O'Donnell v Shanahan

The Court of Appeal allowed the appellant's appeal against a High Court dismissal of a petition under section 459 of the Companies Act 1985 (now section 994 Companies Act 2006). The court held that the respondents, who were directors and shareholders, had breached both the "no conflict" and "no profit" rules in taking up for themselves an opportunity to acquire an investment property (Aria House) that arose while they were acting in the company's estate-agency capacity. The court rejected the relevance of a "scope of business" exception (as derived from Aas v. Benham) to relieve directors from liability under the "no profit" rule and treated Regal (Hastings) v. Gulliver and related authorities as the correct statement of principle for directors. The court further held that the respondent-directors should have disclosed the opportunity to the company and obtained informed consent; their failure to do so exposed them, in principle, to an account of profits. Because factual questions remained (notably whether any profit was made and whether an accounting would benefit the appellant, given the company's insolvency), the Court of Appeal remitted the matter to the trial judge to determine whether the failure to account (if any) amounted to unfair prejudice under section 459.

Background and parties

The petition under section 459 Companies Act 1985 was brought by Mary O'Donnell, a 25% shareholder and director of Allied Business & Financial Consultants Limited, against co-directors and co-shareholders John Shanahan and James Leonard. The company provided financial advice and acted from shared offices. The dispute concerned several alleged instances of unfairly prejudicial conduct; on appeal Ms O'Donnell pursued one principal allegation: that the respondents appropriated for themselves an opportunity to acquire Aria House in breach of their fiduciary duties.

Procedural posture

• The petition was dismissed by Richard Sheldon QC in the Chancery Division ([2008] EWHC 1973 (Ch)).
• Permission to appeal was granted and the Court of Appeal heard the matter.

Nature of the application / relief sought

• Relief sought by the petitioner included an order under section 459 that the respondents buy her shares at fair value and, alternatively or further, an account of profits in favour of the company arising from the respondents' acquisition of Aria House.

Issues framed and decided

1. Whether the respondents breached the "no profit" rule by taking up the Aria House opportunity that came to them while acting for the company.
2. Whether the respondents breached the "no conflict" rule by entering into the purchase while occupying a position where their personal interests conflicted with duties to the company.
3. Whether, if breaches existed, Ms O'Donnell was entitled to relief under section 459, including whether she had acquiesced and whether unfair prejudice was proved.

Facts relevant to the Aria House transaction

• A client, Mr Walsh, initially agreed to buy the fifth floor of Aria House; material work (valuations, solicitors) was undertaken and paid for by Mr Walsh.
• When Walsh withdrew, the respondents pursued substitute purchasers and, together with the Holleran brothers, formed an English company (HRL, later SLH) which completed the purchase.
• The company lost an expected vendor's commission of £30,000 under the new arrangement; the respondents and the appellant later paid the appellant £9,000 by way of compensation (cash payments recorded as such by the trial judge).
• The trial judge found the appellant knew in general terms of the respondents' involvement after 17 May 1999 but did not know all material facts (including payments obtained from Walsh and reliance on confidential reports). The judge concluded the acquisition fell outside the company's scope of business and dismissed the petition.

Court of Appeal reasoning and disposition

The Court of Appeal held that the "scope of business" reasoning derived from Aas v. Benham, relevant in a partnership context, does not relieve directors of the strict fiduciary obligations recognised in Regal (Hastings) v. Gulliver and related authorities. Where an opportunity comes to directors in the course of acting for the company and by use of information or position obtained in that capacity, they must disclose it to the company and obtain informed consent before taking it up; otherwise they may be liable to account under the "no profit" rule and will be in breach of the "no conflict" rule if they prefer personal interest over the company's. The court found breaches of both rules on the facts and rejected an acquiescence defence because the appellant lacked full knowledge of material circumstances. Because there was no factual determination below as to whether any profit was made or whether an account would benefit the appellant given the company's insolvency, the Court of Appeal allowed the appeal and remitted those issues for further trial.

Appeal allowed. The Court of Appeal held that the respondents breached both the "no conflict" and "no profit" fiduciary rules in taking up the Aria House opportunity that arose while acting for the company. The court rejected a "scope of business" exception to the "no profit" rule in the context of directors, held that material non-disclosure precluded a defence of acquiescence, and remitted factual issues (whether any profit was made and whether an account would fairly remedy unfair prejudice to the appellant) to the trial judge for determination.

Appeal from the High Court of Justice, Chancery Division, Companies Court (Richard Sheldon QC sitting as Deputy High Court Judge) [2008] EWHC 1973 (Ch); appeal heard in the Court of Appeal (Civil Division) and allowed on 22 July 2009.