Director's duties Flashcards
Why should directors have duties?
They hold a lot of power and unless they are also shareholders they will not suffer personally if the company loses money as a result of their decisions or actions. These duties are owed to the company itself therefore only the company can bring an action for breach.
What to explain to the client
That they need to ensure that they comply with the Companies Act 2006. Need to ensure that he complies with his duties as a director by:
1) Acting within powers
2) Promoting the success of the company
3) Exercising reasonable care, skill and diligence
4) Declare an interest in a proposed transaction
5) Exercising independent judgment
6) Avoid conflicts of interest with the company
7) Not to accept benefits off third parties
Which duties will always come up
1) Duty to promote success of company
2) Exercise reasonable care, skill and diligence.
To comply they will likely have to get any land independently valued, conduct surveys and tests, experts reports.
Which duty will usually come up
Duty to declare interest in a proposed transaction.
Even if an exception applies still need to state that it is good practice to declare it anyway and this declaration can be in writing or another informal method. This needs to be BEFORE the company enters into the transaction
Duty to act within powers
A director must:
- Act in accordance with the company’s constitution
- Only exercise powers for the purposes for which they are conferred
Duty to promote the success of the company
A director must act in the 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 - Factors to consider
When acting directors must have regard to 6 factors:
1) The likely consequences of any decision in the long term
2) The interests of the company’s employees
3) The need to foster the company’s business relationships with suppliers, customers and others
4) The impact of the company’s operations on the community and the environment
5) The desirability of the company maintaining a reputation for high standards of business conduct
6) The need to act fairly as between members of the company
Duty to promote the success of the company - Subject nature
The court will apply a subjective test to ascertain whether a director has breached this duty - whether they considered in good faith that their actions were most likely to promote the company’s success - this makes it hard to show that this section has been breached
Duty to exercise independent judgment
This is not infringed by a director acting:
- In accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors
- In a way authorised by the company’s constitution
Duty to exercise reasonable care, skill and diligence
The care, skill and diligence that would be exercised by a reasonably diligent person with:
- The general knowledge, skill and experience that may be reasonably be expected of a person carrying out the functions carried out by the director in relation to the company
- The general knowledge, skill and experience that the director has
Duty to avoid conflicts of interest
Directors must avoid situations in which they have or can have a direct or indirect interest that conflicts or may possibly conflict with the interests in the company. BASICALLY IF IT CONFLICTS WITH WHAT THE COMPANY DOES This applies in particular to the exploitation of any property, information or opportunity. This is not breached if the matter has been authorised by the directors. This DOES NOT apply to a conflict of interest arising in relation to a transaction/arrangement with the company
Duty not to accept benefits from 3rd parties
A director of a company must not accept a benefit from a third party conferred by reason of them either being a director or doing anything as director
Duty to declare interest in a proposed transaction or arrangement
If a director of a company is in any way directly or indirectly interested in a proposed transaction or arrangement with the company they must declare the nature and extent of that interest to the other directors.
Duty to declare interest in a proposed transaction or arrangement - Exceptions
- If the director is not aware of the interest or of the transaction/arrangement
- If the interest cannot reasonably be regarded as likely to give rise to a conflict of interest
- If or to the extent that the other directors are already aware of it
- If it concerns the terms of the director’s service contract
Ratification of breach
The shareholders can ratify a breach or potential breach of a director’s duty by ordinary resolution. If the director in question is also a shareholder they will not be counted. If the director’s breach is ratified in this way this means that it is as if the director did not breach their duty at all and the director will escape liability to the company for breach of duty
Directors borrowing money for improper purposes
E.g borrowing it to keep control
MA 14
Always check is MA 14 applies - director cannot count in quorum or vote if they are interested. Explain what this means to client e.g the two other directors would need to attend and vote
Breach of MA 14
Could render meeting invalid and decision invalid
Consequences of breaches
1) May have to offer an account of profits
2) May have to pay compensation for any loss suffered by company
3) Any contract entered into may be declared void
4) Injunction to prevent future breaches
5) Order for restoration of property transferred
