LAWS62023 - Company & Commercial Law

‘Module Name : ‘Company & Commercial Law
‘Module Code : ‘LAWS62023’
‘SU’ Reference’ No: ‘17029395’
‘Word’ ‘Count: ‘2748’
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INTRODUCTION
The role of directors have changed dramatically in the past 100 years. Earlier,
directors were not expected to devote much time for company businesses. The law now
demands a lot from a director because unlike in the past, the interests of the shareholder is at
center stage and directors have to abstain from making very serious errors. Directors as the
agents of the shareholders have a number of responsibilities.1 These fiduciary responsibilities
were established in English case law which are now codified in ss.171–177 of the Companies
Act 2006 (CA).2 For the purpose of this assessment, in order to understand the duty to avoid
conflict3 and other directors’ duties, it is vital to consider the corresponding common law and
equitable rules.4 This paper will first shed light on the duty to avoid conflict. The author will
then discuss and analyze the facts of Aberdeen Railway Co v Blaikie Bros5 along with
additional cases to illustrate the link between the duty to avoid conflict and the other
directors’ duties. Finally, whether the no-conflict-no-profit rule should be harsh or more
flexible is a broad question that must be discussed in this paper.
Aberdeen Railway Co v Blaikie Bros on s175
The primary provision in question is s175– the duty to avoid conflict.6 Section 170(3)
of the CA states that general duties are derived from old common law rules and equitable
principles and codified under this Act.7 Hence, the interpretations under old case law on
director’s duties shall be referred to apply the provisions under duty to avoid conflict. The
essence of the no-conflict-no-profit rule is that when a director is dealing in a proposed
transaction with the company and in this process has an unauthorized personal interest
conflicting his duty to the company, the contract is then void. Aberdeen Railway Co v
Blaikie Bros8 is the landmark case which set forth this principle on a contract entered by
Aberdeen Railway Co with Blaikie Bros in which Mr.Blaikie, a director in his own company
1 Susan McLaughlin, Unlocking Company Law (3rd edn, Routledge 2015) 326
2 Companies Act 2006, ss 171-177
3 Companies Act 2006, s 175
4 Companies Act 2006, s 170
5 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20
6 Companies Act 2006, s 175
7 Companies Act 2006, s 170(3)
8 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20 (Cranworth LJ)
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was also a partner. Here, Mr.Blaikie sacrificed the interests of Aberdeen Co for his own
company, in other words, his personal interest. This is a breach of s175. A remedy for breach
of s175 would be rescission of the contract.9
The rationale for the no-conflict-no-profit rule is to protect companies. Lord
Cranworth in Aberdeen10 made clear a corporate body can only act by agents and thereby it is
the duty of agents to uphold the interests of the company. For this reason, Lord Cranworth
further stipulates that a director as an agent cannot put himself in a position where his interest
and his duty would conflict.11 Therefore, the no-conflict-no-profit rule is a “precaution”
against the abuse of power.
Lord Herschelle described the no-conflict-no-profit rule as in-flexible, his elaboration
in Bray v Ford12 suggest that a director is not allowed to put himself in a position where his
interest and his duty to the company is in conflict because of the high possibility that the
director would give in by interest rather than by duty.13 This was the same approach in
Aberdeen.14 The high possibility that a director would choose his interest over his duty is the
very reason the no-conflict-no-profit rule is harsh.15 Lord Laskin in Canadian Aero Services
Ltd v O’Malley16 reasoned the strict application of the rule is due to the level of control a
director has over the company.17 A director is given the duty to exercise independent
judgment within s173.18 Since Mr.Blaikie had the discretion to use his directorial power
without the interference of others, the delegation of power led to abuse of power. For this
9 Ewan MacIntyre, Essentials of Business Law (3rd edn, Pearson 2011) 173
10 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20 (Cranworth LJ)
11 Robert Flannigan, ‘The adulteration of fiduciary doctrine in corporate law’ (2006) Law Quarterly
Review 450
12 Bray v Ford [1896] AC 44 (Herschelle LJ)
13 Rebecca Lee, ‘In Search of the Nature and Function of Fiduciary Loyalty: Some Observations on
Conaglen's Analysis’ (2007) Oxford University Press 329
14 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20
15 Lee (n13) 330
16 Canadian Aero Service Ltd v O’Malley (‘Canaero’) [1973] 40 DLR 371 (Laskin LJ)
17 James Cox, ‘Managing and Monitoring Conflicts of Interest: Empowering the Outside Directors
with Independent Counsel’ (2003) Villanova Law Review 76
18 Companies Act 2006, s 173
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reason, the harshness of the rule is necessitated to keep the directors under good behavior to
preserve scrutiny.19
A Director’s Guide to Avoid Allegations
A director can escape the rules of no-conflict-no-profit by two means; an exclusion in
the constitution or ordinary resolution.20 In Aberdeen,21 Mr.Blaikie was a director in both the
companies therefore this would allow more possibility of breach. However, there is no
obstruction that a director cannot be a director in other companies. The reason being that a
director can opt for an ordinary resolution to maintain the transaction22 by ‘declaring his
personal interest to the company board’ within s177.23 In Bhullar v Bhullar,24 Jonathan Parker
LJ held the duty to avoid conflict was breached because the appellant did not first declare
their intentions to the co-directors. Likewise, in Aberdeen,25 Mr.Blaikie did not declare his
interest in the arrangement therefore he is in breach of his duty within s177 and s175 for the
profits he received. By contrast in Foster Bryant Surveying Ltd v Bryant,26 Mr.Bryant had
successfully resigned from the company before taking up the contract so he was no longer a
director, in other words, he was not in the capacity of having a fiduciary relationship.
Therefore, the court held there was no breach of s175 in this case. However, in Industrial
development Consultants v Cooley,27 Mr.Cooley was under the fiduciary duty at the time he
decided to take up a project privately and did not disclose this to the company therefore Lord
Roskill held Cooley accountable for the benefits received. Notice, the directors have to
always declare their personal interests and they cannot hide behind a veil, this underlines
transparency.28 Not to forget, the ordinary resolution brings in the element of ‘board-
consent.’29 The possibility that a director can ‘still carry on’ with the transaction despite a
19 Nicholas Bourne, Bourne on company law (6th edn, Routledge 2013) 175
20 Alan Dignam & John Lowry, Company Law (7th edn, OUP 2012) 382
21 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20
22 Lucy Jones, Introduction to Business Law (2nd edn, OUP 2013) 574
23 Companies Act 2006, s 177
24 Bhullar v Bhullar [2003] 2 BCLC 241 (Parker LJ)
25 Aberdeen Railway Co v Blaikie Bros [1853] 15 D HL 20
26 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200
27 Industrial Development Consultants (IDC) Ltd v Cooley [1972] 1 WLR 443 (Roskill LJ)
28 Deirdre Ahern, ‘Legislating for the Duty on Directors to Avoid Conflict of Interest and Secret
Profits: The Devil in the Detail’ (2010) Irish Jurist 85
29 Charles Wild & Stuart Weinstein, Smith and Keenan’s Company Law (17th edn, Pearson 2016) 201
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