Directors Duties' - Case Law Flashcards
Duties not owed to, therefor cannot be enforced by:
Members of a company (group)
Individual members of a company
Creditors
Peskin v Anderson [2001]
Dillon LJ Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983]
West Mercia Safetywear (in Liquidation) v Dodd [1988]
Directors owe a fiduciary duty
Dillon LJ in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983]
‘The directors […] are appointed to manage the affairs of the company and they owe fiduciary duties to the company’:
Duty 171
Lord Wilberforce’s 4 stage test
Howard Smith v Ampol Petroleum Ltd [1974]
1. what power is being exercised. (eg., the power to allot shares)
- the proper purpose for which that power was delegated to the directors
- The substantial purpose for which the power was in fact exercised
- whether that purpose was proper.
Duty 171
Stage 3 of Lord Wilberforce’s 4 stage test
Lord Sumption - Eclairs Group Ltd v JKX Oil & Gas plc [2015]
the court will ask but for the improper purpose, would the power have been exercised? If a decision would not have been taken, then it is tainted by improper purpose and directors will be in breach.
Duty 172
Smith and Fawcett Ltd [1942]
Duty based on equitable fiduciary duty - Lord Greene stated directors must act “bona fide in what they consider-not what the court may consider-is in the interests of the company, and not for any collateral purpose”.
Duty 172
Software (UK) Ltd v Fassihi [2004
equitable duty that directors must disclose breach to company
Duty 172
see Fulham Football Club (1987) Ltd v Tigana [2004] EWHC 2585 (QB)
duty to disclose what director considers (not what court may consider) is in interests of company to know -
Duty 172
Howard Smith v Ampol Petroleum Ltd [1974]
director must act in way he considers to be in good faith, would be most likely to promote company’s success; not way court considers, in light of expert evidence, would be most successful.
Lord Wilberforce
their exercise of power can only be set aside if it be found that the interest or one of the interests they were serving was an inadmissible or corrupting interest, such as self-interest, or that they so misconceived their function that it cannot be said that they were acting substantially for the purpose of serving any legitimate interest”
Duty 172
Extrasure Travel Insurance Ltd v Scattergood [2003]
act done in unreasonable belief that in interests of the company not in breach of fiduciary duty, if belief honestly held
Duty 172
Charterbridge Corporation Ltd v Lloyds Bank [1970]
Pennycuick J
‘The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company’
Duty 173
Boulting v Association of Cinematograph, Television and Allied Technicians [1963]
This case highlighted the importance of directors acting independently and free from external
control. Lord Denning MR famously stated:
“The board of directors owe a duty to the company, and to the company alone. They are not servants of anyone else, whether inside or outside the company. They cannot be dictated to by anyone else.”
Duty 173
Limiting discretion in good faith for the benefit of the company
Fulham Football Club Ltd v Cabra Estates plc [1994]
Fulham’s directors entered into an agreement with Cabra Estates to support a development project, restricting their ability to later oppose it. The court upheld this restriction, emphasizing that the directors believed it was in the company’s interests at the time the agreement was made.
This fettering resulted in substantial benefit to the company. The court will always look at the terms of the agreement,
Duty 174
Re Barings plc (No 5
(knowledge of business + reliance/delegation)
1) Knowledge of the company’s business:
Jonathan Parker J
‘(i) Directors have… a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties’
2) Reliance on company officials and others
Jonathan Parker J
‘The exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions
Duty 174
Reliance on company officials and others
Re Queens Moat House plc (no 2) [2004
The court acknowledged that directors are entitled to delegate certain tasks to others, such as qualified professionals, and can reasonably rely on their expertise. However, this reliance is not absolute. Directors have a duty to exercise independent judgment and critically assess the information provided to them.
o Objective standard: Directors must meet the general standard of a reasonably diligent person with knowledge and skills expected of a person performing the same role.
o Subjective standard: If a director has specific expertise or qualifications, they are held to a higher standard in line with their particular skills.
Duty 174
Reliance on company officials and others
‘Director who asked no questions and sought no advice
Re Bradcrown Ltd [2001]
Director was disqualified - -S.6 CDDA
Duty 174
Re City Equitable Fire Insurance Co [1925]
Attendance to the company’s affairs
Romer J.
