The High Court's decision in Lux Films Ltd v Fowler and Andrew Fowler Media Ltd is a useful reminder of the duties directors owe to their companies and the potential consequences of breaching those duties.
The decision will be of particular interest to D&O insurers because the Court held that a director and a company under his sole ownership and control can, in principle, be liable together for the tort of unlawful means conspiracy. That finding is significant as the Court rejected the argument that a sole director and a company under his ownership and control are incapable of conspiring together. Whilst similar circumstances may not give rise to criminal conspiracy, because there is effectively only one controlling mind, the Court held that a different approach applies in the context of the civil tort of unlawful means conspiracy.
The claim arose from allegations that a director diverted business opportunities, clients, confidential information, and company resources to a competing business which he owned and controlled. In finding against both the director and the competing company, the Court made clear that a director cannot avoid liability by using a separate company to carry out the wrongdoing.
For D&O insurers, the case highlights the potential exposure arising from claims involving breaches of fiduciary duty, conflicts of interest, misuse of confidential information, diversion of business opportunities, and conspiracy allegations.
Background
Lux Films Ltd was a video production company owned equally by three shareholder-directors, one of whom was Andrew Fowler. Mr Fowler also played a significant role in the day-to-day management of the business, including client relationships and administration. As relations between the directors deteriorated, Mr Fowler expressed a desire to leave the company. However, before formally departing, he established a competing business through a new company, Andrew Fowler Media Ltd (AFML), of which he was the sole shareholder and director.
The Court found that whilst remaining a director, shareholder and employee of Lux Films Ltd, Mr Fowler diverted clients and business opportunities to AFML. He also utilised Lux Films' resources, including office facilities, IT systems, employees, footage, and confidential information, to support the competing business. AFML subsequently generated more than £450,000 in revenue from the diverted opportunities.
Lux Films brought proceedings against both Mr Fowler and AFML, alleging breaches of fiduciary duties, statutory directors' duties under the Companies Act 2006, breaches of confidence, knowing receipt, and unlawful means conspiracy.
Unlawful means conspiracy - can a director conspire with his own company?
The most noteworthy aspect of the judgment concerned the claim for unlawful means conspiracy.
To establish unlawful means conspiracy, a claimant must show that two or more persons combined or agreed to act together, that unlawful means were used pursuant to that combination and that the claimant suffered loss as a result of the unlawful acts. Traditionally, defendants have argued that a company and its sole controlling director cannot conspire together because there is, in substance, only one "decision-maker" behind the conduct.
In this case, the defendants argued that, by analogy with criminal conspiracy authorities, a sole director and his wholly controlled company could not form the necessary "combination" required for conspiracy. The High Court rejected that argument. Instead, it distinguished criminal conspiracy principles from the civil tort and confirmed that separate legal persons can be capable of conspiring together even where one individual controls both entities.
In reaching its conclusion, the Court focussed on the practical reality that Mr Fowler acted in different legal capacities. He acted as a director of Lux Films when diverting corporate opportunities and breaching his duties, and as shareholder and controller of AFML when causing that company to receive the benefits of those opportunities. Accordingly, the Court was satisfied that there had been sufficient concerted action between two or more persons combined to establish liability for unlawful means conspiracy.
The decision therefore closes a potential avenue by which directors may previously have sought to argue that a one-person company could shield them from conspiracy allegations.
D&O implications
The case highlights the broad range of exposures that can arise when directors prioritise their own interests over those of the company.
Breaches of fiduciary duty, conflicts of interest, misuse of confidential information, and diversion of business opportunities frequently form the basis of disputes. The addition of conspiracy allegations may increase both the complexity and value of such claims, particularly where a director has used a separate entity to facilitate the wrongdoing.
The judgment also demonstrates that the use of a separate company will not necessarily insulate a director from liability. Where a director causes a company under his control to participate in wrongdoing, both the director and the company may face claims arising from that conduct.
From an insurance perspective, claims of this nature can result in substantial defence costs and coverage disputes. Allegations that a director knowingly placed their own interests ahead of those of the company, diverted opportunities for personal gain or otherwise acted dishonestly may trigger exclusions for fraudulent, dishonest or reckless conduct.
A warning for directors
The decision in Lux Films v Fowler is a clear reminder that directors remain subject to their fiduciary and statutory duties for so long as they hold their position. Whilst a director may take legitimate steps to prepare for a competing venture after their departure, they cannot exploit their position, appropriate corporate opportunities, or use company resources or confidential information for their own benefit whilst continuing to owe duties to the company.
The judgment also provides an important clarification of the law of unlawful means conspiracy. By confirming that a director and a company under their sole ownership and control may, in appropriate circumstances, be liable together, the Court has limited the scope for directors to argue that the use of a separate company prevents the requisite combination of parties from arising.
For D&O insurers, the case is a reminder that claims arising from alleged breaches of directors' duties often extend beyond traditional breach of duty allegations and may be accompanied by claims in conspiracy, breach of confidence and other economic torts. Such claims can significantly increase both the complexity of the litigation and the potential exposure of directors and entities connected with them.
