Starling v The Climbing Gym Ltd & Ors

A director must avoid a direct or indirect interest which conflicts, or possibly may conflict, with the company’s interests. This includes exploiting information or an opportunity relevant to the company, even where the company might not ultimately have taken advantage of it. Authorisation is required unless the statutory exception applies.

Equitable considerations will not ordinarily supplement a shareholder agreement and company constitution unless the relationship has the characteristics of a quasi-partnership. A carefully documented commercial relationship, including agreed provisions governing employment, share transfers and termination of office, may negative any legitimate expectation of continued management participation.

The petitioner was a minority shareholder, director and employee of the respondent company. After investing in and becoming involved with another climbing-wall business, he was dismissed and excluded from management. The company relied on breaches of fiduciary and contractual duties, including failure to disclose an opportunity and conflict of interest.

The petitioner sought relief under the Companies Act 2006, contending that the company was operated as a quasi-partnership and that his exclusion was unfairly prejudicial. The central issues were whether equitable considerations applied, whether the directors’ service agreement bound him, whether his outside investment created a conflict, and whether his exclusion and related matters justified relief.

1. The petition was dismissed. The petitioner was not unfairly prejudiced and the company was entitled to terminate his employment and exclude him from management.
2. Under section 175 of the Companies Act 2006, the petitioner had to avoid a situation in which he had a direct or indirect interest conflicting, or possibly conflicting, with the company’s interests. The duty applies particularly to the exploitation of company information or opportunities. It was immaterial whether the company would ultimately have taken advantage of the opportunity.
3. The investment in Avid presented information and an opportunity relevant for the company to know and explore. The petitioner had failed to disclose it, had not obtained authorisation, and had taken a substantial personal interest. The distance between the businesses was relevant, but did not prevent a possible conflict. The company’s board was entitled to assess the opportunity and the effect on the petitioner’s time and attention.
4. The company was not a quasi-partnership. The parties had not had a pre-existing trading relationship. The incorporation documents, commercial planning, share structure, shareholder agreement and directors’ service agreement pointed towards a commercial enterprise governed by written rules. There was no special circumstance creating a legitimate expectation that the petitioner would remain in management.
5. The directors’ service agreement was binding. It required full time, attention and skill, compliance with reasonable board instructions, disclosure of relevant information and protection of confidentiality. The petitioner’s persistent failure to disclose his outside involvement, failure to comply with a board direction and misleading answers justified exclusion. The court did not determine whether the conduct amounted to gross misconduct, which was an issue for the employment tribunal.
6. The company’s disciplinary process was capable of criticism but was conducted in good faith. Other complaints, including the historic data issue and non-payment of dividends, did not establish unfair prejudice. Removal could also have been effected under section 168 of the Act or the contractual mechanism in the service agreement.

not stated in the judgment.