17. Directors Duties Flashcards
What are the common law duties of directors?
- Act in the interests of the company
- Act responsibly and honestly
- Act in accordance with the constitution and in accordance with law
- Not to make a secret profit and avoid conflict of interests
- Not to fetter their discretion
- Duty of care, diligence, and skill
- Have regard to interests of members
- Have regard to creditors
What section of the act outlines the duties?
Section 228
Exercising powers bona fide in the interests of the company case law
Regencies plc v. Cohen
Nash v. Lancegaye
Duty to act responsibly and honestly case law is also what?
A defence to the making of a restriction order
How is the duty to act in accordance with the constitution and within the law enforced?
An example of any activity prohibited by this duty?
Through misfeasance proceedings
The diversion of company funds
Are there any circumstances where the making of a profit/entering a conflict are permissible?
Yes. Where permitted by the constitution
Or
Where a special resolution is passed by its members
Regal Hastings v. Gulliver
Competing with the company case law
Cooley
Peso Silver Mines
O’Malley
Anderson
Disc,owing a conflict of interest remedies
Profit held on constructive trust for company
Unduly harsh order
Damages
Can a director ever fetter his discretion?
Yes.
Where it is permitted by the constitution.
Where he is acting in good faith
The restriction has been approved by special resolution
Fulham football club Ltd v. Cabra Estates Plc
Duty of care, skill, and diligence case law
Re Cuty Equitable Fire Insurane Co.
What kind of test is used to ascertain the duty of care, skill, and diligence?
A wholly subjective one
Courtney: “subjectivity in this context has been interpreted as meaning that an idiot, provided he is honest, can avoid liability”
Re Brazilian Rubber Plantations and Estates Ltd
Duty of diligence
Where directors are put on notice of impropriety they must act to prevent it
Jackson v. Munster Bank Ltd
Duty of care - case law
Nowadays directors are more qualified, thus a higher standard is required of them.
Dorchester Finance Co v. Stabbing
- two non executive directors
- signed blank cheques which the managing director used to misappropriate funds
- one chartered account, one with vast experience
Held both had been negligent
Held the duties of directors, whether executive or not, are the same
Duties of a non executive director
Less extensive than an executive director as they will not be so involved in the dealings of the company and will rely on the executive director to inform them of performance and other matters.
Re Mitek Holdings
- “there will usually be a real difference between the duties of an executive and non executive director”
Re Barings Plc
Bank collapsed. Rogue trader left unsupervised and granted permission for significant funding by three directors.
Three directors had left him in control.
Allowed him to doctor accounts, and report profits while trading at a huge loss.
Ignored internal audit recommendations.
Held: “ each individual director owes duties to the company to inform himself about its affairs and to join with his codirectors and supervising and controlling them”
Directors owing duties to shareholders
Allen v Hyatt
Coleman v Myers
- set out factors to be taken into account when deciding whether a duty to shareholders exists
- Dependence upon information and advice.
- Existence of a relationship of confidence.
- significance of the transaction
- Extent of any action taken by the director to promote it
Directors owing duties to creditors?
Kinsela
“Where a company is insolvent the interests of the creditors intrude”
Re Frederick Inns Ltd
SC endorsed Kinsella decision
“ Once the company clearly had to be wound up and it’s assets applied pro tanto in discharge of its liabilities the directors had a duty to the creditors to preserve the assets to enable this to be done or at least not to dissipate them.”
Do directors owe duties to employees?
No duties owed at common law.
But a statutory duty owed under s.224.
Directors only need to have regard to the interests of employees.
Statutory duties of Directors
Preventing transfer of substantial non cash assets
Can be approved by ordinary resolution
And informal agreement of all shareholders to enter into a transaction deemed to be sufficient.
Must be of requisite value. Not worth less than 5 thousand and exceeds 10% of the companies assets
What are the effects of a breach of the duty to prevent transfer of substantial non cash assets?
- Contract is voidable unless
- restitution no longer possible
- company has already been indemnified
- avoidance would affect an innocent third party
- approval of the company has been given within a reasonable period after the transaction - Directors and connected persons may be liable to account to the company for any profit made, as well as any loss the company suffered
- Company is also entitled to damages at common law (or equitable relief) provided it doesn’t produce a double benefit
