Directors & Their Duties Flashcards
Director’s general definition
S.250 CA 2006; any person occupying position by whatever name called.
De jure director = person formally appointed to by director and registered with registrar of companies
De Facto director = person who is not formally appointed but carried out all the duties and makes decisions as director
Managing directors
No legal requirement for company to have one - ostenible authority applies to a director who appears for all intents and purposes to by a managing director and contracts with 3rd party =
Freeman v Buckhurst properties; 4 directors needed to constitute quorum, 1 director made deal with 3rd party without quorum claiming to be managing director - company bound to 3rd party
Shadow Director
S.251(1) CA 2006: directions and advice directors of company are accustomed to act upon
Establishing a Shadow director (CASE)
Re hydrodam (Corby) LTD to establish shadow director is necessary to prove:
1) who are actual directors of the company
2) defendant directed those on how to act in the company
3) that those directors acted in accordance with such directions
4) that they were accustomed to act
claim of breach of duty or misfeasance cannot be brought under S.212 CA 2006; but can claim for wrongful trading under insolvency act 1986
Establishing a de facto director (CASE)
Smithton v Nagger; to establish de facto is necessary to prove -
1) whether person was part of corporate governance system of company
2) whether they assumed status and function of director
Line between someone acting as director or in another capacity (CASE)
Richborough furniture, SoS for trade & Industry v Stokes; agreement between SH and company to act in his professional capacity and provide financial assistance, Directors misused comapny’s bank accounts and traded whilst insolvent, accused SH of being de facto director - - held no director as was not held out by company as such (considered financial consultant and decisions subject to approval by board)
History of Director’s Duties
Law commission: complex law on directors duties in equitable principles and at common law too complex so made simpler by statutory reform: assessed advantages and disadvantages of codification and codified final duties in CA 2006. - 170(1): duties specified in S.171 - 177 are owed by a director of company to the company.
Director’s duties to shareholders (CASE
directors generally have no duty to shareholders but one rare exception in Coleman v Myers: SH relying on D for guidance or if SH is vulnerable person - D made takeover offer to by all shares and minority reluctantly agreed, minority claimed breach of fiducuiary duty on basis that they were not properly informed in relation to value of shares; HELD argument accepted because it was a private company and shares held by members of same family and D was always the source of business advice to family members.
S.171; DUTY TO ACT WITHIN COMPANY’S STIPULATED POWERS (case)
two aspects of this duty:
1) should be acting within powers provided in constitution
2) using power for proper purpose = Hogg v Cramphorn; Ds of company acting in good faith and issued new shares with special voting rights to trustees of a scheme set up for benefit of employees; having these new shares they managed to stop a takeover bid, HELD; Ds power had proper purpose of issues shares to raise funds, but it prevented a takeover so invalid.
S.172; DUTY TO PROMOTE SUCCESS OF COMPANY (cases)
enlightened shareholder value = company must run to generate maximum wealth for shareholders. But also to take properly balanced view of wider implications of decisions over time.
subjective test used here = what decision would a person with same set of skills and experience make in the same situation?
duty is based on common law one to act bona fide in best interests of the company (Re Smith Fawcett)
no good faith = Item Software Ltd v Fassihi; director encouraged company to be aggressive in negotiation of new distribution agreement with another company that he would establish - CoA not acting in good faith and bona fide for interests of company
Academic commentary of S.172
KEAY; section is pivotal in providing guidance for directors in their activities and what they should be aiming towards. BUT law society criticises fact that there is no indication in S.172 to meaning of success of company (directors may have different interpretations)
S.173; DUTY TO EXERCISE INDEPENDENT JUDGEMENT
should not be influence by opinion of other directors or fetter their discretion.
Kregor v Hollins; principle established that a director cannot fetter his discretion by way of contract with an outsider = H invested money and agreed to pay renumeration to K to act as nominee director, H defaulted on payments and K succeeded in suit that found agreement did not compel K to put H’s interests over that of the company (but if K had put H’s interests over those of the shareholders then K was in breach of 173)
S.174 A DUTY TO EXERCISE REASONABLE CARE, DILIGENCE AND SKILL
originally a purely subjective test in Re City equitable Fire Insurance Co. = required no minimum standard of competence and instead depended on kind of knowledge/experience that person in question has.
NOW; threshold higher = D’Jan of london Ltd; dual subjective and objective test - Ds signed inaccurate insurance policy which was later repudiated by insurers, HELD D was in breach of fiduciary duty but because he was acting in good faith and was a SH and thus suffered personal losses from his error he was given relief.
objective = what reasonable person in position of director would do in this type of situation
subjective = skills/knowledge that the person in question has.
S.175 DUTY TO AVOID CONFLICT OF INTERESTS AND NO SECRET PROFITS RULE
two duties established in common law cases of Cook v Deek and Regal v Gulliver;
i) director must avoid situation in which he had a direct or indirect interest that conflicts/may conflict with interests of the company.
ii) applies in particular to any property, information or opportunity.
iii) duty is not infringed if it has been effectively authorised by disinterested directors (S.175(4)) = private companies can authorise unless articles say they can’t; public companies can only if articles include a provision allowing such authorisation (Not a default right)
S.175; corp opportunities that company itself is not pursuing and directors took these in their personal capacity
Bhullar v Bhullar; company owned by 2 brothers equally,negotiating to go separate ways and one half told other half at board meeting that they did not wish for any more property to be bought by company; principal accepted but other half still purchased site in company’s name and did not disclose to joint company = breach of fiduciary: CoA agreed and ordered other half to hold site on trust for joint company - site commercially attractive to joint C at time so they were under duty to communicate this exercise of opportunity to acquire property in question.
