Bhullar v Bhullar [2003] EWCA Civ 424

Directors of a family company purchased property adjacent to company premises for their personal benefit without disclosing the opportunity to their co-directors. The Court of Appeal held they breached their fiduciary duty as there was a real sensible possibility of conflict between their personal interests and their duty to the company.

Facts

Bhullar Bros Ltd was a family company with shares split equally between two family branches: Mohan’s family and Sohan’s family. The directors included members from both families. By 1998, relations between the families had broken down and negotiations for dividing the company’s assets were underway. Mohan’s family had expressed that no further properties should be acquired by the company.

In June 1999, the appellants (Inderjit and Jatinderjit, from Sohan’s family) discovered that a property called White Hall Mill was for sale. This property was adjacent to Springbank Works, an investment property owned by the company. The appellants purchased the property through their own company, Silvercrest, without disclosing the opportunity to their co-directors. Inderjit sought legal advice from the company’s solicitor about potential conflicts of interest before completing the purchase.

Issues

The central issue was whether the appellants, as directors of Bhullar Bros Ltd, breached their fiduciary duty to the company by acquiring the property for their personal benefit without first disclosing the opportunity to the company.

Judgment

The Court of Appeal dismissed the appeal and upheld the trial judge’s decision that the appellants had breached their fiduciary duty.

Lord Justice Jonathan Parker, delivering the leading judgment, emphasised the inflexible nature of the rule preventing fiduciaries from placing themselves in positions where their interests conflict with their duties. He quoted Lord Cranworth LC in Aberdeen Railway Co v Blaikie:

“no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect.”

The court applied Lord Upjohn’s qualification from Phipps v Boardman that the phrase “possibly may conflict” means:

“the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.”

Jonathan Parker LJ found that the appellants had one capacity only at the material time—as directors of the company—and were therefore in a fiduciary relationship with it. The opportunity to acquire the adjacent property was information relevant for the company to know, and the appellants were under a duty to communicate it. Their anxiety about the propriety of the purchase, evidenced by seeking legal advice, was described as:

“eloquent of the existence of a possible conflict of duty and interest.”

Key Principles

• Directors owe fiduciary duties to their company which prevent them from placing themselves in positions of conflict between personal interest and duty.
• The test is whether a reasonable person would think there was a real sensible possibility of conflict.
• It is irrelevant whether the company would or could have taken the opportunity itself.
• A fiduciary can only avoid accountability by obtaining the company’s fully informed consent.
• The circumstances in which the opportunity came to the director’s attention are immaterial.

Implications

This case reinforces the strict application of fiduciary duties owed by directors to their companies. It confirms that directors cannot exploit commercial opportunities that fall within or are connected to the company’s line of business without first offering them to the company with full disclosure. The decision emphasises that the rule applies regardless of whether the opportunity was discovered in a personal or professional capacity, and irrespective of whether the company would have taken up the opportunity. The case serves as an important reminder that directors must prioritise their company’s interests over their own and seek proper consent before pursuing personal ventures that may conflict with their fiduciary duties.

Verdict: Appeal dismissed. The appellants breached their fiduciary duty to the company by acquiring the property for their personal benefit without disclosure. Silvercrest was declared to hold the property on trust for the company and was ordered to transfer it to the company at the purchase price, with an account of profits directed.

Source: Bhullar v Bhullar [2003] EWCA Civ 424