A question arose as to whether the need to disclose secret profits to shareholders pursuant to Regal (Hastings) Ltd. v Gulliver [1967] 2 AC 134 is redundant in light of s.131(1) of the Companies Act 1965 (“CA 1965“).  First of all, s.131(1) of the Companies Act 1965 concerns with disclosure to directors whereas Regal (Hastings) Ltd. v Gulliver concerns with disclosure to shareholders, and there is a very good reason to it.

The rule of relevance here is the rule of equity which insists on anyone who makes a profit through a fiduciary position (such as a director) to account for that profit towards the company ( Regal (Hastings) Ltd. v Gulliver). In other words, he is regarded as constructive trustee of that profit (Class 1 Constructive Trustee so to speak, see J J Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467 at para. 29 and Panweld Trading Pte Ltd v Yong Kheng Leong and others (Loh Yong Lim, third party) [2012] 2 SLR 672). Lord Russell, in Regal (Hastings) Ltd. v Gulliver, stated that if the directors wish to protect themselves, they could seek approval by resolution of the company’s shareholders.

As a Class 1 Constructive Trustee, the directors can be regarded as proper trustees as opposed to Class 2 Constructive Trustees, who are only personally liable to account as if they are constructive trustees.

Like any trustees, they are are to comply with the unanimous direction of all the beneficiaries as to how the trust property is to be dealt with (Saunders v Vautier (1841) EWHC Ch J82). In the case of secret profits, the only beneficiary here is the company (not the shareholders), as such ordinary resolution will do to waive the company’s entitlement to the secret profit.

As such, a director’s obligation pursuant to Regal (Hastings) Ltd. v Gulliver cannot be regarded as the same as per s. 131(1) CA 1965. S. 131(1) CA 1965 which imposes a separate obligation on directors to disclose their direct or indirect interest in a contract or a proposed contract to the board of directors. Otherwise, it will mean that co-trustees can waive a beneficiary’s entitlement to the secret profit. In fact, it could amount to willful default on the part of these directors, thus could not avail themselves of the protection of s. 35(1) of the Trustee Act 1949.

Thus, it is plausible to imagine that even if a director has duly disclosed the profit he stood to gain from a transaction to the other directors, he will still be liable to account for these profits if he failed to obtain the approval by ordinary resolution of the shareholders.

Note: This article is not intended to be relied upon as a legal opinion. Readers are advised to consult their solicitors for any advice or opinion.