First Subsea Ltd (Formerly BSW Ltd) v Balltec Ltd – A Directors Fiduciary Duties Case

Exclusion from the Company Is No Excuse for Breaching Directors’ Fiduciary Duties

In 1983,  Mr Robert Emmett, along with someone called Mr Walmsley, started a business called BSW Design and Engineering, designing and supplying underwater tools and machinery for the deep-water oil industry.

It was a quiet British engineering success that does extraordinary things with little fanfare. In 1994 the business was incorporated as BSW Limited. 

For more information, read the full case on First Subsea Ltd (formerly BSW Ltd) v Balltec Ltd and others [2018] Ch 25

Cashing In and Falling Out

In 2001, a controlling 75.1% stake in the company was sold to a businessman called Mr Suttie. Emmett stayed on as a non-executive director and presumably retained the remaining 24.9% of shares. What happened to Walmsley is not mentioned in the Judgment but it is presumed he took money for his shares and left. Robert Emmett may well have envied him for doing so later on. 

When Suttie took over, a new managing director, Ian Brown, was appointed. Mr Brown was a disaster, presiding over a swing from operating profit to operating loss in under a year.  Having lied to Suttie, he was dismissed for gross misconduct in 2003, though inexplicably remained a director.  

Emmett’s relationship with Suttie deteriorated steadily from there and he tried to buy back control of BSW on deferred terms but Suttie refused. Emmett also objected to the new managing director, Daniel Hatfield who had made inappropriate downloads on company computers, but Suttie gave Hatfield only a written warning.

By early 2004, things had become so fractious that Emmett was told not to come into the offices and staff were instructed not to take his calls. 

Stuck In The Middle

Emmett’s position was a difficult one. He was effectively trapped. Although he was frozen out of the business, stripped of any meaningful role and had publicly clashed with the majority shareholder, under BSW’s articles of association, resigning as a director would trigger a forced sale of his shares at a discounted price. Not surprisingly Emmett chose to stay. 

In February 2004 he flew to the United States with Brown, where they met with potential business partners to explore future projects. On his return, Suttie suspended him and still, Emmett did not resign.  

A Directors Fiduciary Duties Case

Born of Frustration

However, possibly driven by frustration, Emmett decided to work against BSW. 

In June, Emmett went to see Graham Halstead, the managing director of HB Halstead & Sons, BSW’s principal engineering supplier. He told him that BSW was effectively insolvent, that its management was incompetent, and that the company would soon be out of business.  

Then he travelled to France and obtained tender documentation from Technip for a major contract known as the Dalia Project, a contract BSW was also preparing to bid for. 

He had already received legal advice that continuing as a director while operating in competition with BSW would constitute a breach of his directors duties and fiduciary duties but he chose to ignore it.

The Rival Bid

However, possibly driven by frustration, Emmett decided to work against BSW. 

In June, Emmett went to see Graham Halstead, the managing director of HB Halstead & Sons, BSW’s principal engineering supplier. He told him that BSW was effectively insolvent, that its management was incompetent, and that the company would soon be out of business.  

Then he travelled to France and obtained tender documentation from Technip for a major contract known as the Dalia Project, a contract BSW was also preparing to bid for. 

He had already received legal advice that continuing as a director while operating in competition with BSW would constitute a breach of his directors duties and fiduciary duties but he chose to ignore it.

The Court’s Decision on Fiduciary Duties and Limitation

A director owes fiduciary duties to the company which are duties of loyalty, good faith, and the avoidance of conflicts between personal interest and corporate duty. Those duties do not evaporate simply because a director has been sidelined or excluded from management. Emmett argued that, having been frozen out by Suttie, his duties had been reduced to almost nothing but that argument failed. The court found that Emmett had chosen to remain a director for his own financial reasons and had therefore chosen to keep those obligations alive. 

The specific breaches the judge found proved were: 

  • The preparation and submission of competing bids for contracts that Emmett knew BSW was also pursuing.
  • The approach to Technip in July 2004 while still formally a director. 
  • The deeply damaging visit to Halstead, in which Emmett told BSW’s own supplier that the company was effectively. 

Each of these acts placed Emmett’s personal interests directly in conflict with his duty of loyalty to BSW. He knew exactly what he was doing, had received explicit legal advice that it was wrong, and pressed ahead anyway. 

The trial judge found Emmett liable and he was ordered to account for, or pay compensation in respect of, his breaches of fiduciary duty.  

Emmett appealed the decision based on a Limitation defence. The question was whether the claims were statute-barred as the events had taken place before December 2004, more than six years before the claim was issued. The Court of Appeal held that because Emmett’s breaches were fraudulent within the meaning of section 21(1)(a) of the Limitation Act 1980, no limitation period applied at all.  

“No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy.” 

A director is treated as a trustee of company property, and equity will not allow a fraudulent trustee to hide behind the passage of time. The financial incentive to stay was real, but it came at a very high price. 

The law is clear: if you cannot act loyally, you must resign. The company’s interests do not wait for yours to be sorted out first. 

Breaching The Conditions of the Sale Agreement ImageSpill Bidco Ltd and others v Wishart – Breaching The Conditions of the...