Regal (Hastings) Ltd v Gulliver

Regal owned a cinema in Hastings. They took out leases on two more, through a new subsidiary, to make the whole lot an attractive sale package. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the beneficiaries brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. They had not gained fully informed consent from the shareholders.

The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. They therefore had to account for their profits to the company. 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.”

Lord Wright said (at 157),

"The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity."

Curiously, even though it was a House of Lords decision, and is now regarded as one of the seminal cases on directors' duties, the decision was not reported in the official law reports until nearly 26 years after the decision was handed down. During the intervening period, it was only reported in the All England Law Reports.

• Guth v. Loft, the Delaware decision that deviated from the strict approach.
• Keech v Sandford, the rule of equity that has been the bedrock of fiduciary duties for 280 years.
• Ex parte James (1803) 32 ER 385

• Full text of decision from BAILII.org