© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Director duties
- Solvent company may be able to take account of interests of group more generally (e.g. large, unsecured, interest-free loans to parent)
"[13] Mr McCall QC, for the Commissioner, submitted that in making very large unsecured interest-free loans to Carreras, and leaving them outstanding from year to year during a period of high inflation, CCJ had improperly subordinated its interest to that of Carreras, to the detriment of its own shareholders (especially the minority shareholders). Mr Milne QC, for CCJ, referred to the well-known and well-established practice of one company in a group performing a treasury function, and treating a group of companies as a single economic unit. Mr McCall did not refer to authority but he might have referred to Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, a remarkable case in which a co-operative society formed a partly-owned subsidiary, and after a few years set about trying to destroy it. The present case is on any view a long way from that, but there is no evidence or finding that in adopting and continuing this policy the board of CCJ was giving separate consideration to the interests of its shareholders (and especially its minority shareholders): for the need for separate consideration see Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, 67. More recent cases applying these principles are Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 and Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598.
[14] The position is summarised as follows in Mortimore, Company Directors (2009) para 12.18:
"In practice, however, it may be possible for the directors of a subsidiary to take into account the interests of the group more than the Charterbridge case suggests. Certainly, if the intended measure is likely to promote the success of the company for the benefit of its members as a whole, it is not a breach of duty for the director to take into account the benefit to the group as a whole. Moreover, in the case of a solvent company the interests of the subsidiary are likely to include the interests of its shareholders generally. In the case of a wholly-owned subsidiary, the interests of the subsidiary will therefore include its holding company."
As this passage indicates, in practice problems are most likely to arise if the subsidiary is at risk of insolvency, or is only a partly-owned subsidiary. In those cases the directors of the subsidiary will be under a duty to consider the interests of creditors or of minority shareholders.
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[27] In fact, as already explained, there is some reason to suppose that during the 1990s the Board of CCJ paid insufficient attention to the interests of a small and diminishing number of minority shareholders. But in the Board's opinion that cannot make artificial what would otherwise have been standard practice in corporate group structures throughout the world. There was no artifice in this apparent error. On such evidence as there is it seems to have been an oversight, and not part of a plan." (Commissioner of Taxpayer Audit v. Cigarette Company of Jamaica Limited [2012] UKPC 9)
Director as a fiduciary
- Must not without principal's consent keep a profit from their position as such or place themself in a position where their interest + duty may conflict
"[47] The rule that fiduciaries must not without their principal's consent keep for themselves a profit from their position as such (the "profit rule") and the related principle that fiduciaries must avoid placing themselves in a position where their interest and duty may conflict (the "conflict rule") have a long antiquity. The relevant case law, extending back over 300 years to Keech v Sandford (1726) Sel Cas Ch 61, was explored by the Supreme Court (sitting as a panel of seven) in Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209 ("Rukhadze"). It is unnecessary for the purposes of this case to look further than the judgment of Lord Briggs (with whom Lords Reed, Hodge and Richards agreed, being the majority) in that case.
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[51] The rule does not necessarily preclude a director of a company making profits from a venture unconnected with his role as a fiduciary..." (Song v. Smith [2026] EWCA Civ 719, Zacaroli, Whipple, Cockerill LJJ)
- Degree of connection between position and profit
CA 2006, s.175
"[52] The precise formulation of the degree of connection between a director's fiduciary position and the profit made is difficult to pin down. As Lord Briggs noted at §26, different judges have used different phrases over the years (such as a profit made "by use of" a fiduciary position or "by reason of and in the course of that fiduciary relationship" or "benefits which he obtained in the course of and owing to his directorship"). Lord Briggs used the following formulation, at §25:
"The duty, which may well extend beyond the end of the fiduciary relationship, is to account for profits made from, out of, or otherwise sufficiently connected with, the fiduciary relationship."
[53] What is clear is that it is no defence for a director to rely on any of the following, with reference to the relevant paragraph in Lord Briggs' judgment:
(1) The company would not have made the profit even if the director had not breached their fiduciary duty: §37, citing Industrial Developments Ltd v Cooley [1972] 1 WLR 443;
(2) The company could not have taken up the opportunity from which the profit arose: §24, citing Keech v Sandford (above) and Regal Hastings Ltd v Gulliver [1967] 2 AC 134, per Lord Porter at p.159;
(3) The director would have made the profit even if they had not committed any breach of duty: §5, §38 and §75 (rejecting the invitation to change the law in this respect);
(4) The company, had its consent been sought, would have permitted the director to take up the opportunity from which the profit arose: §40, citing Boardman v Phipps [1967] 2 AC 46 per Lord Guest at p.117." (Song v. Smith [2026] EWCA Civ 719, Zacaroli, Whipple, Cockerill LJJ)
- Director developing properties in opportunities arising out of or connected with fiduciary relationship
"[64] It would clearly be a breach of Mr Smith's fiduciary duties owed to SGR and KCL to develop any opportunities that arose out of or were connected with his fiduciary relationship with those companies. If Holton Road and Albany Road were such opportunities then, leaving aside the question of whether the termination of the joint venture impacts on this (the subject matter of Ground 2), there was a breach. It is no answer that the opportunity could not have been exploited by the company itself. That is clear from the principles confirmed in Rukhadze set out above." (Song v. Smith [2026] EWCA Civ 719, Zacaroli, Whipple, Cockerill LJJ)
- Duty to account does not cease re post-directorship profits
CA 2006, s.170(2)
"[54] Moreover, the duty to account does not end on the termination of the fiduciary relationship. The director's obligation to account applies to profits made from an opportunity exploited after the termination of the fiduciary duty where the opportunity arose prior to that termination and was sufficiently connected with the fiduciary relationship, as Lord Briggs explained at §4:
"Where profits are only made by the fiduciary after the fiduciary relationship has ended ("post-termination profits"), the fiduciary will still owe a duty to account if the profits have been derived from or made out of that former relationship. Typically the profits may be attributable to the development of an opportunity which the fiduciary learned about while performing his fiduciary role, or have been facilitated by the use of information which he received while acting in the same capacity."
[55] He went on to point out that the outcome of disputes as to whether post-termination profits fall within the duty to account are often very fact-sensitive." (Song v. Smith [2026] EWCA Civ 719, Zacaroli, Whipple, Cockerill LJJ)
Members authorising/ratifying breach
- Insolvency means members no longer have power to authorise/ratify
"[66] An important consequence of the company's insolvency, however, is that the members no longer have the power to authorise or ratify conduct which would constitute a breach of the director's duty to the company: see for example Sequana at §37 per Lord Reed. It may also be of significance when it comes to assessing whether a director's breach of duty has unfairly prejudiced the company's shareholders (a point I return to below)." (Song v. Smith [2026] EWCA Civ 719, Zacaroli, Whipple, Cockerill LJJ)