at 636 Upjohn LJ said that the principle has nothing to do with establishing that the director is guilty of fraud or corruption. In the case of a company director the principle recognises the primacy of the interests of the company which he is trusted not to betray. Thus a company is entitled, in the words of Upjohn LJ, “to the undivided loyalty of its directors.” We have been reminded by counsel for the appellant that Upjohn LJ referred to the rule as being a broad and flexible one to be fashioned according to changing circumstances and to be applied with common sense and realistically: see pp 636 and 638. That approach to the formulation and the application of the principle does not, however, undermine the strict nature of the liability enshrined in the principle where it applies. The rationale and the justice of the principle lie in its strict regard for the protection for those interests potentially at risk from a director who does not give his undivided loyalty to the company.

Thus a director’s liability for disloyalty in office does not depend on proof of fault or proof that a conflict of interest has in fact caused the company loss: Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200. A director’s potential conflict of interest may arise, for example, in connection with a business opportunity. If a director obtains the opportunity for himself, he will be liable to the company for breach of duty regardless of the fact that he acted in good faith or that the company could not, or would not, take advantage of the opportunity.

As explained by Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver [1967] AC 134 at 144 the liability of a fiduciary to account for the profit made by use of his position-

“ …in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged of benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.”

Equity’s response of strict liability to account for breach of a fiduciary duty is similar whether the liability is triggered by an event which breaches the loyalty duty, or the “no conflict principle”, or the “no profit principle.”

This case arose from a director’s acquisition of equipment for his personal use by way of a free, undisclosed and unapproved loan from one of the company’s customers. In its proceedings against the director the company joined the customer as a co-defendant. The claim against the director was that he was under a liability to account to the company for breach of the loyalty and the “no profit” and “no conflict” duties.

Premier Waste Management Limited (the Company) is a waste disposal and treatment company. It brought this action against Mr Philip Towers, a director of the Company from June 2001 until December 2007 when he left on what may fairly be described as bad terms. It came to light in 2008 that Mr Towers had in 2003 accepted from Mr Colin Ford, a customer of the Company, a personal loan of plant and equipment without charge. Mr Towers did not tell the board of the Company about the transaction. He returned the plant and equipment in 2008 after Mr Ford had invoiced the Company for the cost of its hire.

The Company made a claim against Mr Ford for a declaration that it was not liable to pay hire charges to him and a claim against Mr Towers for an account of the profit received by him. Mr Ford counterclaimed for the cost of the hire of the equipment. Neither that claim nor the cross claim feature in the appeal, as the Company and Mr Ford have settled their differences. Viewed commercially, an aspect of the matter pressed on the court in various submissions on behalf of Mr Towers, it is surprising that Mr Towers and the Company have not also found a way of settling their differences given the modest amounts at stake and the substantial costs incurred.

The appeal brought by Mr Towers is from an order made by HHJ Roger Kaye QC on 15 October 2010 to pay to the Company within 28 days the sum of £5,200 together with interest making a total of £7,997.31. That is considerably less than the larger sum of £48,525 claimed against him by the Company. The judge based his award on a finding that Mr Towers had acted in breach of duty and that he had used the equipment for a period of 6 months in 2003, but not for the whole period of 5 years down to his return of the equipment. The judge based his quantification of the benefit obtained by Mr Towers on the rate which Mr Ford had sought to charge the Company which represented the best evidence of what it would have cost Mr Towers to hire the same equipment in the open market. The judge ordered Mr Towers to pay the costs of the action.

On 9 December 2010 Arden LJ granted permission to appeal. Mr Towers seeks to have the Company’s action dismissed with costs.

The Company cross appealed against the judge’s finding, which affected the quantification of its claim, that the period of user of the plant was only for 6 months rather than for the whole period from 1 January 2003 to 20 May 2008 while it was in the possession of Mr Towers. Towards the end of the hearing, and after responding to the appeal by Mr Towers, the Company abandoned its cross appeal.

