7 - Directors' duties Flashcards
Can more than one duty be breached in one action?
Yes
S.170(1) states general duties are owed by who, to who?
By a director of a company, to the company
Significance of general duties being owed to ‘the company’ (2)
- Directors don’t owe duty to other persons (members, employees, creditors)
- Only company itself, and those empowered to bring claims on company’s behalf, can commence proceedings for breach of duty
2 caveats of general duties being owed by ‘a director of the company’
- Also apply to shadow directors
- Can apply to former directors
Two duties imposed by S.171
- Act in accordance with company’s constitution
- Only exercise powers for purposes for which they are conferred
Consequence of director breaching constitution
They are required to account for any gains made, or compensate company for losses sustained, as a result of breach
What is the significant point of note in how courts decide whether director has exercised powers for improper purpose?
The substantial purpose of the power being exercised is ascertained. - If this is proper, no breach has occurred, even if another less substantial purpose is improper
CA 2006 - which duty replaced duty to act bona fide in the interests of the company? - S.172 duty
- Duty to promote the success of the company *
‘[a] director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’
Duty to promote the success of the company - objective or subjective?
Subjective insofar as the wording is ‘act in a way he considers… will promote’
However, if success of company has not been considered, then objective
What does the Act mean by ‘success of the company’?
It doesn’t really given any guidance. Companies are free to define this themselves in the articles but few do. Could be financial but a wide array of factors are at play.
Does a director breach duty to promote success of company ‘for benefit of its members as a whole’ if part of the membership’s interest don’t align with the of company?
No
6 matters to which directors must ‘have regard to’ when promoting success of company - S172(1) factors
- Likely long-term consequences of decision
- Interests of employees
- Need to foster relationships with suppliers, customers, etc.
- Impact on community and environment
- Desirability to maintain a reputation for high standards of business conduct
- Need to act fairly as between members
Remedies to breaches in S.172 duty
- Agreement is voidable at company’s instance
- Director in breach may be required to compensate the company
S.173 duty
A director must exercise independent judgement
2 exceptions to duty to exercise independent judgement
- Where director is acting in accordance with agreement which restricts future exercise of discretion
- Where director acts in a way that is authorised/required by company’s constitution
Remedies to breaches in S.173 duty
- Agreement is voidable at company’s instance
- Director in breach may be required to compensate the company
S.174 duty
A director of a company must exercise reasonable care, skill and diligence
S.174 - What standard of care, skill and diligence are directors required to meet?
That which would be exercised by a reasonably diligent person with:
- knowledge, skill and experience that would be expected of director of that company (objective)
- knowledge, skill and experience of the director (subjective)
Remedy to breaches in S.174 duty
Director will be required to compensate company
S.175 duty
Duty to avoid conflicts of interest
Re. S.175, what accounts to a conflict?
Must arise from a transaction or arrangement with a third party
Does S.175 duty only apply to current directors?
No, also applies to former directors
When (and when aren’t) former directors found to have breached S.175 duty?
No breach - simply by vacating office and setting up a rival business
Breach - property, information or opportunity of which director became aware at a time when they were director is exploited
2 instances where courts may be less likely to hold that former director has breached S.175
- Reason for resignation was not to compete
- Director resigned due to being excluded from management
S.175 conflict authorisation - what do private model arts say?
They do not invalidate directors’ ability to authorise conflicts
S.175 conflict authorisation - what do public model arts say?
They do NOT contain provision enabling directors to authorise conflict
Authorising conflicts - private companies
Directors may authorise conflict providing that constitution does not invalidate authorisation
Authorising conflicts - public companies
Directors may only authorise conflict if there is a provision in the articles enabling them to do so
4 rules to be complied with when authorising conflict
- Must be obtained prior to dir. entering into agreement
- Authorisation only valid if conflicted director did not count towards quorum and vote
- Directors have acted in accordance with general duties
- Authorisation cannot avoid director being in breach of other duties (than S.175)
Remedies to breaches in S.175 duty
- Agreement is voidable at company’s instance
- Director in breach may be required to account for any gains made
S.176 duty
Director must not accept benefit from third party conferred by reason of being a director or doing anything as a director
What constitutes a benefit from a third party?
Only a benefit that can reasonably be regarded as likely to give rise to a conflict of interest
2 exceptions to breach of S.176 duty
- Benefit has been approved by the members
- Director has acted in accordance with provisions of articles
4 possible consequences to S.176 breach
- Contract can be rescinded by company
- Company can recover benefit from director, or damages from third part
- Company can summarily dismiss the director
- Offence committed if benefit amounts to a bribe
S.177 & S.182 rules (duty)
Regarding disclosing their interest in certain transactions or arrangements
Which sort of transactions and arrangements are covered by S.177 rules
Where the director has entered into an agreement with the company, or is the shareholder of another company which has done so
Model articles provision regarding S.177 duty on disclosing interests
Director cannot vote or be counted towards the quorum when board decides whether to proceed
Remedy to breach of S.177 duty
Transaction or arrangement is voidable at company’s instance - director in breach faces no liability
What does S.182 say on conflicting transactions and arrangements?
