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Director Pays Price for Private Arrangement with Customer

13th January, 2012

The law relating to the fiduciary duties of directors is stricter than many company directors might think, as a recent case illustrates.

The director of a company was given the loan of ‘a second-hand excavator and dumper’ for his personal use, by a customer of the company, from 2003 until 2008. The equipment was used by him in renovating a house he owned. The director considered it to be a private arrangement of negligible value to him, but the company took the view that he had received the loan as a result of his being a director of the company and that he should therefore account to it for the value received. He left the company’s employment before the case came to court.

The court ordered him to pay the sum of £5,200 plus interest to his former company. He appealed.

The Court of Appeal ruled that, on the facts of the case, the director’s duties of strict loyalty to the company and avoidance of potential conflicts of interest were breached. The fact that the company had neither availed itself of the opportunity nor suffered any loss as a result of the arrangement was not relevant.

The duties of directors are set out in detail in the Companies Act 2006. Directors would be well advised to ensure that they are aware of the rights and responsibilities attached to the role. Directors are legally bound not to accept benefits from third parties that arise from their position as a director.

It is also worth pointing out that a person who receives a benefit from a third party by virtue of their employment normally receives a taxable benefit in kind, which must be declared to HM Revenue and Customs on form P11 or P11D so that any tax due can be assessed. A penalty of up to £3,000 may be levied for an incorrectly submitted declaration.

We can advise directors and companies on the applicable law if there are any circumstances in which a breach of a director’s duty has happened or could happen. Please contact Nick Clarke for advice on such matters.

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