A manager is the alter ego of the company. He is authorized to access highly sensitive information about the activities of the company which is not generally available or accessible by the public. He also has the ability to make decisions for the company. In doing so, cases may arise when an administrator sees an opportunity to make a profit or benefit for himself.
Section 218 (1) of the Companies Act 2016 states “a director or officer of a company must not, without the consent or ratification of a general meeting … use any information acquired by virtue of his function as a director or officer of the company … use his function of director or officer … to obtain directly or indirectly a benefit for himself or for any other person, or to harm the companyIn common law, this is called the âno-profit rule.â This principle derives from Regal,1 where Lord Russell explained the rule:
“… The rule of fairness which requires that those who, by the use of a fiduciary position make a profit, be held to account for that profit, does not depend in any way on fraud or fraud. lack of good faith; or such questions or considerations as whether the profit should or should have accrued to the plaintiff, or whether the profiteer had an obligation to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as it did for the benefit of the plaintiff, or if the plaintiff was in fact wronged or benefited from its action. Liability arises from the mere fact that a profit has been made, in the circumstances indicated. profiteer, however honest and well-intentioned, cannot escape the risk of being called to account. “
The Court of Appeal, in Alcatel Lucent,2 also held:
âA trustee is a person who has undertaken to act for or on behalf of others in a particular matter in circumstances which give rise to a relationship of trust. A trustee must act in good faith; he should not take advantage of his trust; he must not put himself in a situation where his duty and his interest may come into conflict; he may not act for his own benefit or for the benefit of a third party without the informed consent of his principal.
The position is therefore clear, a director should not make a secret profit or obtain any advantage through his function as a director. Likewise, he is not allowed to use for his own benefit the information or knowledge acquired through his function, unless he has obtained the approval of the board of directors or the agreement of an assembly. general. There may be a breach of fiduciary duty even if the director acted in good faith.3
The courts have held that the directors breach the fiduciary duty of the no-profit rule and, therefore, are required to account to the company for the losses it has suffered, in the following cases:
- Court of Appeal4 ruled that the directors had acted in violation of their duties by deliberately appropriating the affairs of the plaintiff company. They transgressed the rule of no profit and no conflict with impunity and were therefore held to account to the plaintiff company for the losses suffered as a result of their breach of the duties of the directors.
- The High Court5 found that the director had breached his fiduciary duties as the evidence showed that he had obtained a secret profit amounting to 160,000 USD by ordering the plaintiff to deposit the money for the purchase of a vessel on his personal account. He was therefore unjustly enriched.
- The High Court6 ruled that the defendant had breached his fiduciary duty because the evidence showed that he had not declared to the board of directors of the plaintiff company that he was receiving commissions from another entity in connection with the resin purchases of polypropylene. The defendant broke the rule of no conflict and no profit and made secret profits for himself 7 and therefore, must account for this money to society.
- The High Court8 concluded that the first defendant had breached his duties as director and trustee of the company because he took the sums paid by the third defendant for the subleases and the electricity charges and that he had not not account for the sums to the company. There was also a depletion of funds and assets owed to the business. Thus, the first defendant failed in his duty as director by making secret profits.
The law is clear that a director of a company cannot make a secret profit for himself. It’s hard to resist temptation. As part of a director, he must resist all temptations to take advantage of it. One misstep can cause lifelong regrets.