Directors Duties' Flashcards
What is the interpretation of directors’ duties under section 170?
Duties are interpreted and applied in the same way as common law rules or equitable principles, allowing for wider interpretation and more flexibility.
This approach provides a broader context for understanding directors’ responsibilities beyond strict statutory language.
What are the repercussions of breaches or threatened breaches of general duties according to section 178?
They have the same repercussions as pre-Companies Act 2006 law under equitable principles and common law.
This includes potential legal actions and liabilities that may arise from such breaches.
Who do the general duties apply to?
- Directors
- Former directors
- Shadow directors (with specific provisions)
Shadow directors are defined under section 170(5) and subject to regulations by the Secretary of State.
When do directors’ duties cease?
Generally when a person ceases to be a director, but the duty to avoid conflicts of interest and the duty not to accept benefits from third parties continue.
These duties persist even after a director’s resignation or removal.
To whom are directors’ duties owed?
Duties are owed to the company.
This means that directors must act in the best interests of the company, not individual members or creditors.
What are the sanctions for breach of duty?
- Claim for damages by the company
- Equitable remedy of tracing profits and property acquired in breach
These remedies can help restore losses incurred due to breaches of duty.
How are directors regarded in terms of fiduciary duties?
Directors are regarded as fiduciaries, historically treated as trustees with a duty to act in good faith in the interests of the company.
This fiduciary relationship emphasizes the trust placed in directors to manage company affairs responsibly.
What is the core duty of directors according to section 172?
Promote the success of the company, considering the interests of members and other stakeholders.
This duty is aimed at ensuring long-term corporate success.
What does the ‘but for’ test assess in directors’ duties?
It examines whether a decision would have been taken ‘but for’ an improper purpose, indicating a breach if the answer is negative.
This test was notably discussed in Eclairs Group Ltd v JKX Oil & Gas plc.
What is the significance of the Enlightened Shareholder Value approach?
It encourages directors to consider the interests of wider stakeholders while promoting the company’s success for members.
This approach aims for stability and long-term benefits to shareholders.
What does section 173 require from directors?
Directors must exercise independent judgment in their decision-making.
This ensures that directors prioritize the company’s best interests over external influences.
What does section 174 outline regarding directors’ care and diligence?
Directors must exercise reasonable care, skill, and diligence, meeting a minimum standard and considering their individual expertise.
This includes an objective and subjective test for assessing a director’s performance.
What is the importance of knowledge of the company’s business for directors?
Directors have a continuing duty to maintain sufficient knowledge and understanding of the company’s business to discharge their duties effectively.
This is crucial for informed decision-making and risk management.
What does the case of Fulham Football Club Ltd v Cabra Estates plc illustrate?
Directors can lawfully agree to restrict their discretion if it is in good faith for the company’s benefit.
This case emphasizes the balance between director autonomy and fiduciary duty.
What is the test for determining good faith in directors’ decisions?
Directors must act in a way they believe to be in the best interests of the company, not necessarily how the court would view it.
This reflects the business judgment rule.
What does section 172(3) indicate about creditors’ interests?
If a company has no reasonable prospect of avoiding insolvent liquidation, creditors’ interests take priority.
This shifts focus from shareholders to creditors in times of financial distress.
What is the primary duty of directors when delegating functions?
Directors must supervise the discharge of the delegated functions
The extent of this duty depends on the facts of the case, including the management role of the director.
In the case of Re Queens Moat House plc (No 2), what was the court’s conclusion regarding the chairman and joint managing director?
The chairman and joint managing director breached their duty of care by failing to question the accounts prepared by the finance director
They should have recognized discrepancies based on available financial information.
What two standards are applied for the duty of care, skill, and diligence for directors?
- Objective standard: Reasonably diligent person
- Subjective standard: Higher standard for directors with specific expertise
This is codified in Section 174 of the Companies Act 2006.
True or False: Directors can blindly rely on the expertise of qualified professionals.
False
Directors have a duty to exercise independent judgment and critically assess information.
What does the duty to avoid conflicts of interest entail for directors?
Directors must avoid situations where they have a direct or indirect interest that conflicts with the interests of the company
This includes exploitation of any property, information, or opportunity.
What is the significance of the case Bray v Ford [1896] in relation to fiduciary duty?
It established that a fiduciary is not allowed to put themselves in a position where their interest and duty conflict
This principle underlines the no conflict and no profit rule.
