In Plus Group Ltd & Ors v Pyke

A director’s fiduciary duties include the no-conflict and no-profit rules. However, there is no completely rigid rule prohibiting involvement in a competing business. Liability depends on the precise facts, including the director’s practical role and whether company property, confidential information or a corporate opportunity was used.

Exceptionally, a director who had been wholly excluded from management, decision-making, remuneration and access to company information did not breach fiduciary duty by trading with a former customer. His directorship had become entirely nominal, and he used neither company property nor confidential information.

Consolidated group accounts do not, without more, make every group company liable for a loan advanced to and recorded in the accounts of one company.

The four appellant companies were controlled equally by Mr Plank and Mr Pyke, who were their only directors. After suffering a stroke, Mr Pyke was progressively excluded from management, financial information and remuneration. Although he remained formally a director, he established a new company and obtained substantial work from Constructive Interiors, formerly the second appellant’s principal customer.

The companies alleged that Mr Pyke had breached his fiduciary duties and sought an account of his profits. He counterclaimed for the balance of his director’s loan account. On 9 February 2001 Judge Levy QC in the Central London County Court dismissed the claim and entered judgment against all four companies on the counterclaim.

The appeal concerned whether Mr Pyke’s competing activities constituted a breach of fiduciary duty and which company or companies were liable to repay his loan.

1. The appeal was dismissed on the fiduciary-duty claim and allowed in part on the counterclaim. Brooke LJ delivered the leading judgment. Sedley and Jonathan Parker LJJ agreed with the order.

2. The governing equitable principles were the no-conflict and no-profit rules. A director must not place personal interests or duties in potential conflict with duties to the company without informed consent. A director must also account for secret profits made through the company’s property, confidential information or opportunities. The existence and scope of the relevant fiduciary relationship depend upon careful examination of the particular facts.

3. There is no completely rigid rule that a director cannot be involved in a competing business. Mr Pyke’s circumstances were exceptional. More than six months before the relevant trading, he had been effectively expelled from management, denied access to information and remuneration, and prevented from withdrawing his loans. His formal directorship was entirely nominal. He used neither the appellants’ property nor confidential information obtained as their director. Brooke and Jonathan Parker LJJ therefore concluded that the fiduciary claim failed.

4. Sedley LJ agreed in the result but emphasised that the Mashonaland principle was narrow. It did not grant directors a general licence to enter or remain in positions where duties or interests might conflict. Ordinarily, a fiduciary who encounters such a position must regularise or abandon it, and preventive relief may be available before an actual breach. Those observations did not command a majority because Brooke and Jonathan Parker LJJ considered this an inappropriate case for determining the principle’s wider scope.

5. The separate contention that Mr Pyke had impeded recovery of the debt owed by Constructive was unsupported by evidence and had not been pleaded. He had offered assistance on three occasions, but the offers were not taken up.

6. On the counterclaim, only the second appellant was liable for the loan. The money had been advanced to it and consistently recorded in its individual accounts. Consolidated group accounts did not transfer liability to the other companies, and no cross-guarantees had been obtained. The judge’s findings concerning the £9,800 cash expenditure and the treatment of monthly payments as remuneration were left undisturbed.

1. Court of Appeal (Civil Division): The companies’ appeal was dismissed on their fiduciary-duty claim but allowed on the counterclaim to the extent that only the second appellant was liable for the director’s loan.

2. Central London County Court: On 9 February 2001 Judge Levy QC dismissed the companies’ claim and entered judgment against each of the four companies for £115,818, with interest, on Mr Pyke’s counterclaim.