Where director becomes interested in transaction or arrangement that has already been entered into, he must declare nature and extent to directors
1 key difference between S.177 & S.182
S.177 breach results in civil consequences only, S.182 breach results in criminal offence
3 ways by which a director found liable for a breach of duty can attempt to avoid liability
- Through a provision excluding or limiting liability
- Through a provision indemnifying the director for any liability he may face
- By seeking to be relieved from liability
3 situations where provision indemnifying director (or excluding or limiting liability) will not be void
- Where company purchases and maintains insurance for a director against such liability
- Where company indemnifies director against liability to a person other than the company (ie. a third party)
- Where company indemnifies director who is a trustee of an occupation pension scheme re. that scheme
In which 2 ways may a director be relieved from liability?
Members & Court
How do members relieve director from liability?
By ratifying their conduct through passing a resolution of the members of the company
When may court relieve director (or auditor) from liability?
When they see that he acted honestly and reasonably, and ought to be fairly excused having regard to the circumstances of the case
4 types of transactions which potentially give rise to significant CoIs - and therefore require member approval
- Long-term service contracts
- Substantial property transactions
- Loans, quasi-loans and other credit transactions
- Remuneration and payments for loss of office
Which length of service contract is considered long term?
Longer than 2 years
What is considered a substantial non-cash asset?
Any property or interest in property, other than cash, that:
- Exceeds £100,000
or - Exceeds £5,000 and is greater than 10% of net assets
Transactions requiring member approval apply to directors and ‘connected persons’. Who are considered ‘connected persons’? (5)
- Members of directors family
- Body corporate with whom director is connected
- Trustees of a trust, the beneficiaries of which include the directors, members of his family, or connected body corporate
- Any partner of director or partner connected to director by virtue of any of above
- Firm which is legal person and of which director is a partner, or one of the partners is connected to a director by virtue of any of above
Consequence of long-term service contract not being approved
Still valid, but will be deemed to contain term entitling company to terminate it at nay time by giving reasonable notice
3 examples of exceptions to transactions requiring member approval
- Company is in administration
- Relates to a director’s payment for loss of office
- Director is entitled under service contract
What can consequences be if transaction (substantial property transaction or loan/quasi-loan/credit arrangement) requiring member approval is not obtained?
- Transaction may be voidable at company’s instance
- Director’s liable to account for gains, and indemnify company for any loss or damage
Example of when transaction may not be voidable by company, in instance where required member approval not obtained
If it had been approved by members within reasonable period
When will a director not be liable to account for gains, and indemnify company for any loss or damage, in instance where required member approval not obtained
If it can be shown that they did not know of relevant circumstances that constituted the contravention
Which companies may not enter into loans with directors (of company or holding company) without member approval?
Private co’s and public co’s
Which companies may not enter into quasi-loans with directors (of company or holding company) without member approval?
Public companies (and other associated companies)
When is a company ‘associated’ with another?
If one is the subsidiary of the other, or the are both subsidiaries of the same company
What is a quasi-loan?
One party agrees to pay a sum for another person, on basis that this will be reimbursed
What is the third type of loan-like transaction requiring member approval? loans and quasi-loans
A credit transaction entered into by company for benefit of director or connected person (or by company guaranteeing/securing such a transaction)
6 instances where requirement for member approval of prop transaction/loan/quasi-loan/credit arrangement does not apply
- Transaction provides director with funds to meet company’s expenditure
- Transaction provides director with funds incurred in defending specified legal proceedings
- Value of transaction less than £50k
- Loan or quasi-loan does not exceed £10k
- Credit transaction does not exceed £15k
- Loan/quasi-loan/credit transaction is made to an associated body corporate
In which 2 instances may a quoted or unquoted traded company make a remuneration payment or a loss of office payment to a director or former director
- Consistent with approved remuneration policy
- Amendment to remuneration policy in order to make payment is approved by resolution of the members
What is consequence of payment being made to director where approval is required but not obtained?
- The recipient of the payment holds it on trust for the company that made the payment
- Any director who authorised payment is jointly and severally liable to indemnify company and compensate it for any loss
Why is there a difference in ability to make remuneration and loss of office payments between a) quoted and traded companies, and b) unquoted untraded companies?
Quoted and traded companies are required to have remuneration policies
A payment for loss of office is a payment made to a director or former director: (4)
- By way of compensation for loss of office
- By was of compensation for loss while director of (or employed by) the company, through other office or employment
- As consideration for or in connection with retirement from office
- As consideration for or in connection with retirement, while director, from other office or employment
7 duties of directors
- Act within powers
- Act in a way they consider most likely to promote success of company for its members as a whole
- Exercise independent judgement
- Exercise reasonable care, skill and diligence
- Avoid CoIs
- Must not accept benefits from third parties
- Declare nature and extent of interest in transactions and arrangements (and disclose interests if they arise following approval of transaction/arrangement)
