Imagine that a company sends one of its directors to secure an important contract. The director wins the work, but instead of bringing it back to the company, keeps the opportunity personally or routes it through another business.
It may feel obvious that something has gone wrong. The harder questions are what duty has been breached, who is entitled to act and what the company or its shareholders can do next.
Directors must avoid conflicts of interest
Section 175 of the Companies Act 2006 requires a director to avoid a situation in which they have, or may have, a direct or indirect interest that conflicts, or could conflict, with the interests of the company. The duty expressly covers the exploitation of property, information or an opportunity. Importantly, the Act says it is immaterial whether the company could itself have taken advantage of that opportunity. A director therefore cannot necessarily defend their position by arguing that the company would not have won the work, lacked the resources to deliver it or had decided not to pursue similar opportunities.
Authorisation can sometimes matter, but it must be handled properly and in accordance with the company’s constitution and the statutory rules. Quietly taking an opportunity and explaining it afterwards is very different from obtaining informed approval in advance.
The company does not always need to prove a financial loss
Alongside the duty to avoid conflicts sits the fiduciary profit rule. A director should not retain a profit derived from their position unless the company has given fully informed consent.
The Supreme Court reaffirmed the strict nature of that rule in Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10. The case concerned fiduciaries who diverted a business opportunity and were required to account for the resulting profits. The Court confirmed that the rule is not simply a claim for compensation based on what the company lost. Its focus is also on the unauthorised profit made through the fiduciary relationship.
That distinction can be important. A company may have had only a limited prospect of securing the contract itself, but the director may still be required to account for profits connected with the opportunity they obtained through their role.
What should a company examine first?
Before deciding on a remedy, the company needs to establish exactly what happened. Useful questions include:
- How and when did the opportunity reach the director?
- Was the director acting for the company when the negotiations began?
- What information, contacts or resources belonging to the company were used?
- Was the opportunity disclosed to the board or shareholders?
- Was any valid authorisation given, and what do the articles and shareholders’ agreement require?
- Where did the resulting income or benefit go?
The answers will help determine whether there has been a breach and what may be the appropriate next step. Depending on the facts, the company may consider recovery of profits, compensation, an injunction or another form of relief. But what’s important is that the correct route is highly fact-specific, so early advice and careful preservation of documents can be key.
Why a shareholder may need to think about a derivative claim
A director’s duties are generally owed to the company. That means the company is normally the proper party to pursue a breach, even where an individual shareholder is understandably concerned or has suffered indirectly through a reduction in the value of their shares.
Where the company will not act, a shareholder may consider a derivative claim under Part 11 of the Companies Act 2006. A derivative claim is brought by a member in respect of a cause of action belonging to the company, with relief sought on the company’s behalf. It can include an alleged breach of duty by a director, but the shareholder must obtain the court’s permission to continue the claim.
That permission stage is one reason derivative claims can be complicated. The court will consider the statutory tests, the company’s position and whether the claim should properly proceed. A shareholder should therefore distinguish between harm done to the company and any separate personal claim they may have before starting proceedings.
Take advice before the position becomes entrenched
Suspected diversion of a contract or business opportunity can quickly become a serious shareholder and board dispute. The earlier the company establishes the facts, secures the relevant correspondence and reviews its constitutional documents, the more clearly it can assess its options.
If you are a shareholder or director facing this situation, I can help you understand the duties involved, the remedies potentially available to the company and whether a derivative claim or another route may be appropriate.
Contact Suezanne: suezanne@skinglegal.co.uk
Video by Gillan Williams.
S King Legal is a legal consultancy and is not a firm of solicitors. Regulated legal services are provided through Aria Grace Law CIC, which is authorised and regulated by the Solicitors Regulation Authority.