Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Directors of Regal used their position to acquire shares in a subsidiary company, Amalgamated, which they subsequently sold at profit. The House of Lords held that directors in a fiduciary position must account for profits made by reason of that position, regardless of good faith or whether the company suffered loss.

Facts

Regal (Hastings) Limited owned a cinema in Hastings and sought to expand by acquiring leases of two other cinemas through a subsidiary company, Amalgamated. The original scheme involved Regal subscribing for the entire share capital of Amalgamated. However, when the lessors required a rent guarantee, the directors decided Regal could only invest £2,000. To avoid giving personal guarantees, the five director defendants and the company solicitor, Garton, subscribed for the remaining 3,000 shares themselves at par. Shortly thereafter, all shares were sold at a substantial profit of approximately £2 16s 1d per share.

The new owners of Regal brought an action against the former directors and solicitor to recover the profits made on the sale of Amalgamated shares.

Issues

Principal Issue

Whether directors who acquired shares by reason of their fiduciary position must account for profits made, even where they acted in good faith and the company could not have acquired the shares itself.

Secondary Issues

Whether the solicitor, Garton, who subscribed at the directors’ request, was similarly liable; and whether Gulliver, who arranged for others to subscribe rather than subscribing himself, was liable to account.

Judgment

The House of Lords allowed the appeal against four directors (Bobby, Griffiths, Bassett and Bentley), holding them liable to account for their profits. The appeals against Gulliver and Garton were dismissed.

The Fiduciary Principle

Lord Russell of Killowen stated the fundamental principle:

The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the Plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the Plaintiff, or whether he took a risk, or acted as he did for the benefit of the Plaintiff, or whether the Plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.

Lord Wright emphasised the strictness of the rule by quoting James LJ from Parker v McKenna:

that that rule is an inflexible rule, and must be applied inexorably by this Court, which is not entitled to receive evidence or suggestion or argument as to whether the principal did or did not suffer an injury in fact by reason of the dealing of the agent, for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an enquiry as that.

Position of Gulliver

Gulliver was held not liable as he never personally subscribed for shares nor received any profit. He merely found other subscribers who paid for and received the proceeds from the shares themselves.

Position of Garton

Garton, the solicitor, was held not liable because he subscribed for shares at the express request of the Regal directors. Lord Russell stated that he knew of no principle requiring a solicitor to account for profit from a transaction entered into on his own behalf at his client’s request.

Implications

This case established the strict no-profit rule for company directors and persons in fiduciary positions. The principle operates regardless of the fiduciary’s good faith, whether the company suffered loss, or whether the company could have taken the opportunity itself. Directors could only escape liability by obtaining prior approval from shareholders in general meeting. The decision reinforced that fiduciary duties exist to protect principals from the difficulty of proving actual harm, making the rule prophylactic rather than compensatory in nature.

Verdict: Appeal allowed against directors Bobby, Griffiths, Bassett and Bentley, who were held liable to account for profits of £1,402 1s 8d each with interest. Appeal dismissed against Gulliver (who made no personal profit) and Garton (who subscribed at the company’s request).

Source: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134