Just Abolish the No Profit Rule

Abstract

In 2013, Ernest Lim and Professor Sarah Worthington respectively published two articles in the Law Quarterly Review and the Cambridge Law Journal. Both articles engaged in comprehensive discussions of the rule laid down in Regal (Hastings) Ltd v Gulliver, commonly known as the no-profit rule, the rule that prohibits a director from making profits out of her fiduciary position. They took different approaches in attempting to rationalise this murky if not inconsistent area of law. I argue in this article that these attempts, albeit in the right direction as is any attempt that seeks to place limit on the scope of the no-profit rule, are unable to remedy the defects of the rule that may disincentivise directors from acting in the best interest of the company. I use practical examples to show that the rule can have the effect of harming the interest of the company, the exact opposite of the purpose for which the rule was designed.

Keywords: Conflict of interest, Directors' liabilities, Directors' powers and duties, Fiduciary duty, Remedies

JEL Classification: K20, K22