Directors Duties - Conflict/ Breach Flashcards
What are the general duties of a director?
s. 288 CA
* Act in good faith
* Act honestly and responsibly
* Adhere to the company constitution
* Avoid secret profits
* Have independence of judgement
* Avoid conflicts of interest
* Use skill, care, and dilligence
* Consider the interests of its members
* Have regard to certain matters where company is, or is likely to be, unable to pay its debts
Expand on the duty of skill, care, and dilligence.
Re City Equitable Fire Insurance Company
* Case where the liquidator sought to make the directors liable in negligence for failing to exercise reasonable care
* Court held that aside from acting honestly, a director must excercise a degree of skill and dilligence and laid down three principles.
1. A director need not exhibit a greater degree of skill than may be reasonable expected from a person of his knowledge and experience.
2. A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature (meetings etc.)
3. In respect of all duties which may properly be left to some other official, a director is justified in trusting that official to perform such duties honestly
How are honestly and responsibly distinguished?
Re USIT World plc
* Dishonesty implies something akin to improper dealing with money or other assets belonging to the company, or some form of fradulent trading. Dishonesty is more fundamental and goes to the core of a persons integrity.
* Dishonesty will always amount to irresponsiblity, the converse is not true.
What is the objective test for the duty to act honestly and responsibly?
- Conduct so incompetent as to amount to irresponsiblity
- Responsibility for insolvency
- Responsiblity for net deficiency of assets upon winding up
- Lack of commercial probity or want of proper standards
- Compliance with formal obligations under the CA such as record and book keeping
- Commercial management of the company when the company was heading towards insolvency
- Compliance with obligation towards creditors in insolvency
Expand on the duty to act bonda fide
Re Smith and Fawcett
* Early proclamation that directors must act bona fide in the company’s interest
* Intentions of directors are of paramount importance
Regent Crest v Cohen
* If courts feel from an objective POV that the director’s actions are detrimental, may still avoid liability if they honestly believed they were acting in good faith
* Director waived contractual payment of 1.5 m
* Claimed he had good commercial reason
* Court held that they would not intervene as he acted honestly and responsibly
Expand on the duty to act in accordance with the CC / in proper purpose
Howard Smith v Ampol Petrol
* Directors issued shares in a company to raise new capital for that company and to ensure that a takeover bid by a particular party would be unsuccessful
* Such a purpose would be improper
* L Wilberforce: court must investigate weather proper purpose was pursued, must respect judgment if exercised bona fides.
Nash v Lanegaye
* Dixon J held that a director issuing shares to himself to avoid being ousted should be set aside as this was not a proper purpose
What is the duty not to make improper/ secret profits?
- A director should not benefit from their office by exploiting a business opportunity received as a result of their position as director.
Regal (Hastings) v Gulliver
* The liability arrises from the mere fact of a profit having, in the stated circumstances, been made.
* Directors in breach of this duty will have to account for or give back the profits made.
Expand on the duty not to make secret profits
O’Donnell v Shanahan
* It is not for the director to decide that the company will not be interested and proceed, without more, to appropriate the opportunity for himself.
Gencor ACP Ltd v Dalby
* Only escape from potential accountability is obtaining the prior approval of the shareholders
What are the three issues that arise in conflict of interest case law?
- Unauthorised profit
- Transfer of non cash assets to/ from a director
- Loans to Directors/ connected persons
What if a director makes a profit in good faith?
Regal Hastings v Gulliver
* Company owned cinema, sought to acquire 2 more and then sell all 3
* Subsidiary was formed for taking up lease of 2 others
* Directors bought shares in subsidiary to ensure liquidity
* Both parent company and subsidiary were sold, subsidiary share brought profit for directors, when parent company found out, demanded that this be paid to the company
* No suggestion that the directors did not act in good faith or that they did not act in companies best interests.
* Still, HOL held that directors had to account for the profit.
- Courtney notes harshness of this decision as no profit at would have been made if not for directors ensuring liquidity.
AIB v Diamond
* Confirmed Re. Hastings and cited L. Russell - The liability arises from the mere fact of a profit havinng, in the stated circumstances, been made.
What if a director decides to leave and set up a rival company?
British Midland Tool Ltd v Midland International Tooling
* Four directors of a company were dissatisfied with how it was run and decided to leave and set up a rival company next door with ex BMT employees.
* Plaintiff claimed the directors had conspired to damage the company and had used confidential information belonging to it.
* Held - in the circumstances it was a breach of fiduciary duty to set up a rival company and poach employees. However, this was due to the secrecy, conspiracy, and failure to disclose whilst they were directors.
* Following resignation directors can do what they like.
What happens is an arrangement for non cash assets is made with a director/ connected person?
s. 238(3)
* The company will have the choice of voiding the relevant contract.
Kerr v Conduit Enterprises
* Requisite value is not the value of the arrangement but the value of the non cash asset.
* In this case a lease was entered into by conduit with two directors being the landlords. New owners of the company sought to treat the lease as void under s.238.
* Value was the capital value of the lease, ie. the amount that an assignment of the lease could be sold for - zero. Remedy did not apply.
What are the remedies for a breach of directors duties?
If a director breaches s.228 they are liable to either account to the company for the gain which they make, or indemnify the company for any loss or damage resulting from the breach.
