The Court of Appeal decision in the case of Fairford Water Ski Club v Cohoon & Anor  EWCA Civ 143 is a useful reminder to directors of the need to declare their interest in a contract or proposed contract with their company. The case also serves to highlight the differences between the declaration requirements of the Companies Act 1985, as compared to the Companies Act 2006.
Why does this matter?
The Companies Act 2006 (CA 2006) introduced a number of duties to which all company directors are subject. In particular, some of the statutory duties relate to directors’ conflicts of interest between the company and their personal interests. Directors need to be aware of these duties because if they do not make appropriate declarations in relation to conflicts, they risk claims for breach of duty against them. They may ultimately be held liable to account to the company financially for those breaches.
The rationale underpinning the disclosure requirement is that following a disclosure, the board of directors can pause for thought and consider the director’s interest in a contract or proposed contract before deciding on how the board wishes to proceed. Section 317 of the Companies Act 1985 (Section 317) set out the rules for declarations of interests up to 30 September 2008. Thereafter section 177 of CA 2006 (Section 177) applies.
The decision in Fairford Water Ski Club
Fairford ran a member’s water skiing club. Mr Cohoon was one of its directors. Mr Cohoon was also a partner in a business called Watersports that operated a water skiing school out of Fairford’s premises, including a lake on Fairford’s land. All of Mr Cohoon’s co-directors of Fairford knew of his interest in Watersports. A 2007 Management Agreement between Fairford and Watersports governed relations between these two entities.
Following a change in Fairford’s management, Fairford commenced a claim for breach of duty against Mr Cohoon and others alleging, in short, misappropriation of Fairford’s funds and the payment of unapproved management fees. The Judge at first instance held that Mr Cohoon had not properly declared his interest at the time the board considered the Management Agreement. This was contrary to the strict requirements of Section 317 and he was held liable for some £90,000 under this aspect of the claim brought by Fairford.
Mr Cohoon appealed the decision. The Court of Appeal allowed the appeal, looking closely at the language and purpose of the disclosure requirements of Section 317. Males LJ considered six factors to be relevant:
- The wide nature of Section 317 catches all manner of director’s interests and the nature of the declaration required in any given case would depend upon the nature of the interest and the context. Males LJ could see a scenario where the disclosure obligations might be different depending on the complexity of the contract between the company and the director. The purpose of the disclosure is to ensure that the board is “fully informed of the real state of things”.
- The need for the declaration to given at a board meeting. Notably a declaration was required under Section 317 even if the other directors were already aware of the director’s interest or reasonably ought to be. This is in direct contrast to the position under Section 177 that permits notice to be given other than at a board meeting. Notably, assessing the disclosure under Section 177 (i.e. after 1 October 2008) would have meant there could have been no argument that a breach had occurred given the knowledge of all involved.
- The need for the disclosure to be in advance of the contract being concluded. The fact that Section 317 refers to “proposed contract” expressly recognised that the terms of the contract may not yet have been fully determined at the time of the disclosure.
- As to timing of the disclosure, the declaration must be made at the first meeting at which a contract (or proposed contract) is to be considered. Males LJ noted that, as has long been the case, there is no need for repeat disclosures every time the matter is considered by the board.
- A general notice under section 317(3) could be given in very general terms.
- Section 317 is not concerned with whether the entry into the contract is in the company’s best interests. Other statutory and fiduciary obligations address that and to read Section 317 otherwise would be to superimpose additional requirements that are covered elsewhere.
Having set out these six relevant factors the Court of Appeal applied them to the facts of the case and concluded that the judge in the lower court had erred in his decision. The Court of Appeal unanimously decided that Mr Cohoon had made a disclosure that was sufficient to comply with the requirements of section 317 and hence no breach of duty had occurred in this respect.
This case provides helpful guidance on the operation of both Section 317 and is successor provision (Section 177). It also gives a useful reminder of the availability of relief under section 1157 of CA 2006. Under this provision, the court may relieve a director who acted honestly and reasonably from liability for breach of duty as a director, either wholly or in part. Technical breaches may therefore not matter.
The key points for directors to note are to:
- Recognise when they may have an actual or potential conflict of interest
- Make the declaration at the appropriate time
Whilst it is possible to rely on the knowledge of the board where the other directors are already aware of a director’s conflicts or potential conflicts, it can do no harm to remind your co-directors of them. The saying “prevention is better than cure” rings true here. Ultimately a director who acts honestly and reasonably can expect to be relieved from liability under section 1157 CA 2006, but the existence of a paper trail that records the director’s considerations and disclosures to the board will go a long way to show that the Section 177 duty was not breached.