Covid-19: A smart step or a breach of duty?

For many companies and organisations around the world, Covid-19 has compelled them to reshape, rebrand or restructure. Directors are starting to look at new avenues to take to ensure that their business stays afloat. Unfortunately, as some companies are feeling the sting of insolvency or closing down as a result of the virus, some directors may use this time to exploit opportunities for themselves. Whilst this could help them reap the short-term benefits, in certain circumstances, they may be in breach of their fiduciary duties if they are not careful with their next steps.

These issues were determined in Keystone Healthcare Ltd and another v Parr and others [2018] EWHC 1509 (Ch) in which Front Row Legal acted for Keystone. It was ruled that Mr Parr had breached his duty, as a fiduciary, to report his own wrongdoing to Keystone concerning payroll and invoice frauds against the company. This resulted in Keystone suffering loss. It was further ruled that Medipro, the third defendant company, in undertaking a competing business was liable for dishonestly assisting Mr Parr in relation to his breaches of fiduciary duty.

Within this blog, we will also be taking a closer look at the more recent case of Davies v Ford & Another [2020].

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Case Background

Mr Davies was the owner of Greenbox Recycling Limited (GBR). Mr Ford and Mr Monks were the company’s directors. Both Ford and Monks had come together to create a similar recycling company named Greenbox Recycling (Kent) Limited (GBRK). GBRK conducted business in Ashford where GBR had previously operated. The original GBR was eventually struck off and dissolved later that year. GBRK continued in operation and grew into a success.

Mr Davies took Mr Ford and Mr Monks to court and argued that they breached their fiduciary duties as directors, specifically under s175 Companies Act 2006 which states:

“A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”

Mr Davies had stated that Ford and Monks had pursued their own interests ahead of the company’s, putting themselves in a position of “irreconcilable conflict”. Monks had then argued that no conflict of interest or breach had taken place as GBR was close to insolvency and that his and Ford’s actions were to save the company.

Decision

It was held that Monks had in fact breached s175 Companies Act 2006 and that he was undoubtedly placed in a position of conflict. Monks had taken steps to benefit GBRK including acquiring a lease of the Ashford site and conducting business there. Two important points to mention is that a) it was immaterial that GBR would not have been able to exploit any business opportunities and b) it was irrelevant why GBR was unable to take up future business opportunities because of any alleged insolvency issues.

Whilst similar cases have been seen by the courts, it does reinforce how the seriousness of a director’s duties. In addition, a director exploiting a business opportunity for the benefit of themselves will not be a valid defence should their particular case go to litigation.

What can this teach us about the relationship between business and sports during Covid-19?

As Front Row Legal specialises in all aspect of sports law, the same principle applies to its stakeholders, whether you are a sports agent, sports club director or stadium owner. In fact, it could be even more tempting as a director to take exploit a business opportunity as there is still uncertainty looming in the realm of sports, particularly that of the Premier League and other major sporting events to take place later this year.

It is worth noting that a breach in fiduciary duty does not just regard section 175 but can regard any of the fiduciary duties that fall under Companies Act 2006:

  • s171: Duty to act within powers
  • s172: Duty to promote the success of the company
  • s173: Duty to exercise independent judgment
  • s174: Duty to exercise reasonable care, skill and diligence
  • s175: Duty to avoid conflicts of interest
  • s176: Duty not to accept benefits from third parties
  • s177: Duty to declare interest in proposed transaction or arrangement

Whether you are a director yourself or are planning to make a decision with fellow directors, big or small, it will be necessary to think about your actions and how it could be interpreted as a breach of fiduciary duty.

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For more information on the cases of Keystone and Davies and a list of duties under Companies Act 2006, please visit the following websites:

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Front Row Legal are a boutique law firm that specialises in Sport, Media and Business Law in England and Wales. They have specialist knowledge in these areas of law, which means they can help where many law firms won’t have the experience. They are based in Leeds with a national client base. frontrowlegal.com