Mr Ford ran a small business supplying plant and machinery for sale and hire. The Company was one of his customers. He also bought redundant items of machinery from the Company. He usually dealt with Mr Mike Rafter, the operations manager who worked in the Treatment and Disposal Division of the Company headed by Mr Towers.

In January 2003 Mr Ford loaned a second hand Kubota 350 excavator and a Rough Rider dumper to Mr Towers, who used it in the renovation of a dilapidated farm house and outbuildings belonging to him and his wife. The arrangements were made by Mr Rafter with Mr Ford who asked what was in it for him. Mr Rafter made it clear to Mr Ford that there was nothing in it for him. Mr Towers was not directly involved in the dealings with Mr Ford.

The equipment remained at Mr Towers’s property until 28 May 2008. He says, and the judge found, that he only used it for 6 months in 2003. An excavator was needed to dig out a trench to lay a mains water pipe to the house and a small dumper truck was needed to carry aggregates and spoil and other materials around. Five years then passed before Mr Ford requested the return of the equipment. Mr Towers understanding was that Mr Ford was going through a divorce and was happy for the equipment to be off his premises and not count as his assets for the purposes of any claim his wife might have.

The plant was old, dilapidated and in poor condition. It needed remedial work done to it. Mr Towers did some of the repairs and fittings (such as a fuel tank for the excavator) at his own expense. The excavator’s tracks then broke before Mr Towers had finished using it. Mr Rafter arranged for the purchase of new tracks via the Company and for them to be fitted. After they were fixed Mr Towers used the excavator for a short period. The cost was left to Mr Rafter who arranged for the work to be paid for through the Company. The Company was to be reimbursed. In December 2005 Mr Rafter raised an invoice for £1860 on Mr Ford who re-imbursed the Company for that sum on the basis that he was getting back an excavator in better condition than when he had loaned it. When Mr Towers discovered the financial arrangements made by Mr Rafter about the tracks he reprimanded him for having put the matter through the Company.

In April 2008 Mr Ford sent an invoice for £45,825 to the Company alleging that it had hired a small excavator and dumper truck from him in 2004 and 2005 which had not been returned. A further invoice was submitted by Mr Ford to the Company for £1,645 covering the period till May 2008 when Mr Towers finally returned the items to Mr Ford. The invoices suggested that Mr Rafter was involved. Meanwhile the Company had conducted an investigation and issued proceedings against Mr Towers and Mr Ford in February 2009.

The judge found that, in the main, Mr Towers and Mr Rafter were truthful witnesses (Mr Ford was not called to give evidence). The judge was not over impressed by Mr Towers, finding that he down-played his role, regarded the whole matter as insignificant and did not seem to appreciate his position of trust as a director. The judge commented that his attitude throughout was that this was an entirely personal matter having nothing to do with the Company and that Mr Ford was merely doing him a favour. He denied being in any position to influence any transaction that Mr Ford might do with the Company after or in consequence of the loan and pointed to the system of financial controls that existed within the Company. In another part of the judgment the judge commented that Mr Towers was someone who did not really seem to appreciate the trust and confidence imposed upon him by his position as a director.

His principal findings of fact were that Mr Rafter organised the loan of the equipment plant to Mr Towers by Mr Ford and that Mr Towers only used the equipment for 6 months in 2003 during which period it was repaired. The judge concluded that Mr Towers should account to the Company for that period at the same weekly rate that Mr Ford had attempted to charge the Company.

In rejecting Mr Quiney’s submissions the judge held that there was a causal link or connection between Mr Towers and Mr Ford via Mr Rafter, who acted as Mr Towers’s agent for the purposes of negotiating with Mr Ford, knew Mr Ford as a customer of the Company and, with knowledge of opportunities that Mr Ford had through his business connections and through his being a customer of the Company, went to see him to see if he had any equipment he could lend to Mr Towers.

