Monday 6 January 2025
Your weekly SQE Prep Quiz has arrived
Dear Subscriber,
I hope you had a great start to the new year! Please see below for the question, the answer to the previous question and associated resources. This is the web version of this newsletter.
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Question: GreenScape Ltd., a landscaping company, enters into a contract with Bloom Ltd., a garden center, to deliver plants and gardening materials for a large project. Disputes arise when GreenScape Ltd. fails to deliver the agreed materials on time, and Bloom Ltd. refuses to pay the full amount under the contract. Both companies wish to avoid the costs and delays of going to court but cannot reach a resolution through direct negotiations. They are considering alternative dispute resolution (ADR) methods to settle the dispute. Which ADR method is most appropriate for GreenScape Ltd. and Bloom Ltd. if they want a binding decision but still wish to avoid the formalities of court proceedings?
- Mediation; the parties appoint a neutral third party to facilitate a negotiated agreement.
- Arbitration; the parties agree to submit their dispute to a neutral arbitrator.
- Conciliation; a conciliator suggests potential solutions to the dispute.
- Negotiation; the parties attempt to resolve the dispute directly without involving any third party.
- Expert determination; an independent expert resolves the dispute.
Resource: Learn more about ADR by watching this video.
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Answer and feedback to last week’s question: Sophia is a director of EcoWare Ltd., a company that manufactures biodegradable packaging. Without informing the board of directors, Sophia sets up her own company, GreenWrap Ltd., which produces similar biodegradable packaging and begins competing for EcoWare Ltd.’s customers. Sophia uses confidential information obtained from EcoWare Ltd., including customer lists and pricing strategies, to gain a competitive advantage for GreenWrap Ltd. When the other directors of EcoWare Ltd. discover her actions, they accuse Sophia of breaching her duties as a director.
Which of the following duties under the Companies Act 2006 has Sophia most likely breached, and what remedies might EcoWare Ltd. pursue?
- The duty to promote the success of the company; EcoWare Ltd. can claim damages for loss of profits caused by Sophia’s actions.
- The duty to exercise reasonable care, skill, and diligence; EcoWare Ltd. can remove Sophia as a director for failing to perform her duties competently.
- The duty to avoid conflicts of interest; EcoWare Ltd. can seek an account of profits to recover any financial benefit Sophia obtained from competing with the company.
- The duty to act within powers; EcoWare Ltd. can claim rescission of any contracts Sophia entered into on behalf of GreenWrap Ltd.
- The duty to declare an interest in a proposed transaction; EcoWare Ltd. can require Sophia to disclose all her dealings with GreenWrap Ltd.
Correct Answer: 3. The duty to avoid conflicts of interest; EcoWare Ltd. can seek an account of profits to recover any financial benefit Sophia obtained from competing with the company. Feedback: Under section 175 of the Companies Act 2006, directors have a duty to avoid situations in which they have, or could have, a conflict of interest with the company. By setting up a competing business (GreenWrap Ltd.) and using EcoWare Ltd.’s confidential information, Sophia has placed herself in direct conflict with her duties to EcoWare Ltd. She has also breached her fiduciary duty by failing to disclose this conflict and by using company information for personal gain. The most appropriate remedy in this case is for EcoWare Ltd. to seek an account of profits, which requires Sophia to hand over any financial benefits she gained from her competing business. This remedy ensures that Sophia does not unfairly benefit from breaching her duties. Option 1 is incorrect because while Sophia’s actions may have harmed the success of the company, the duty to promote the success of the company (section 172) is not the primary duty breached in this scenario. The breach of the duty to avoid conflicts of interest is more directly relevant. Option 2 is incorrect because the duty to exercise reasonable care, skill, and diligence (section 174) concerns the standard of competence and decision-making expected of a director, which is not the key issue here. Option 4 is incorrect because the duty to act within powers (section 171) relates to acting in accordance with the company’s constitution, not to conflicts of interest or competing businesses. Option 5 is incorrect because the duty to declare an interest in a proposed transaction (section 177) applies when a director has an interest in a transaction with the company, not when they set up a competing business.
Therefore, the most relevant duty Sophia has breached is the duty to avoid conflicts of interest, and EcoWare Ltd. can pursue an account of profits to recover the financial benefits Sophia gained from her competing business.
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Dr Ioannis Glinavos
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