When a director is on the board of each of two contracting companies, each of which is a majority shareholder in each of the companies, can the director of both be bound by the inflexible rule of equity?

The existence of conflicting duties of loyalty when a director is on the board of each of two contracting companies has been considered to give rise to a sufficient conflict of interest to call for an application of the inflexible rule of equity. The point was made explicitly by Roach J.A. in Gray v. Yellowknife Gold Mines Ltd et al, at page 521, where he stated: “Now the decision in the Transvaal case [[1914] 2 Ch. 488] declared that a director of one company who (a) is a shareholder of the other company, or (b) is in a fiduciary position towards and owes a duty to another company, and that would most certainly include a director of that other company, has a personal interest.... A director of two companies owes a fiduciary duty to both. If he is a director of one company and only a shareholder of the other, he has a fiduciary duty only to the former. If he is a director of both, then in any proposed transaction between the two companies he would find himself in a position where he would be dealing with himself. He could not serve two masters whose interests conflicted."

The consequences were summarized succinctly by Vinelott J. in Movitex Ltd v. Bulfield and others, [1986] BCC 99 (Ch. Div.) as follows: "The true principle is that if the director places himself in a position in which his duty to the company conflicts with his personal interest or his duty to another, the court will intervene to set aside the transaction without inquiring whether there was any breach of the director’s duty to the company. That is an over-riding principle of equity."