As for Mr Quiney’s submission that the matter of the loan was insignificant or “commonplace” and could be dismissed or ignored, the judge held that the focus was not on the condition of the equipment or the amount involved but on the principle of no profit and the secrecy of the undisclosed fact of benefit. He said:

“ 44. … A secret profit may be large or small; it matters not which. The vice is the fact that it is secret, undisclosed. If it was so innocent or insignificant it ought to have been and could have been disclosed, especially (if not before) when the invoice for the tracks came to light in 2005.”

As for Mr Quiney’s contention that there was no actual influence or conflict and no loss or effect on the Company’s business, the judge said that there was in fact a loss of money on the finance used to buy the new tracks. He added that, in any event, the Company was not obliged to prove any loss: “The potential conflict was more than fanciful or theoretical; it was real.” Mr Towers had signed off at least one transaction involving Mr Ford or was in a position to do so. His potential involvement in the approval of transactions involving Mr Ford was yet another opportunity for him to make disclosure to his fellow directors and he failed to do so.

The judge concluded that Mr Quiney’s other arguments based on commercial reality, flexibility and fairness did not assist:-

“46.

…I find nothing in any of these points on the facts of this case. Loans of equipment and favours may be commercial reality but that does not say they need not be disclosed: quite the contrary. As to flexibility and fairness, I see nothing unfair in the circumstances of this case: Mr Towers was a director; as such he owed duties of loyalty to the company of which he was a director. He borrowed equipment for personal use over an extended period from a corporate customer. He should have disclosed it, if it was a commonplace and innocent he had nothing to fear from so doing. In my judgment, I see no reasons for not applying the rule and I accordingly find him liable to account or compensate the company for the benefit he received in connection with the loan.”

He also held that Mr Towers should not be excused under s.1157 Companies Act 2006 (replacing s.727 Companies Act 1985) which was in force at the date of judgment and provides that

“If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.”

The deputy judge rejected Mr Quiney’s contention that Mr Towers had acted reasonably in relying on Mr Rafter and should be excused or relieved of liability, saying simply-

“50.

…He acted unreasonably in failing to make disclosure…”

There is no challenge by Mr Quiney, appearing for Mr Towers, to the primary findings of fact by the deputy judge. He submits that the “unfortunate feature” in the judgment below was the adoption of a strict and technical approach to the application of a broad flexible principle that covered diverse situations ranging from the corruption of a bribe to harmless hospitality gifts. The judge had also confused the principles relating to making a secret profit with the duty to disclose for the purposes of obtaining approval from those entitled to object.

Mr Quiney contended that, on the proper approach, Mr Towers had not been placed in a position of conflict between his own interests and those of the Company. The judge misapplied the proper test of “a real sensible possibility of conflict” having regard, in particular, to a number of factors: the small amount involved, which he called negligible and de minimis; the dilapidated condition of the plant and equipment; and the nature of the relationships between Mr Ford, Mr Rafter and Mr Towers, which Mr Quiney described as private, informal, ad hoc and amongst friends, though he emphasised the absence of direct contact between Mr Towers and Mr Ford, Mr Rafter having taken the initiative in suggesting the loan and Mr Ford having received no favours from Mr Towers in relation to the transaction. He sought to distinguish that situation from things done by Mr Towers in his capacity as director of Company. He also relied on the financial controls in the Company for the proposition that any potential benefit to Mr Ford in the form of additional business between him and the Company was not easily attributable to Mr Towers because a network of authorisations was required and Mr Towers did not generate such business.

The judge was criticised for adopting an approach that was overly technical and strict in the light of recent case law such as Foster Bryant (see above).

The judge wrongly overplayed the fact of non-disclosure when no duty to disclose the loan was pleaded. Mr Towers made no disclosure because he genuinely did not consider that the loan was potentially unlawful or notifiable to the Company. It was submitted that the loans were not in the context of Mr Towers’s capacity as a director of the Company but rather a private arrangement between friends negotiated by Mr Rafter.

The causal link between the breach of duty and the obtaining of a benefit of value was also challenged. The deputy judge should have looked at the negligible or nominal value of benefit received by Mr Towers rather than at the putative cost that he had saved in not having to pay for the cost of hiring the equipment in the market. It was never put to Mr Towers at trial whether, but for the loan, he would have hired the relevant plant at commercial rates.

