Clarification of directors’ duties: The case of McKillen v Misland (Cyprus) Investments Ltd

February 18, 2013

More than 6 years after receiving Royal Assent, the High Court has recently provided some of the first judicial guidance on the interpretation of directors’ duties under the Companies Act 2006 (the Companies Act).

The case of McKillen v Misland (Cyprus) Investments Ltd and others examines various directors duties set out in the Companies Act.  The case is an important reminder to directors of the need to consider each and every directorship held when carrying out their duties in order to avoid a conflict of interest.

Mr McKillen asserted as part of his petition that three of the directors on the board of Coroin Limited (Coroin), a company that owned the London hotels Claridges, The Berkeley and The Connaught and in which Mr McKillen was a substantial investor, had breached their statutory duties to Coroin.  The directors in question had been appointed by Sir David and Sir Frederick Barclay (the Barclay family), who had a substantial interest in Coroin.  Mr McKillen alleged breaches of duty which were all said to be motivated by a desire to advance the interests of the Barclay family and their associated companies rather than Coroin itself.

Application of the Statutory Duties

The court examined the duties of promoting the success of the company and avoiding conflicts of interest. The court found that there had been no breach of section 172 of the Companies Act (promoting the success of the company) as the directors’ actions had not resulted in any loss to Coroin.  In giving its judgment, the court applied common law in force prior to the date of the Companies Act and therefore pre-existing case law was not overturned.  

Avoiding Conflicts of Interest

On examining the duty under section 175 of the Companies Act to avoid conflicts of interest, the court concluded that the actual knowledge of the individual director was relevant, even though section 175 makes no reference to a director’s actual knowledge as a means of limiting the statutory duty.  This aspect of the judgment showed a departure from previous case law, which suggests a more objective, ‘reasonable person’ test.

Judgment

The court found two of the directors to be in breach of section 175 as they had actual knowledge of matters which resulted in a conflict of interest.  This suggests that directors can argue against a breach of conflict of interest by reference to what is within their knowledge; however this is a risky strategy and a court may not look kindly on a director relying on his own ignorance as a means of limiting the scope of his duties.  

Directors should also be reminded that they have to consider each and every directorship that they hold when carrying out their duties so as to avoid any allegations of conflict.  This may be a simple task for directors of small private companies but is potentially onerous for directors who are on the boards of many companies.


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