Diversion of corporate opportunity

 Cook v Deeks :[2]

Facts: TCC was formed to execute a tender for construction of railway line for CPR. When
contract successfully completed CPR commenced negotiations with 2 directors of TCC,
Deeks and H, for construction of another line. Deeks, his brother and H together held 3/4 of
capital in TCC with remainder held by Cook. Those 4 people were the only directors of TCC.
- Cook’s fellow directors decided to exclude him from any new contract, so they
formed a new company, DCC, in which Cook had no interest. DCC then carried out
the new contract. A general meeting of TCC was held at which Deeks, his brother
and H used their voting power to approve sale of part of company’s plant to DCC and
to declare that TCC had no interest in new contract.
- Cook brought proceedings against other directors and DCC claiming they held
contract for benefit of TCC.

Held (Lord Buckmaster LC): the directors obtained the new contract in the course of their
role as directors of TCC, and therefore that contract rightfully belongs to TCC under the duty
not to make secret profits. They cannot ignore their fiduciary duties and divert new business
for their own purposes.
An attempt by the three directors (who constitute a majority of the TCC) to give up the new
contract or ratify their own actions amounts to forfeiting the interests and property of the
minority of shareholders in favour of the majority, which is not allowed – the general
meeting cannot make resolutions to oppress the minority (see fraud on the minority).

 A boarder-line case *Re Bhullar Bros Ltd [2003] BCC 711 – see TB [8.124].
Fact: Bhullar Bros Ltd was owned by families of two brothers. Each side owned 50% of
ordinary shares. The directors were Mr Mohan Bhullar, his son Tim, Mr Sohan Bhullar and
his sons Inderjit and Jatinderjit. The company had a grocery store at 44 Springwood
Street, Huddersfield. It also owned an investment property called Springbank Works, Leeds
Road, which was leased to a bowling alley business called UK Superbowl Ltd. In 1998 the
families began to fall out.[1] Mohan and Tim told the board they wished for the company to
buy no further investment properties. Negotiations began to split up the company, but they
were unsuccessful. In 1999, Inderjit went bowling at the UK Superbowl Ltd alley. He noticed
that the carpark next door (called White Hall Mill) was on sale.[2] He set up a company called
Silvercrest Ltd (owned by him and Jatinderjit) and bought, but did not tell Bhullar Bros Ltd.
But Mohan and Tim found out and brought an unfair prejudice claim (now s 994 Companies
Act 2006) on the basis that Inderjit and Jatinderjit had breached their fiduciary duty of
loyalty to the company.

Jonathan Parker LJ held that there was a clear breach of the rule that directors must avoid a
conflict of interest.
41. Like the defendant in Industrial Development Consultants Ltd v Cooley,[3] the appellants
in the instant case had, at the material time, one capacity and one capacity only in
which they were carrying on business, namely as directors of the Company. In that
capacity, they were in a fiduciary relationship with the Company. At the material time,
the Company was still trading, albeit that negotiations (ultimately unsuccessful) for a
division of its assets and business were on foot. As Inderjit accepted in cross-
examination, it would have been "worthwhile" for the company to have acquired the
Property. Although the reasons why it would have been "worthwhile" were not
explored in evidence, it seems obvious that the opportunity to acquire the Property
would have been commercially attractive to the Company, given its proximity to
Springbank Works. Whether the Company could or would have taken that
opportunity, had it been made aware of it, is not to the point: the existence of the
opportunity was information which it was relevant for the Company to know, and it
follows that the appellants were under a duty to communicate it to the Company. The
anxiety which the appellants plainly felt as to the propriety of purchasing the Property
through Silvercrest without first disclosing their intentions to their co-directors –
anxiety which led Inderjit to seek legal advice from the Company's solicitor – is, in my
view, eloquent of the existence of a possible conflict of duty and interest.

42. I therefore agree with the judge when he said (in paragraph 272 of his judgment)
that "reasonable men looking at the facts would think there was a real sensible
possibility of conflict".

 See also: Chinese United Establishments Ltd v Cheung Siu Ki [1997] 2 HKC 212 –
TB [8.123]

 The Kishimoto situation: *Kishimoto Sangyo Co Ltd v Akio Oba [1996] 1 HKLR
196 – see TB [8.127]