‘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.
Duty 175
No profit, no conflict rule
Bray v Ford [1896]
Lord Herschell
when discussing a trustee’s fiduciary duties and the no conflict and no profit rule:
“a person in a fiduciary position… is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.”
Emphasised by Lord Justice Mummery in Premier Waste Management Ltd v Towers [2011]
Duty 175
Bhullar v Bhullar (Jonathan Parker LJ)
Jonathan Parker LJ stated in paragraph 41:
“In my judgment, the question whether the company could or would have taken the opportunity is not the right question. The question is whether the opportunity was such as to give rise to a real sensible possibility of conflict of interest. In the circumstances of the present case, in my judgment, plainly it was.”
Duty 175
Industrial Development Consultants Ltd v Cooley [1972]
Mr. Cooley was the managing director of Industrial Development Consultants Ltd (IDC). While in this role, he was in negotiations on behalf of IDC with a gas board for a construction contract. The gas board, however, indicated that they would not enter into a contract with IDC but were willing to engage Cooley personally. Cooley then feigned illness, resigned from IDC, and subsequently took the contract for himself without informing the company.
Remedies - Return of Property
J Harrison (Properties) Ltd v Harrison [2000]
remedies must be adequate and appropriate to meet the circumstances of the case.
a director of a company who has taken its property in breach of a fiduciary duty holds that property in trust for the company and may be ordered to restore it to the company
Remedies - Account for Profits
Murad v Al Saraj [2005] CA
profit made as result of breach of duty must be confiscated and given to company
accounting for profits not to compensate company for loss, but to deter directors’ breaches
Arden, LJ (in transcript)
Para 56 -
‘Equity recognises that there are legal wrongs for which damages are not the appropriate remedy. In some situations …..a court of equity instead awards an account of profits……the purpose of the account is to strip a defaulting fiduciary of his profit’ see also para 74-wider principle
Remedies - Rescission
transaction made by a director in breach of duty is not void see Bamford v Bamford [1970] but voidable at instance of company
rescission involves each party returning to the other what was transferred in the transaction so if that is not possible then rescission will not be granted: see Cavendish-Bentinck v Fenn (1887)
Remedies - Equitable Compensation
Extrasure Travel Insurance Ltd v Scattergood [2003]
court has power to award equitable compensation for any loss not compensated for by restitution, account of profits or rescission
awarded only for a loss (measured as at time of trial) which would not have occurred but for the breach: see Target Holdings Ltd v Redferns [1996] 1 AC 421
Secondary Liability
knowing receipt or dealing
Belmont Finance Corporation Ltd v Williams Furniture Ltd (No.2) [1980]
company can recover losses incurred by fraudulent directors
where in breach of a director’s fiduciary duties company property was transferred to an outsider who knew the transfer was a breach of duty,
held: Despite the fraudulent director being in control of the company, the knowledge of his wrongdoing was not attributed to Belmont, allowing the company to recover losses from those involved in the scheme.
Secondary Liability
Dishonest assistance
Barlow Clowes International Ltd v Eurotrust International Ltd [2006]
outsider dishonestly assists in or procures directors’ breach of fiduciary duty even though not personally receiving company property (liability as an accessory)
Mr Henwood was found liable for dishonest assistance
Relief from liability
Ratification
Phosphate of Lime Co v Green (1871)
Ratification is effective provided…
‘it is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it’
Relief from liability
Ratification
during liquidation..
West Mercia Safetywear Ltd v Dodd [1988]
para 122- ‘It is open to a company, by its shareholders acting unanimously, to release a director from liability for breach of duty by its shareholders provided that the release does not jeopardise the solvency of the company or cause loss to creditors and that there is no sufficient public policy objection to the …release.’
relief by Court
Re Duomatic [1969]
Application of s.1157
Buckley J suggested that if all shareholders, with full knowledge, agree to a course of action, then this can implicitly excuse a director from liability, as it indicates shareholder approval. This aligns with s.1157 CA 2006, which allows a court to grant relief to directors if they acted honestly and reasonably and ought fairly to be excused.
