Directors Duties

Question 1

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 (CA)

Answer 1

facts:
The directors refused to exercise a power of sale granted to them by the articles. The members tried to exercise the power themselves by passing an ordinary resolution.

principles:
The division of power between the directors and the members is a matter for the articles, and where the articles grant a power to the directors only, then only the directors may exercise that power.

Held: The court noted that the company’s articles of association determined which organ had the powers of management. In the present case, the management powers were given to the board of directors.

Therefore, in these circumstances, the general meeting has no power to interfere with the management of the company by the directors by simply passing an ordinary resolution.

Question 2

Bushell v Faith [1970] AC 1099 (HL)

Answer 2

facts:
A company’s articles provided that, in relation to resolutions to remove a director, the voting power of the director involved would be trebled.

principles:
The Companies Act 1948 did not prohibit weighted voting clauses and so the clause in this case was effective.

held: The House of Lords decided to recognise the weighted voting rights accorded by the company’s articles of association.

Question 3

Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71

Answer 3

facts:
The directors used a power in the company’s articles to disenfranchise a group of shareholders, who were due to vote against the company at the upcoming AGM.

principles:
The proper purpose rule would apply to provisions in the articles. Exercising a power to disenfranchise members is not a proper purpose.

Question 4

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)

Answer 4

facts:
A company issued a batch of shares to the defendant in order to relegate the claimant to the status of minority shareholder, and thereby prevent it from blocking the defendant’s takeover bid.

principles:
The courts should determine the dominant purpose of the exercise of power. If proper, no breach will occur, even if subservient improper purposes exist, and vice versa.

held: Despite no motivation for personal gain, judge held that in thesecircumstances the directors had improperly exercised their powers

He ordered the allotment of the shares to be set aside and the shareregister rectified Decision held on appeal to the judicial committee

Although the directors had acted honestly and had power tomake the allotment, to alter a majority shareholding was tointerfere with that element of the company’s constitutionwhich was separate from and set against the directors’ powers

Question 5

Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 (Ch)

Answer 5

facts:
An issue of shares on preferential terms was denied to members in certain locations, due to the cost of complying with the laws of those locations.

principles:
Where the interests of the company and some part of its members conflict, preference should be given to the interests of the company.

Held: Rank’s directors had exercised their powers in the interest of the company, and so, in favouring the company over some part of the shareholders, they had not breached their duty.

Question 6

Re Barings plc (No 5) [2000] 1 BCLC 523 (CA)

Answer 6

facts:
Several directors were disqualified due to their failure to monitor an employee who engaged in financial transactions that caused the company’s collapse.

principles:
The duty to exercise skill and care requires directors to acquire sufficient knowledge of the company’s business and monitor those to whom managerial functions have been delegated. The duty will be affected by the directors’ role and function.

Question 7

s.171 CA 2006

Answer 7

Duty on a director to act within powers

A director of a company must—
act in accordance with the company’s constitution, and
only exercise powers for the purposes for which they are conferred.

Question 8

s.172 CA 2006

Answer 8

A director of a company 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, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

Question 9

s.173 CA 2006

Answer 9

(1)A director of a company must exercise independent judgment.

(2)This duty is not infringed by his acting—

(a)in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

(b)in a way authorised by the company’s constitution.

Question 10

S.174 CA 2006

Answer 10

(1)A director of a company must exercise reasonable care, skill and diligence.

(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b)the general knowledge, skill and experience that the director has.

Question 11

s.175 CA 2006

Answer 11

Duty to avoid conflicts of interest
This duty codifies the fiduciary duty to avoid causing a conflict of interest.

Question 12

s.176 CA 2006

Answer 12

Duty not to accept benefits from third parties

(1)A director of a company must not accept a benefit from a third party conferred by reason of—

(a)his being a director, or

(b)his doing (or not doing) anything as director.

(2)A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

(3)Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.

(4)This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

(5)Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

Question 13

s.177 CA 2006

Answer 13

Duty to declare interest in proposed transaction or arrangement

1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
(2) The declaration may (but need not) be made—
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with—
s184 (notice in writing) or s185 (general notice).
(4) Any declaration required by this section must be made before the company enters into the transaction or arrangement

Question 14

s.239 CA 2006

Answer 14

Ratification – directors can escape any sort of prosecution
A director who is prima facie liable for a breach of directors’ duties may be relieved from such liability by ratification.
A breach of duty by a director may often be ratified by the passing of an ordinary resolution at general meeting.
Not all directors’ breaches of duties can be ratified.
The differences between ratifiable and non-ratifiable wrongs remain unclear.

Question 15

Bhullar v Bhullar [2003]
s.175 pre CA 2006

Answer 15

Facts: For over fifty years, the families of two brothers (M and S) had run a company that let commercial property. Following an argument, it was decided that the families would part ways. M’s family proposed that the company should not acquire any further properties and S’s family agreed. A director, who was part of S’s family, discovered, by chance and not whilst acting in the course of the company’s business, a piece of property near to a piece of property owned by the company. Through another company that they owned, S’s family acquired this property without informing M’s family. M’s family alleged that S’s family had acted in conflict with the interests of the company.

Held: Although S’s family acquired knowledge of the property in a ‘private’ capacity, the opportunity to purchase the property was one that belonged to the company. Whether or not the company could have or would have acquired the property (because it was in the process of being wound up) was irrelevant.

Question 16

Boardman v Phipps [1967]

Answer 16

Boardman was solicitor for a trust: the ‘Phipps family trust’. He was not a trustee, but was in a fiduciary capacity as the advisor to the Phipps family trust. Boardman was aware of a large amount of commercial information about the company. This information was confidential.
With a great amount of work on Boardman’s part, the company generated a large profit both for the trust and for Boardman personally. However, one of the beneficiaries learned that Boardman had taken personal profit. As a result, they sought to sue Boardman to recover the profit for the benefit of the trust.

Held:
Boardman should have held the profits on constructive trust for the beneficiaries of the existing trust because he was acting as a fiduciary in his capacity as a solicitor advising the trustees. As a fiduciary, he was not entitled to permit a conflict between his personal interests and his fiduciary duties.

Question 17

Non-ratifiable wrongs

Answer 17

No clear definition, for example:
A breach of the duty to act bona fide for the interests of the company.
The breach of director’s duty which results in the company performing an illegal act;
‘fraud on the minority’: a majority of shareholders or directors succeed in expropriating at the expense of the minority the ‘money, property, or advantages’ of the company.

Question 18

Percival v wright 1902

Answer 18

shareholders approached the directors of a company asking them to buy their shares. The directors did so without informing them that a sale of the business was being negotiated, at a price per share which was vastly more than the shareholders were asking for.

It was held that the directors were not liable to the shareholders, because their duties were owed to the company, not the shareholders. Furthermore there had been no misrepresentation or unfair dealing, and the shareholders had approached the directors and named their price.