Directors Duties & Responsibilities

Question 1

What is the purpose of directors being subject to extensive duties?

Answer 1

In order to protect the shareholders and creditors of the company from directors exploiting or abusing their powers to act in their own self-interest, directors are subject to extensive duties.

Question 2

Where can directors duties be found?

Answer 2

The duties of directors were developed by the common law and equity but were codified in CA 2006: 170-177 CA 2006

Question 3

Who do the directors owe their duties to?

Answer 3

The general duties of directors are owed by a director to the company. Therefore, any breach of duty by a director is a wrong done to the company and it is the company who would be the claimant in respect of a breach of duty by a director.

Note the above position changes when the company is in financial difficulty, the directors’ duties shift to the protection of creditors.

Question 4

What are the duties set out in CA?

Answer 4

• Duty to act within powers (s 171 CA 2006);
• Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
• Duty to exercise independent judgment (s 173 CA 2006);
• Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
• Duty to avoid conflicts of interest (s 175 CA 2006);
• Duty not to accept benefits from third parties (s 176 CA 2006); and
• Duty to declare any interest in a proposed transaction (s 177 CA 2006).

Question 5

Explain the duty to act within powers

Answer 5

This is effectively two duties:

1. Duty to act within the company’s constitution
   The company’s constitution is the articles and decisions taken in accordance with the articles (i.e. shareholder resolutions). A director is in breach of this duty if they act without authority, e.g. commit the company to borrow more than the articles allow without prior shareholder approval.
2. Duty to exercise powers for the purposes for which they are conferred. Directors must not use their powers for improper purposes e.g. personal gain.

Question 6

What has the government stated ‘success’ should normally mean?

Answer 6

A long-term increase in value

Question 7

What matters must the directors take into consideration when promoting the success of the company?

Answer 7

*Likely long-term consequences of any decision

*Employees’ interests

*the need to foster relationships with suppliers, customers and others

*the impact of the company’s operations on the community and the environment

*the desirability of the company’s maintaining a reputation for high standards of business conduct

*The need to act fairly as between the members of the company.

Question 8

What is ‘enlightened shareholder value’?

Answer 8

This is a term used to describe the ‘middle way’ between, on the one hand, running the company to purely maximise shareholders’ interests/profits and, on the other hand, a pluralist approach which involves acting in the interests of a wider group of stakeholders.

Question 9

What does it mean that companies are taking a ‘common-sense approach’ in relation to duty s172?

Answer 9

Since the introduction of the statutory duties there has been some uncertainty as to how to balance the various matters in this list. Many companies are taking the common-sense approach of ensuring board minutes clearly note that consideration has been given to s172 when taking board decisions particularly, with regard to significant commercial decisions, there will have been the requisite amount of research, discussion and briefing of the board to amply demonstrate consideration of the matters in s172 should the company be challenged.

The courts appear to be backing this approach given the lack of significant case law on the point since these provisions came into force.

Question 10

Explain the duty to exercise independent judgment

Answer 10

*This duty codifies the principle that directors must exercise their powers independently, and not fetter this discretion.

*Directors can rely on advice from others but must make their own judgements.

*Directors cannot blindly follow others’ views without considering the interests of the company.

Question 11

Explain the duty to exercise reasonable care, skill and diligence and the standard to which it is assessed

Answer 11

The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.

The minimum standard expected of a director is that objectively expected of a director in that position. This standard may be subjectively raised if the particular director has any special knowledge, skill and experience.

Question 12

Explain the duty to avoid conflicts of interest

Answer 12

The duty requires a director to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’. It is said to apply in particular to the exploitation of any property, information or opportunity’.

Question 13

When is s175 not infringed?

Answer 13

*‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest’

*If the conflict arises in relation to a transaction or arrangement with the company.

*In relation to a matter which has been authorised by the directors.

Question 14

Explain the duty not to accept benefits from third parties

Answer 14

A director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing anything as a director.

*The duty is not breached if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

*Other directors cannot authorise an arrangement under this section.

*It would be possible for the shareholders to approve a directors proposed action in advance or for ratification.

Question 15

Explain the duty to declare interest in proposed transaction

Answer 15

Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors.

For example, if Company A is about to sign a contract with Company B, and a director of Company A also happens to be a shareholder in Company B, they will have an indirect interest in the proposed transaction.

Question 16

Does s.177 apply to indirect interests?

Answer 16

Applies equally to `indirect interests’ e.g. an interest through a spouse or relative.

Question 17

Do directors need to disclose interests in existing transactions or arrangements?

Answer 17

Yes.

Question 18

When must a director declare their interest?

Answer 18

A director must declare their interest before the transaction is entered – subject to anything in the articles.

Question 19

What form should the declaration of interest take?

Answer 19

*The declaration can be at a BM, or in writing in advance of the BM. It is also possible for directors to give one-off general notice of their interest. Best practice suggests declaring the interest in BM1.

*If a director discloses via written notice, it must be sent to all directors either electronically (if agreed) or in paper form.

*A director can give general notice to the effect that they are always to be considered interested in any transaction or arrangement with a specified party. This will be if a director has an interest in a specified body corporate or firm or is connected to a specified person.

Question 20

When is a director not required to make a declaration?

Answer 20

*The director is not aware of the interest or transaction or arrangement in question (treated as being aware if it is a matter which they ought reasonably to have been aware);

*The interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know or ought to have known about the conflict of interest; or

*If the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board, or a committee of the board, of directors.

Question 21

What does the MA state in relation to s.177?

Answer 21

MA specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement.

However, MA allows the conflicted director to count in the quorum and vote if:

*Company disapplies MA each time the conflict arises by ordinary resolution;

*The directors interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or

*The directors conflict arises from a permitted cause

A company can remove the MA and replace it with amended articles, therefore, excluding it completely.

Question 22

What are the remedies for breach of s.174?

Answer 22

Damages

Question 23

What are the remedies for all duties except s174?

Answer 23

Injunction;
setting aside of the transaction;
restitution and account of profits;
restoration of company property;
damages

Question 24

Is it possible to gain shareholder approval in advance of a breach?

Answer 24

Shareholders may support a directors proposed action, and be prepared to approve it in advance, even though it would otherwise represent a breach of the general duties set out in CA 2006.

Authorisation is only effective provided there has been full disclosure by the directors so shareholders are properly aware of the details of the action and can make an informed decision.

Question 25

Explain ratification for breach of duty

Answer 25

The shareholders can, by ordinary resolution, subject to anything in the company’s articles requiring higher majority, ratify the following conduct of the directors:

*Negligence;
*Default;
*Breach of duty; and
*Breach of trust

If a director holds shares in the company, then any votes to ratify their breach which attach to shares held by them or any person connected with them (e.g. their spouse) will be disregarded.

Unlawful acts can never be ratified (e.g. declaring a dividend when no distributable profits are available) and shareholders cannot ratify a directors breach of fiduciary duty in insolvency situations since directors owe their duties to creditors, not shareholders once the company is insolvent.