7. Directors' duties

Question 1

Is the duty under s.172 subjective or objective?

Answer 1

Subjective (director honestly believed that his act or omission was in the interests of the company

Question 2

Can the directors prioritise the interests of the company over interest of the members/

Answer 2

if the directors favour the co’s interests in the event of conflict between members’ interests, s.172 provides there is no breach

Question 3

Identify the 6 factors listed in s.172.

Answer 3

The likely consequesnces of the any decision in the long term
The interests of the co’s employees
the need to foster business relationships with suppliers, customers and others
The impact of the co’s operations on the community and the environment
The desirability of the Co maintaining a reputation for high standards of business conduct
The need to act fairly between the members

Question 4

S.171

Answer 4

Duty to act within powers outlines directors’ duty to comply with the co’s constitution and only exercise powers for the purposes for which they are conferred.

Howard Smith Limited –v- Ampol Petroleum Limited (1974)

Question 5

Key factors in s.172

Answer 5

The overriding duty is that a director must act int he way he considers, in good faith, will be most likely to promote the success of the company for the benefit of its member as a whole.

Examples of good faith:
A director must account for any profit he makes whether made honestly or otherwise.
Regal (Hastings) Company Limited –v- Gulliver (1942)

He must not divert company contracts to himself.
Cook –v- Deeks (1916)

Question 6

key factors in s. 173

Answer 6

Duty to exercise independent judgement
This section reflects the principle that a director must exercise their judgement independently of the influence of others
(this duty would not be infringed if D is acting in accordance with agreement that restricts exercise of discretion)
or if acting in a way authorised by constitution.

• D should ensure that D shoud not allow personal interests to affect the judgement in the interest of the co.
• D should not promote collective executive line
• D, while able to delegate, should not abrogate all resoinsibility
• D should not prevented from seeking external professional advice
• D who are representatives of major shareholder, or family, must set their representative function aside and make decision of their own merit.

Question 7

Key factor in s.174

Answer 7

Duty to exercise reasonable care, skill and diligence

a D owes a duty to the co to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with

• the general knowledge and skill reasonably expected of a person carrying out functions by the D (objective test)
• the general knowledge and skill reasonably expected of the director (subjective test)

Re: Barings PLC (no. 5) Secretary of State for Trade and Industry –v- Baker (1999)

Question 8

S.175

Answer 8

Duty to avoid conflicts of interests

D must avoid a situation in which they have a direct/indirect interest in the co that conflicts with the interests of the co.

Applies when exploitation of property, information or opportunity. Also applies to former directors.

The duty is not infringed if it has been authorised by directors

Question 9

What type of situation do not amount to a conflict under s.175?

Answer 9

The s.175 duty will not apply in relation to transaction or arrangement with the company itself, or where the situation cannot be reasonably regarded as likely to give rise to a conflict of interest.

Sec 175 CA 2006
This is now a statutory rather than common law duty and is wider in its application. But the directors may in effect authorise any infringement provided such authority is not invalidated by the Co’s constitution (private Cos) where the Co’s constitution includes provisions for the giving of such authority.

The Board may permit a conflict of interests – but for PLCs this is only possible if the Articles specifically permit.

Sec 175 continues to apply even after the director leaves office if he became aware of the information during his appointment.

Canadian Aero Service Ltd –v- O’Malley (1973)

Question 10

Are directors able to sit on boards of rival companies?

Answer 10

There is no rigid rule to prevent, however, it will depend on the factors of the case.

Question 11

Does the s.175 duty apply to former directors of the co?

Answer 11

Yes

Question 12

When will a director in a position of conflict not be in breach of s.175 duty?

Answer 12

Not infringed if authorised by directors or the company

Question 13

Can directors authorise a s.175 duty?

Answer 13

The directors ability is as follows:

• Can’t be authorised if statute requires member approval (third-party benefit);
• Can In private companies, if not invalidated by AA;
• Can in PLC, if AA allows them

Question 14

How does the standard of care under s.174 differ from its common law predecessor?

Answer 14

Under common law, the standard of care was subjective.

Under s.174, it has subjective and objective component

Question 15

When will the subjective element of s.174 duty apply?

Answer 15

S.174(2) imposes a subjective standard based on knowledge, skill and experience that merits raising the standard expected of him.

Question 16

If a director delegates one of his functions to another person, and that person does not perform with the requisite skill and care, will the director be in breach of s.174 duty?

Answer 16

Generally no, will not breach, subject to several exceptions:

• The directors must exercise reasonable care to whom to delegate
• The directors are required to supervise those to whom they delegated their powers.

Question 17

What is a remedy under s.174 duty

Answer 17

Compensation for any loss the company sustains due to the breach

Question 18

Explain the difference under s177 and 182

Answer 18

• S.177 duty applied to proposed transactions or arrangements, whereas s.182 applies to transactions that the company has entered to.
• Under s.177 the declaration must be made before entering transaction. S.182 - as soon as practicable
• A breach of s.177 results in civil consequences. Breach of 182 is a criminal offence.

Question 19

How can a director with an interest in proposed transaction under s.177 avoid a breach of duty?

Answer 19

Director must declare the nature and extent of their interest to the other directors.

Co Act 2006 Sec 260-9 provide that any member may bring a derivative action against any director alleging an actual or proposed act of negligence, breach of trust or breach of duty.

However, leave of the court must first be obtained.

Question 20

Duty not to accept benefits from third parties

Answer 20

Sec 176 CA 2006

This is to avoid putting directors into a position where a conflict of interest may arise

Question 21

What are the remedies for breach of duty?

Answer 21

Sec 178 CA 2006
Failure to disclose:- account for profit and fine; return of property, rescission of contract and compensation (Sec. 175/177 CA 2006
Dismissal;
Damages as appropriate e.g. negligence (Sec. 174 CA 2006).
N.B. Model Articles now provide that a Co may effect insurance against the costs incurred in civil or criminal proceedings. The Co will pay the premium.

N.B. Ratification required.

Question 22

Substantial property transactions

Answer 22

By s. 190/196 Co. Act 2006, any transaction between a company and its directors in which:

• a non-cash asset is changing hands
• to the value of more than £100,000 or 10% of the company’s nett assets, whichever is the lower,
• and subject to a minimum value of £5,000,

MUST be approved by the members in general meeting.

Question 23

Directors loans

Answer 23

By s. 197/214 Co. Act 2006 it is provided that a company may make loans including quasi loans to directors.
These loans must be preceded by approval given by the members in general meeting by passing an ordinary resolution.
However, the wording of the resolution must be available for inspection by the members for at least fifteen days prior to the meeting at which the resolution is to be voted on.
The resolution must disclose the purpose of the loan, the amount of the loan, the extent of the liability to which the company may be exposed as a result thereof.

Question 24

When is the members’ consent not required for loans?

Answer 24

The members’ consent is not required for the following:
Loans or quasi loans up to £10,000.
Loans to a director to enable him to perform his duties (the aggregate amount not to exceed £50,000).
Loans made by the company in the normal course of business on normal terms (no limit for such loans).
Loans of up to £15,000 for credit transactions where the director acquires goods from the company on its deferred payment terms.

Question 25

Can breaches of duty be ratified?

Answer 25

Yes, they can be ratified under s239 CA 2006 by the members, excluding any votes held by the director. In addition, the court can sometimes relieve a director from breach of duty if they have acted honestly and reasonably under s1157 CA 2006. See Re D’Jan of London Ltd [1990].