REGAL (HASTINGS) LTD. V. GULLIVER (1967) 2 A.C. 134 (HL)
FACTS
- The appellants, Regal (Hastings) Ltd. ("Regal") were plaintiffs in the action and the respondents Charles Gulliver, Arthur Frank Bibby, David Edward Griffiths, Henry Charles Bassett, Harry Bentley and Peter Garton were the defendants.
- The action was brought by Regal against the first five respondents who were former directors of Regal, to recover from them sums of money amounting to £7,018 8s. 4d., being profits made by them upon the acquisition and sale by them of shares in a subsidiary company formed by Regal and known as Hastings Amalgamated Cinemas Ltd.
- The action was brought against the respondent Garton, who was Regal’s former solicitor, to recover a sum of £1,402 1s. 8d. and also a sum of £233 15s. in respect of a solicitor’s bill of costs. There were alternative claims for damages and misfeasance and for negligence.
- The action was based upon the allegation that the directors and the solicitor had used their position as such to acquire the shares in Amalgamated for themselves with a view to enabling them at once to sell them at a very substantial profit, that they had obtained that profit by using their offices as directors and solicitor and were therefore accountable for it to Regal, and also that in so acting they had placed themselves in a position in which their private interests were likely to be in conflict with their duty to Regal.
ISSUE
- Whether the Respondents, as directors of Regal, are liable to account for the profits they made on the sale of the shares in Amalgamated?
HELD
The Appeal against the decision in favour of the Respondents Gulliver and Garton should be dismissed. The Appeal against the decision in favour of the other four Respondents should be allowed.
- The Court held that the Respondents, as directors, stood in a fiduciary relationship towards their company. The equitable principle applies to directors making a profit, and they are accountable for the profit made. The Appellants failed to establish that the Respondents acted in bad faith or with dishonest intentions.
- The Court of Appeal dismissed the Appeal, holding that in the absence of dishonesty, negligence, or breach of a specific duty, the Respondents were entitled to buy the shares themselves.
- The governing principle was succinctly stated by Lord Russell of Killowen:
- “The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides, or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”
COMMENTARY
“A learned writer says: A director who acquires property while in office will, however, be liable to account for his profit upon resale if two elements are present. He must have acquired property only by reason of the fact that he was a director and in the course of the exercise of the office of director. Regal (Hastings) Ltd v Gulliver carries the principle to the farthest limit… It was held that in the circumstances the directors, other than the Chairman, were in a fiduciary relation to the company and liable, therefore, to repay to it the profit they had made on the shares. The solicitor was not in a fiduciary relationship and was not liable. They acquired these shares only by reason of the fact that they were the directors of the Regal case and in the course of their execution of that office. Lord Macmillan added: The plaintiff company has to establish two things: firstly, that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors and, secondly, that what they did resulted in a profit to themselves.
The real ground for the decision seems to be that the opportunity to take 5000 shares was the corporate opportunity. The directors, however, took the shares in good faith because the company was financially unable to make use of the opportunity. But if they were permitted to retain the profit, there would be temptation to induce such inability on the part of the company and to profit by it. The liability of the directors to account, therefore, seems to be just and clear. But to hand over this profit to the purchaser shareholders would be to give them the benefit of an undeserved reduction in price which they had willingly paid up. Recovery, therefore, should have been in favour of the old shareholders who had really suffered.”