Directors' Duties Flashcards
s 171: duty to act within powers
- Directors must “act in accordance with the company’s constitution” (this includes the articles (s17)).
- the Director must also “only exercise powers for the purposes for which they are conferred”.
- can happen when director oversteps their authority under the constitution or uses their power for an improper purpose
- need to see articles of association to asses if breached occured
- MA 3 allows directors to exercise all powers of the company, but there can be a special article that overrides / limits MA 3
s 172: duty to promote the success of the company
- director must act in a way that they consider “promotes the success of the company for the benefit of its members as a whole”
director must consider factors set out in s171(a) - (f) when making decisions:
- likely long term consequences of the decision;
- interest of the employees;
- need to foster business relationships with suppliers, customers, and others;
- impact of the decision on the community and the environment;
- the company maintaining a reputation for high standards of business conduct; and
- need to act fairly between members of the company
- to consider if breach happened, should review minutes of board meetings
- duty is subjective > the director needs to honestly consider the way they are acting will promote success
- will also need to take interests of creditors into account if the company is approaching insolvency (BTI 2014 LLC v Sequana SA (2022)) and give them appropriate weight
- if liquidation is inevitable, creditors’ interests will become paramount (will not just need to be balanced with the shareholders’ interests)
s 173: duty to exercise independent judgment
- directors need to make their own decisions based on the best interest of the company; and
- not be swayed by external circumstances
directors should not:
- contract out their decision making
- be subject to undue influence
- be subject to bribery
duty will not be infringed if:
- director acts in accordance with an agreement with the company that fetters the directors’ discretion; or
- in a way that is authorised by the articles
- they take advice (e.g. from lawyers or accountants)
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s174: duty to exercise reasonable care, skill and diligence
Expected to exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
a) the same general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions of a director at the company; AND
b) the general knowledge, skill, and experience that the director has
two components to the test:
- objective: has the director exercised the care, skill and diligence that would be exercised by a reasonably diligent person with the “general knowledge, skill and experience reasonably expected of a director”? > need insight into how the director arrived at the decision
- subjective: has the director acted with the general knowledge, skill and experience that that director has? (higher standard for some) > need insight into how the director arrived at the decision and details of any relevant knowledge they have
- directors being completely inactive and allowing one director to act alone can be a breach ( Lexi Holdings PLC v Luqman [2009] 2 BCLC 1)
- damages for negligence > going back to a position before the tort was committed
s 175: duty to avoid conflicts of interest
must avoid situations in which they have, or can have, a direct or indirect conflict of interest with the company
applies to situations where the company’s name isn’t on the contract, the contract will be between the director and a third party
- s 175(2) applies to exploitation of any property, information, or opportunity
- indirect conflict = directors must avoid a situation where they could have a conflict
Examples:
- exploiting position to get business opportunities for their own advantage
- director resigning to take an opportunity that arose before they left
- using a company’s customers’ equipment for personal use ((Towers v Premier Waste Management Ltd [2011] EWCA Civ 923)
mutually exclusive with s 177
ss 175(3) and 175(4): exclusions from the duty to avoid conflicts
- s 175(3): conflicts which arise under a transaction or arrangement with the company are excluded
- s 175(4): situations that cannot reasonably be seen as giving rise to a conflict of interest are excluded
- s 175(4): directors can authorise a matter giving rise to a conflict if the articles don’t prohibit this
s 176: duty not to accept benefits from third parties
- directors can’t accept a benefit from a third party that they would get because of their activities as a director
exceptions:
- where the benefit can’t reasonably be regarded as likely to give rise to a conflict
- where it is permitted by the articles
e.g.:
- bribe or a gift from a third party given to them from someone looking to take advantage from the company
- corporate hospitality
s 177: duty to declare interests in a proposed transaction
director needs to declare the nature and extent of any direct or indirect interest in the transaction before the company enters in the transaction or agreement
applies to transactions where the company enters into the contract (the company’s name must be on the contract)
must disclose either at:
- board meeting (s177(2)(a)); or
- written notice to the directors > must comply with s 184: be sent to the other director, in hard copy or electronic form, via post or electronically, and will be deemed made at the next board meeting after it was given
director can give a general notice where the director has interest on a regular basis or needs to declare interest with a connected person, e.g. spouse
MA 14: director who made a declaration cannot vote as a director regarding the contract or form part of the quorum
failure to declare interest = transaction is voidable
exceptions to s 177: duty to declare interest in a proposed transaction
- director is not aware of the interest, or ought not reasonably to have been aware of that interest (s177(5))
- the interest could not reasonably give rise to a conflict of interest (s177(6)(a))
- the other directors are already aware of the interest (s177(6)(b)) > still best practice to make the declaration
- the interest is in the director’s own service contract (s177(6)(c))
these exceptions also apply for s 182
s 182: duty to declare interests in an existing transaction
- where a company is already involved in an arrangement and the director becomes interested in it after, the director must declare the nature and extent of that interest (s 182(5))
e.g.:
- newly appointed directors
- a director buys shares in another company
the declaration must be made:
- as soon as reasonably possible (s 182(4));
- at a board meeting; OR
- by notice in writing in accordance with s 184
is it possible to make a general notice
same exceptions as for s 177
consequences: criminal sanctions
