Directors' Duties

Question 1

Which Act sets out principle duties that directors owe to their company?

Answer 1

Companies Act 2006, when a duty has been broken the courts will consider this Act primarly, most of the case law is before 2006.

Question 2

Who are the duties owed to?

Answer 2

S170 - directors owe duties to the company not the members, only company can take action against a director for breach, however member bring derivative claim on behalf of company

Question 3

Who are the duties owed by?

Answer 3

Every person who is classed as a director, certain aspects regarding conflicts of interest and accepting benefits from third parties also apply to past directors, even to those who have left, to prevent directors from exploiting a situation simply by resigning

Question 4

Duties relating to Articles of Association?

Answer 4

• If a director has acted in accordance with the articles, they cannot be in breach of duty to exercise independent judgement
• some conflicts of interest by independent directors ar permissible by the articles
• Directors will not be in breach of any CoI if they follow provisions in the articles when doing so

Question 5

Section 171?

Answer 5

• Duty to act within powers given
• Act in accordance with the company’s constitution, if not then ultra vires
• have a fiduciary duty to the company to exercise their powers bona fide
• must use their powers for proper purpose (s171(b))
• cannot be said to be acting bona fide if they use their powers for some ulterior or collateral purpose - eg issuing shares to prevnent takeover bid or ensuring one shareholder has majority control

Question 6

Section 171 case?

Answer 6

Hogg v Cramphorn 1966 - directors issued shares to an employee’s trust fund to defeat a takeover bid - although acting in good faith as genuinely believed it would not be good for the company, the use of power was held to be ultra vires, ratifiable by shareholders

Question 7

Section 172?

Answer 7

• Duty to promote the success of the company (act does not specify what this is it is down to directors)
  Directors should consider
  a) the consequences of the decision in the long term
  b) the interest of their employees in general
  c) the need to develop good relationships with customers and suppliers
  d) impact on local community and government
  e) maintaining high standards of business conduct and reputation
  f) need to act fairly between members of company

Question 8

Section 172 Case?

Answer 8

Smith v Fawcett Ltd (1942) - Smith and Fawcett were the directors and the sole shareholders of the company. Fawcett left his shares to his children. The articles of the company provided that the directors may at any time and in their absolute and uncontrolled discretion refuse to register any transfer of shares. Smith and the new director suggested he should get half pf F’s shares left. Directors had duty to act bona fide and decision was upheld.

Question 9

Section 173?

Answer 9

Duty to exercise independent judgement
Should not delegate decision making powers or be swayed by influence of others
No fettering duty - fulham v cabra estates In both this case and in Thorby v Goldberg, directors had exercised their independent judgment at the time the agreements were entered into. The cases were not those of fettering discretion but of exercising it at a certain time and in a certain way

Question 10

Section 173 case?

Answer 10

Fulham Football Club v Cabra (1994) -The directors of a company had entered into an undertaking to support planning applications by another party for the development of certain land in return for the receipt by the company of large sums of money. The directors subsequently wanted to give evidence to a planning inquiry opposing the development and sought a declaration that they were not bound by the undertakings and were entitled to give such evidence to the inquiry as they considered to be in the interests of the company. The court of Appeal disagreed. It held that they had not improperly fettered their discretion.

Question 11

Section 173 other description?

Answer 11

Duty not to fetter discretion
This duty is not infringed by him acting - in accordance with an agreement entered by company which restricts future exercise of discretion by directors, and also a way authorised by the company’s constitution
Boulting v ACTAT (1963) - must not subordinate interests of company to someone else

Question 12

Section 174?

Answer 12

Duty to exercise reasonable care, skill and dilligence.
By a person with - general knowledge, skill and expertise reasonably expected of a person carrying out functions of director AND experience that director has eg accountant or lawyer

Question 13

Section 174 cases?

Answer 13

Re City Equitable Fire Insurance Co Ltd (1925) per Romer J - A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician….
A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed.
In the case of Re City Equitable Fire and Insurance Co Ltd [1925] it was held that a director is expected to show the degree of skill which may reasonably be expected from a person of his knowledge and experience.

Question 14

Section 174 other case?

