An Agent’s Disclosure of a Breach of Duty and Informed Consent: Park’s of Hamilton’s (Holdings) Ltd. v Campbell [2011] CSOH 38; 2011 G.W.D. 8-196

Like the old case of Allen v Hyatt (1914) 30 TLR 444, the recent case of Park's of Hamilton's (Holdings) Ltd. v Campbell [2011] CSOH 38; 2011 G.W.D. 8-196 is one of those unusual cases where it was held that a director of a company owed fiduciary duties under the law of agency to the shareholders of the company. Section 170(1) of the Companies Act 2006 clearly states that a director owes the duties adumbrated in sections 171 to 171 of the Act to the company and not any individual shareholder. However, in Park’s of Hamilton (Holdings) Ltd. v Campbell, the director was held to be an agent of each individual shareholder of a company when he sent a letter to each of the shareholders indicating that a third party had made an offer for the entire share capital of the company and asked them to sign a power of attorney in his favour enabling him to sign the SPA on their behalf. Since the director was an agent of the shareholders, he owed them fiduciary duties under the common law (not sections 171 to 177 of the Companies Act 2006) and the main issue in the case was whether the director had breached the fiduciary duty not to make a personal profit out of his agency. The shareholders contended that the terms of a consultancy agreement to be entered into between the director and the company post-completion relating to his remuneration had been concealed from them. The director's defence was that there had been disclosure of the personal profit under the consultancy agreement to the shareholders and that the latter had provided informed consent. The director based these assertions on the fact that the solicitors of the company were aware of the terms of the share purchase agreement and consultancy agreement and that that their knowledge could be imputed to each of the individual shareholders since the terms of engagement of the solicitors expressly provided that they were acting as agents of the shareholders in respect of the sale of their shares in the company.

In the recent case of Commonwealth Oil & Gas Ltd. v Baxter 2009 SC 156, para. [10], Lord President Hamilton conceived of the ‘no-profit’ rule as having a fluctuating and self-modulating character somewhat alien to the uncompromising hard-edged duty described by Rimer LJ in the Court of Appeal case of [2009] 2 BCLC 666:

“… it seems to me that if, without the identification of any particular opportunity, the company, expressly or implicitly, were to give its prior consent to a director pursuing possibly competing interests, his duty would not extend to avoiding such conflicts. If, for example, in the present case agreement had been reached between [the director] and [the company] that some opportunities (say, any onshore) would be brought to [the company] but that others (say, offshore) could be exploited by [the director] for his own interest and benefit, the scope of [the director]'s duties would have been modified by that arrangement. Even without express agreement, the actings of parties could in some circumstances have given rise to a modification of [the director]'s duties…"

Thus, in terms of the text above, where the principal’s actions are such that it expressly or implicitly provides its consent to the agent exploiting an opportunity or making a personal profit, the agent will not be deemed to be in breach of duty. Thus, there are two stages for the director to go through to be relieved of liability: (1) Disclosure of the breach, including the source and extent of the profit; and (2) the receipt of informed consent of the principal. With regard to the disclosure requirement,  the director in Park's of Hamilton (Holdings) Ltd. argued that disclosure to the company’s solicitors was sufficient and that the shareholders would be deemed to have constructive knowledge in such circumstances. This assertion was predicated on the argument that the terms of engagement of the company's solicitors provided that they were acting as the agents of the director and each of the shareholders in the sale of their shares in the company. Lord Hodge indicated that it might indeed be possible for the disclosure requirement to have been satisfied by virtue of the doctrine of constructive knowledge, but was not convinced that the remit of the company's solicitors could be ascertained without a proof before answer. Evidence would need to be lead about the scope of the company's solicitors' agency and from whom instructions were received. The provisions of the terms of engagement of the company's solicitors would be part of the factual matrix, but of themselves could not be conclusive.

Although Lord Hodge's judgment in Park's did not settle the status and relevance of the constructive/imputed knowledge of a principal (through an agent such as a solicitor or accountant) and whether this was sufficient for another agent to have discharged its duty to disclose a breach of fiduciary duty, there are indications in that judgment that it is perfectly possible for this doctrine to play a role. Of course, if the question in the case had been about the director's duty to disclose the making of a personal profit at the expense of the company itself, the means by which disclosure could have been validly tendered would have been more restricted since section 175(5) of the Companies Act 2006 provides that disclosure must be made directly to the board of directors of the company. In such circumstances, there would be no scope for the company (via its board of directors) to have constructive knowledge of the director's breach of duty. This is another area where the law of director's duties in company law has diverged and followed a different path from its original sources in agency and trust law.

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