Finally, the judge erred in not exercising his statutory discretion under s.1157 Companies Act 2006 to relieve Mr Towers from liability for any breach of duty. The judge had failed to consider all the factors and circumstances relevant to the exercise of his discretion: the nature of the relationships of Mr Towers, Mr Ford and Mr Rafter, the modest value of the benefit obtained by Mr Towers and the absence of a real risk of conflict supported the exercise of discretion. The absence of detailed or cogent reasons underlying the decision refusing relief was a defect in itself and illustrative of the general defect in the decision.

For the Company Mr Alastair Walton made very concise submissions in support of the judgment under appeal.

First, the judge applied the correct test of whether there was a real sensible possibility of conflict and rightly held that there was. Mr Towers and Mr Rafter knew Mr Ford only via the Company. Mr Ford continued to deal via Mr Rafter with the Division of the Company headed by Mr Towers. The relationship between him and them was via the Company. The interposition of Mr Rafter was as irrelevant to the application of the no–conflict principle as the alleged friendship and the absence of a corrupt motive. The dealing between them was a case of an actual conflict of interest and duty.

Secondly, the equipment and plant was of benefit to Mr Towers, even though it was not commercially hireable, because it was sufficient for the purpose for which he acquired and used it without having to pay any hiring charges.

Thirdly, it is irrelevant that there was “nothing in it” for Mr Ford. His motive was irrelevant. The facts are that Mr Towers needed the equipment and plant; he borrowed it from Mr Ford without the approval of the Company; and he in fact used it.

Fourthly, it is irrelevant that the condition of the equipment was such that it was of no commercial value and could not have been loaned on the market in that condition. It was necessary to look at the benefit to Mr Towers, who needed the equipment. Under the free hiring transaction he was saved the cost of hiring the equipment on the open market and the Company lost an opportunity to consider whether it wanted it or not.

Fifthly, Mr Rafter had ordered the new tracks through the Company and the Company was left out of pocket on a sum of £1,860 for 2 ½ years. He did not report this to the Company, which was used for a private transaction benefiting Mr Towers and left the Company out of pocket until it was re-imbursed. That was an acute conflict of interest about which he reported nothing to the Company when he discovered how the new tracks had been paid for.

Finally, there should be no relief from liability. It was unreasonable of Mr Towers not to make disclosure of the transaction to his co-directors so that, if he had, they would have been able to consider whether they objected to it. It was irrelevant that it was not alleged or proved that there was bad faith or corruption on his part. It was for Mr Towers to show that he had acted honestly and reasonably in compliance with the no conflict principle if he wished to be relieved of liability. He had not done that. His reliance on Mr Rafter as a go-between with Mr Ford to get the equipment was irrelevant. Mr Ford did a favour for Mr Towers, who got the plant free. The Company suffered a loss for which he did not re-imburse it and Mr Ford sought to claim hire charges from the Company. The informality of ad hoc arrangements said to be between friends was also irrelevant to the claims and the conduct which gave rise to liability. The Company was also wrongly used to pay for the repair of the tracks and had lost interest for 2 ½ years on the sum of £1,860.

As for the cross appeal, which is no longer pursued, the Company’s case was that the judge was plainly wrong about the period during which Mr Towers used the equipment and in holding him accountable only for the period 1 January 2003 to 1 July 2003 on the basis that he only used it for that period thus reducing his liability from £55,900 to £5,200. He did not return it after use for redevelopment works at the property. Had he finished with it after 6 months? The Company knew nothing of this. Building works continued at the property until July 2007.

The grounds of appeal fall under three broad headings.

The emphasis in Mr Quiney’s submissions was that Mr Towers did not make a significant profit from plant and equipment in poor condition that would have been of no value to the Company and that there was no evidence that Mr Towers would have gone out into the market to hire equipment at commercial rates. It was not established that he had obtained a valuable benefit.