Answer 14

Re Brazillian Rubber Plantation and Estates Ltd (1911) - Directors had no experience in rubber plantations.
The court held that the directors had shown the skill expected of someone of their knowledge i.e. none- and therefore the standard of care is to be determined according to the expertise of the particular director.
“He is, I think, not bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance,’

Question 15

Re D’Jan of London 1993

Answer 15

Director negligently signed an insurance form without reading it so he gave incorrect information that the company wasnt properly insured, valuable stock was lost in fire.
Hoffman J ‘the kind of thing that could happen to any business man’ - no it could not, this marked end of laissez fair attitude.

Question 16

Section 175?

Answer 16

• Duty to avoid conflicts of interest - avoid situations where personal interests conflict or may possibly conflict with the company’s interests.
• Eg, personal use of information, property or opportunities belonging to the company
  Directors owe fiduciary duty to avoid conflict of interest.
• Will not be liable if members of company authorised actions, actions authorised by other directors, the company rejected the opportunity they took up - peso silver mines v cropper

Question 17

Section 175 case?

Answer 17

Regal (Hastings) Ltd v Gulliver (1942) - exploitation of property - The company owned a cinema. It had the opportunity of acquiring two more cinemas through a subsidiary to be formed with an issued capital of £5,000. However, the company could not proceed with this scheme since it only had £2,000 available for investment in the subsidiary. The directors and their friends therefore subscribed £3,000 for shares of the new company to make up the required £5,000. The chairman acquired his shares not for himself but as nominee of other persons. The company’s solicitor also subscribed for shares.
The share capital of the two companies (which then owned three cinemas) was sold at a price which yielded a profit of £2.80 per share of the new company in which the directors had invested. Where directors in the course of their management of a company avail of their opportunities and special knowledge and, as a result, obtain a profit, they must account to the company for that profit, even though there was nothing improper in what they did and the company did not suffer.

Question 18

Section 175 other case?

Answer 18

IDC v Cooley (1972) - Cooley managing director of IDC, tried to negotiate a contract with eastern gas board for IDC. Board refused contract with IDC but offered job to Cooley himself. He feigned ill health, resigned and took the job.
Was a breach of hid fiduciary duties and had to account to IDC for fees and remuneration. He acted in conflict of interest and had to compensate IDC.

Question 19

Section 176?

Answer 19

Duty NOT to accept benefits from third parties, eg bribes.
Where a director accepts a benefit, this may also create a conflict of interest, they will also breach 175 duty.
2) ‘Third Party’ - is a person other than the company, associated body corporate, or person acting on behalf of company or body corporate.
3) Benefits received by a person whose services are provided to the company are not third party.
4) If not regarded as likely to give rise to conflict of interest then not infringed.
If amounts to a bribe then bribery act 2010 will apply.

Question 20

Section 176 case?

Answer 20

Boston Deep Sea Fishing v Ansell - D is Director of company, authorised to purchase ships for company, took a secret commission from ship builders to award them the contract
Held, director only able to obtain commission because he was director, liable to repay commission to company

Question 21

Section 177?

Answer 21

Duty to declare interest in proposed transaction or arrangement

1) If interested in proposed transaction or arrangement he must declare extent and nature of interest to other directors
2) Declaration may be at meeing of directors or by notice to directors in accordance with s184 (notice in writing) or 185 (general notice)
5) Does not require a declaration of an interest of which the director is not aware of the transaction or arrangement in question
6) Need not declare if a) not likely to give rise to conflict of interestor b) other directors are already aware of it

Question 22

Section 177 case?

Answer 22

Guinness plc v Saunders and Ward [1988] -
Ward was a director of Guinness. A company controlled by Ward was paid over £5 million by Guinness for work. Ward disclosed his interest to some but not all of the board of directors. On discovery of the facts, Guinness sought to recover the money.
Held: Ward held the money on constructive trust for Guinness, and must repay the money. It was also held that the disclosure was insufficient, disclosure must be to the full board.

Question 23

Remedies against directors?

Answer 23

Varies with the breach of duty
May have to account for personal gain - Regal (Hastings) Ltd v Gulliver 1942 - sold shares and kept profit when it was actually the company’s profit - had to repay it

Question 24

Consequences of breach of duty of directors?

Answer 24

• Damages repayable to the company where suffered loss
• Restoration of company property
• Repayment of any profits
• Rescission of contract