Fill in the blank: A director must declare their interest in a proposed _______ or arrangement.
transaction
This declaration must include the nature and extent of the interest.
What are the civil consequences of breaching directors’ duties under sections 171–177?
Determined by pre-existing common law and equitable principles
This includes remedies such as return of property or account for profits.
What does Section 176 of the Companies Act state about directors accepting benefits from third parties?
Directors must not accept benefits conferred by reason of their position as a director
This applies unless the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
In the case of Industrial Development Consultants Ltd v Cooley [1972], what was determined about the fiduciary relationship?
Cooley was required to disclose information received in his capacity as MD that was of concern to the company
He was liable to account for benefits received under the contract with the Gas Board.
What does the remedy of account for profits entail for directors who breach their duties?
Profits made as a result of the breach must be confiscated and given to the company
This remedy serves to deter directors’ breaches, not to compensate for loss.
What does the term ‘rescission’ refer to in the context of transactions made by directors in breach of duty?
Rescission allows the company to void a transaction made in breach of duty
The transaction is voidable, meaning it can be ratified by the shareholders.
What is required for a director to avoid conflicts of interest according to Section 175?
Situations must be authorized by the directors, and the interested director cannot be counted in the quorum
This is subject to the company’s constitution and quorum provisions.
What is the role of a managing director in relation to a company’s affairs?
Responsible for running the day-to-day matters of the company
Typically, directors are only required to attend some Board meetings.
True or False: A non-executive director has no legal meaning but indicates part-time involvement with the company.
True
Their contract will specify how many days a week they must devote to the company’s business.
In which case was it determined that failure to inquire into financial statements can lead to a breach of duty?
Re Park House Properties Ltd [1997] 2 BCLC 530
It emphasized that failing to make inquiries can result in disqualification.
What is the legal status of a transaction made by a director in breach of duty?
Not void but voidable at the instance of the company
Referenced case: Bamford v Bamford [1970] Ch 212
What does rescission involve?
Each party returning to the other what was transferred in the transaction
Referenced case: Cavendish-Bentinck v Fenn (1887) 12 App Cas 652
What are the remedies of account of profits and rescission considered?
Independent; suited to different circumstances
What is equitable compensation?
Court has power to award for any loss not compensated for by restitution, account of profits, or rescission
Referenced case: Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598
Under what circumstances is equitable compensation awarded?
Only for a loss that would not have occurred but for the breach
Referenced case: Target Holdings Ltd v Redferns [1996] 1 AC 421
What is the purpose of equitable compensation according to the unanimous court’s ratio?
To make good a loss in fact suffered, which could be seen to have been caused by the breach
When is equitable compensation not available?
If no loss suffered by the company or would have been suffered even if there had been no breach
Referenced case: Target Holdings
What is secondary liability in the context of directors’ breaches of duty?
Parties outside the company may be liable to hold company property in trust for the company or account for profits
What are the two circumstances under which secondary liability may arise?
- Knowing receipt or dealing
- Dishonest assistance
What constitutes knowing receipt in secondary liability?
When an outsider receives property knowing it was transferred in breach of a director’s fiduciary duties
Referenced case: Belmont Finance Corporation Ltd v Williams Furniture Ltd (No.2) [1980] 1 All ER 393
What is meant by dishonest assistance in the context of secondary liability?
An outsider dishonestly assists in or procures a director’s breach of fiduciary duty
How can a director be relieved from liability?
- By ratification
- By the company
- By court
What is required for ratification under s 239?
Must be made with full knowledge of the character of the act or with intention to adopt it
What happens if a company is insolvent regarding ratification?
Ratification is not possible under pre-existing case law
Referenced case: Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722
What does s 232 state regarding agreements for relief from liability?
Agreements will be void but the company may pay insurance premiums for insurance cover
What must a court find to grant relief under s 1157?
That the officer or auditor acted honestly and reasonably
What is required for a director’s long-term service contract under s 188?
Prior approval by shareholders needed if the contract may be longer than 2 years
What happens if a substantial property transaction does not receive prior authorization?
The transaction is usually voidable at the instance of the company
Referenced sections: s 190 and s 195
What is required for loans to directors under s 197?
Prior authorization by Ordinary Resolution needed for the company to grant a loan to a director
If no prior consent is given for loans to directors, what is the consequence?
The transaction is usually voidable at the instance of the company
Referenced section: s 213