In my judgment, the submissions miss the point. The applicable duties are of a director’s loyalty to the Company and the duty to observe the no conflict principle, which embrace a duty not to make a secret profit for himself. The no conflict duty extends to preventing Mr Towers from disloyally depriving the Company of the ability to consider whether or not it objected to the diversion of an opportunity offered by one of its customers away from itself to the director personally.

Mr Quiney cited The Parkdale [1897] P 53, an Admiralty case, as an instance in which a person in a similar position to a company director (in that case the master of a ship) was held by the court to be entitled to retain for himself a gift from a customer (the consignee of a cargo) of his employer (the owner of the ship).

In my judgment, that authority does not assist Mr Towers. The decision did not turn on a breach of fiduciary duty. The case was one of an employee accepting a customary tip from a customer with the employer’s knowledge. The point arose in the taking of an account in an action in rem for wages. The master of the ship had received gratuities from the consignee of the cargo for the efficient manner in which he had superintended the discharge of the cargo. The judge found that the owner of the ship knew of the gratuities and that it was customary to allow them to the master. The Court of Appeal rejected the argument that, if the master were allowed to retain them, he would be blind to the interests of his employer and tend to suit the convenience of the consignee. Gorell Barnes J said at p58 that he accepted that no master or other agent was allowed to keep a secret commission and so act against the interests of his employer, but that this was “a little present” or common form of gratuity that the master was entitled to accept. It was not antagonistic to the owner’s interests. Jeune P described it as a present for doing his duty extra well: it was not a secret commission case or a no conflict case.

The “commercially sensible” defences set up by Mr Quiney to the breach of the undivided loyalty duty also miss the point: the strict no loyalty and no conflict duties were breached by Mr Towers. The absence of evidence that the Company would have taken the opportunity, or has in fact suffered any loss, or that Mr Towers or Mr Ford had any corrupt motive or that, if there had been no free loan, Mr Towers would have hired that sort of equipment in the market; the fact that the value of the benefit to Mr Towers was small and that Mr Ford received no benefit from it; the fact that Mr Rafter and not Mr Towers dealt directly with Mr Ford and was the prime mover: none of those matters supported the contention that there was no breach of the duty of loyalty or the no conflict duty.

The deputy judge is criticised for not taking all the relevant circumstances into account in the exercise of his discretion to grant relief, which he dealt with very briefly.

In my judgment, this ground of appeal fails. The brevity of judicial treatment of this point is not a defect in this judgment. Brevity is a compliment to the judge rather than a criticism of his judgment, because there was very little that could sensibly be added to what had already been said earlier in the judgment about the case and about the conduct of Mr Towers. A judge should not feel obliged to be a legal windbag repeating himself at length just for the sake of it. Reasons for a decision do not have to be long-winded or repetitive in order to pass muster as sufficient and satisfactory in value.

The position simply was that Mr Towers owed fiduciary duties to the Company and acted in breach of them in circumstances where there was no mitigating factor and no evidence of injustice or hardship which might be relevant to granting relief in his favour. The factors relied on by Mr Quiney were in the main a rehash of what he had relied on, without effect, to dilute the duty to be loyal or to cancel the fact that the duty was breached by an act of disloyalty. The absence of any finding of bad faith or of any actual conflict; the reasonableness of reliance by Mr Towers on Mr Rafter to sort matters out; the lack of direct contact between Mr Towers and Mr Ford, the fact that Mr Towers and Mr Rafter were friends and colleagues; and the absence of quantifiable loss by the Company or the negligible profit to Mr Towers do not justify relieving Mr Towers from the consequences of his breach of fiduciary duty.

Other aspects of the matter work positively against exercising discretion in favour of Mr Towers. The ordering of new tracks through the Company and the Company’s payment of that cost is impossible to justify and is a factor that militates against any relief.

I would dismiss the appeal. Mr Towers has not begun to demonstrate that the judge’s decision was wrong on liability for breach of fiduciary duty.

The cross appeal was abandoned in the course of the hearing and is dismissed.

I agree.

I also agree.