Under the Companies Act, directors are required to observe a number of different duties and obligations. But just how far do these extend?
In Item Software Ltd v Fassihi (IRLR 2004, 928), the Court of Appeal has just decided that a director (who was also an employee) had a duty to disclose his own misconduct as part of the director's duty of loyalty.
What happened in this case?
Mr Fassihi was the sales and marketing director of Item Software. He was also an employee with a contract that paid him monthly in arrears.
A major part of Item's business was the distribution of software products for Isograph Ltd. In November 1998, Item decided to negotiate more favourable terms with the company but, when these failed, Isograph gave notice to terminate the contract, expiring in May 2000.
During the course of the negotiations, Mr Fassihi (who had set up his own company) secretly approached Isograph and entered into a distribution agreement with them. When Item discovered what he was doing, it dismissed him summarily on 26 June 2000.
Item then claimed that Mr Fassihi was in breach of duty for failing to disclose his approach to Isograph. Mr Fassihi counterclaimed for wrongful dismissal and for arrears of salary for the 26 days prior to his dismissal.
The High Court judge decided that Mr Fassihi was in breach of his duty as a director and an employee for failing to disclose his own misconduct and that Item was entitled to recover damages from him. He rejected Mr Fassihi's counter claim for wrongful dismissal and arrears of salary.
What did the Court decide on 'Disclosure'?
The Court of Appeal said that, as a director, Mr Fassihi was a fiduciary of the company which meant that he had to observe certain mandatory duties and obligations. These included a liability to account for secret profits and to act in the best interests of the company.
But, as a director, was he under a duty to disclose his own misconduct? The court decided that just because the duty of loyalty had not been applied before as a way of imposing an obligation on a director to disclose his own misconduct, that was 'not a good objection to the application of the fiduciary principle.'
The court concluded, therefore, that Mr Fassihi could not fulfil his duty of loyalty to the company as a director without telling Item about his plan to acquire the Isograph contract for himself.
What did the Court decide on 'Apportionment'?
The Court of Appeal decided, however, that the High Court judge was wrong to hold that Mr Fassihi was not entitled to arrears of salary for the 26 days prior to his dismissal. It said that the 1870 Apportionment Act allows for a proportional part of someone's salary to be claimed.
It said that the fact that Mr Fassihi's June salary was not due until the end of the month (when he was no longer employed by Item) was not a good objection. The Act allows for payment of a portion of salary when the whole lot would have become due and it should be paid on that date - in this case at the end of the month.
The judge had been wrong to decide that he was bound by the decision of the Court of Appeal in Boston Deep Sea Fishing and Ice Co Ltd v Ansell. This concerned an employee whose salary was paid at the end of designated periods but whose contract was terminated before the end of one of them. As a result, he was not entitled to recover a proportionate amount of his salary.
However, for whatever reason, counsel had not relied on the Apportionment Act in the Boston case and it could not be relied on now as authority for how the Act should be applied.