Item Software (UK) Ltd v Fassihi & Ors

A company director’s fiduciary duty of loyalty may require disclosure of the director’s own misconduct. The duty is not a separate, free-standing duty of disclosure. It arises where disclosure is necessary for the director to act in what he in good faith considers to be the company’s best interests. A director who seeks secretly to divert a corporate opportunity cannot fulfil that duty while withholding the scheme from the company.

Bell v Lever Brothers Ltd [1932] AC 161 does not establish that a director can never owe such a duty. Its ratio is confined to its own employment and termination-agreement circumstances.

Under the Apportionment Act 1870, salary is treated as accruing day by day. Unless expressly excluded, it is time-apportionable where employment ends during a pay period, although payment falls due only when the full period’s salary would have been payable.

Item Software (UK) Ltd distributed software for Isograph. Its sales and marketing director, Mr Fassihi, secretly proposed that his own company should take over the Isograph contract. Item later discovered the conduct and summarily dismissed him.

The Deputy High Court Judge held that Mr Fassihi had breached his duties as director and employee by failing to disclose the attempted diversion. The judge ordered an inquiry into Item’s resulting damages. He also rejected Mr Fassihi’s counterclaim for salary accrued during the 26 days before dismissal, holding that the Apportionment Act 1870 did not apply: [2003] 2 BCLC 1.

Mr Fassihi appealed on the disclosure issue and the apportionment issue. The central questions were whether a director’s fiduciary duties required disclosure of his own wrongdoing, and whether a salary payable monthly in arrears was apportionable when employment ended before the payment date.

1. The appeal was allowed in part. The court dismissed the appeal on disclosure, but allowed it on salary apportionment. Lady Justice Arden gave the leading judgment. Holman J agreed on disclosure and reached the same conclusion on apportionment. Mummery LJ agreed with Arden LJ.

2. A director is a fiduciary, not merely a senior employee. The relevant obligation was the fundamental duty of loyalty: to act in what the director in good faith considers to be the company’s best interests. That duty is sufficiently flexible to require disclosure where a director cannot reasonably regard the company’s ignorance of his own diversion of its business as being in its interests. Mr Fassihi could not comply with that duty while concealing his plan to divert the Isograph contract.

3. The court rejected a free-standing fiduciary duty of disclosure as the basis of liability. It held instead that the duty arose from loyalty in the particular circumstances. The agency-law fraud exception concerning attribution of an agent’s knowledge did not affect a fiduciary’s liability to the principal.

4. Bell v Lever Brothers Ltd [1932] AC 161 did not govern the case. Its ratio was limited to whether, in its own circumstances, an employee had to disclose misconduct before entering a compensation agreement with the employer. It did not decide that a fiduciary director could never be obliged to disclose misconduct, nor did it decide a case of fraudulent concealment. The disclosure appeal was therefore dismissed.

5. Sections 2, 3 and 5 of the Apportionment Act 1870 treat salary as accruing day by day and permit its time apportionment. Section 3 postpones payment until the date on which the whole payment would have fallen due, including where employment has ended. Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 did not consider the Act and did not prevent that construction. As the contract contained no express exclusion under section 7, Mr Fassihi could claim salary attributable to 1 to 26 June, payable on 30 June.

• Court of Appeal (Civil Division): By [2004] EWCA Civ 1244, dismissed the appeal against liability for non-disclosure of the director’s misconduct, but allowed the appeal concerning time-apportioned salary.
• High Court of Justice, Chancery Division: Mr Nicholas Strauss QC, sitting as a Deputy High Court Judge, held that Mr Fassihi had breached duties as director and employee by failing to disclose his misconduct and ordered an inquiry into damages. He rejected the salary claim under the Apportionment Act 1870: [2003] 2 BCLC 1.