Director Duties I

Question 1

DIRECTORS DUTIES:

• Developed by the courts of equity but were codified in the CA 2006
• Any breach of duty by a director is therefore a wrong done to the company and it is the company who would therefore be the claimant in proceedings in respect of a breach of duty by a direct

Answer 1

If a director exceeds their powers/breaches their duties, they can be liable to the company for loss caused
- s239: Any liability for breach can be avoided if the director’s conduct is capable of subsequent approval, or ratification, by the shareholders

• Although the duties of directors were codified in CA 2006, the remedies for breach were not codified
• s178 provides that the existing common law and equitable remedies still apply

Question 2

Shareholder power over directors

-Shareholders have only a limited input into the company’s decision making

• CA 2006 requires the directors to obtain prior shareholder approval for certain decisions (see first page MA4/s21)
• s168: Ultimately, if shareholders do not approve of the way the directors are managing the company, they can change the composition of the board by removing directors and/or appointing new directors
• When exercising their powers and functions, the directors act as a board and make decisions by passing board resolutions

Answer 2

The Articles will regulate the procedure for passing board resolutions. In most cases this means that the directors make decisions by passing board resolutions at a board meeting and board resolutions are usually passed by a simple
majority of those who are present at the meeting, and voting

MA8: As an alternative the Articles usually allow directors to take decisions unanimously by some other means that
allows all the directors to indicate common consent

Question 3

Who do directors owe a duty to

Answer 3

• To a company: S170(1) CA06 : the general duties of directors specified in s171-177 are owed by a director to the company (not shareholders) – Foss v harbottle

Somecircumstances directors may owe duties to shareholders: these will be “something over and above the usual relationship that any director of a company has with its shareholders, e.g. where there is a special relationship between the directors and shareholders arising usually from a personal relationship and the shareholders place trust and confidence in the directors – Sharp v Blank (2015)

when a company is in financial difficulty, the position changes and the directors’ duties shift to the protection of the creditors

Question 4

Fiduciary nature of directors (origins and pre CA 2006)

• Directors are agents of the company and therefore subject to the fiduciary duties owed by agents.
• oveverriding principle of the equitable fiduciary duties = fiduciaries must not benefit from their position of trust

Answer 4

This principle has long been recognised and can be summarised as follow

• His duty to promote its success and to protect its [company’s] interests […] His fiduciary commitments to the company took the form of a duty of loyalty and a duty to avoid a conflict between his personal interests and his duty to the company.” Towers v Premier Waste Management Ltd [2012] Mummery LJ

Question 5

Old common law fiduciary duties, owed by directors now codified in CA 2006:

Answer 5

-Common law duty of skill and care;
- Fiduciary duties / duties in equity, e.g.
- duty to act bona fide in the best interests of the company;
- duty to act within powers and for proper purposes and not for any collateral purpose (e.g. not for personal gain,
or with a conflicting interest);
- duty not to misapply company property;
- duty to account for a secret profit (i.e. a profit made by virtue of one’s office, perhaps involving a contract
between the director and a third party, which is not approved by the company);
 duty to avoid conflicting interests and duties; and
 duty not to fetter discretion.

Question 6

Director duties- current position

Answer 6

• Whenever a director is making a decision, they must always consider the duties to which they are subject.
• former regime (duties from common law/equity) still operates to the extent not expressly provided for in CA

S170(3)General duties are based on certain common law rules and equitable principles

S170(4) new duties shall be interpreted/applied in the same way as the common law rules/equitable principles.

Practical efect: although any claim for breach of duty must be based on the statutory duties, the old case law will continue to be relevant in the interpretation of the statutory duties where it does not conflict with CA 2006.

Question 7

General duties of directors

Answer 7

s171: Duty to act within powers
s172: Duty to promote the success of the company for the benefit of the members as a whole s173: Duty to exercise independent judgment
s174: Duty to exercise reasonable care, skill and diligence
s175: Duty to avoid conflicts of interest
s176: Duty not to accept benefits from third parties
s177: Duty to declare any interest in a proposed transaction

Question 8

A director if a company must:

Answer 8

A) act in accordance with the company’s constitution

• Company’s constitution is defined in s257 (includes everything set out in company’s articles of association and decisions take in accordance with the articles
  A director is in breach of this duty if he acts without authority

B) only exercise powers for the purposes for which they are conferred

• Directors should exercise their powers “bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.” – Re Smith & Fawcett Ltd (1942)
• This duty codified the ‘proper purposes’ doctrine.