5. Directors' duties and powers

Question 1

What do the Model Articles for Public Companies say about directors’ general powers of a company?

Answer 1

The directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’.

Question 2

What is the reserve power given to Shareholders in the Model Articles for Public Companies?

Answer 2

Allows shareholders to instruct the directors by special resolution to take, or refrain from taking, specified action.

Question 3

Outline the general duties of directors under s.171 to 177 of the Companies Act 2006.

Answer 3

• s.171 - to act within their powers in accordance with the company’s constitution and only exercise those powers for which they are conferred
• s.172 - to promote the success of the company for the benefit of its members as a whole and have regard to stakeholders
• s.173 - to exercise independent judgement
• s.174 - to exercise reasonable care, skill and diligence
• s.175 - to avoid conflicts of interests
• s.176 - not to accept benefits from third parties
• s.177 - to declare any interest in proposed transactions or arrangements

N.B. also s.182 - to declare any interest in existing transactions - gives rise to criminal sanction - maximum penalty of £5,000

Question 4

What does the second limb of s.171 (i.e. only exercise powers for which they are conferred) mean?

Answer 4

Directors should not exercise powers for a collateral purpose - Hogg v Cramphorn is an example where directors feared a takeover bid and allotted shares to themselves to prevent the takeover from happening (i.e. acting with their interests above the company)

Question 5

Outline the matters which directors should have regard to in relation to s.172 - CREELS

Answer 5

• the likely consequences of any decision in the long term;
• the interests of the company’s employees;
• the need to foster business relationships with suppliers, customers and others;
• the impact of the company’s operations on the community and the
• environment;
• the desirability for the company to maintain a reputation for high standards of business conduct;
• the need to act fairly as between members of the company.

CREELS - Community, reputation, employees, environment, long term, suppliers

Question 6

What does it mean for a director to exercise independent judgement?

Answer 6

This means that the directors must not fetter their discretion. This duty can cause difficulties for directors who represent outside interests as they may let an outsider vote in their interests on a particular transaction

The ICSA guidance note states the following:
• If the board is considering a contract in which a director has a personal interest, a director with a personal interest must leave the meeting

Question 7

s.174 states a director should exercise reasonable care, skill and diligence of what?

Answer 7

‘reasonably diligent person’ with – two tests
o the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
o the general knowledge, skill and experience that the director has - when scrutinising financial decisions, a director who is a chartered accountant will be judged at a higher level of knowledge than a director who does not have training in accountancy.

Question 8

Are there any protections in which a director can avoid a conflict of interest in particular transactions?

Answer 8

• authorise conflicts via shareholder resolution

- include safe harbour provisions in company articles (i.e. intra-group conflict does not violate interests)

Question 9

Name some warning factors which might limit the quality of decision making - RIIIDES

Answer 9

• reluctance to involve NEDs
• insufficient attention to risk
• inappropriate reliance on prev exp
• inadequate info
• dominant personality
• emotional attachment and self-interest

Question 10

Who can bring an action for breach of general duties?

Answer 10

The general duties are owed to the company – therefore shareholders can bring a derivative action on behalf of the company against the directors – can be brought against in relation to an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director. There is no need to show that the company has suffered a financial loss.

Question 11

What is fraudulent trading?

Answer 11

Fraudulent trading arises where the directors have acted with intent to defraud creditors. In these circumstances, they may be required to contribute to the assets of the company. This is also a criminal offence.

Question 12

What is wrongful trading?

Answer 12

Wrongful trading – continue to trade when aware the company is in or soon would go into liquidation