Duties and Responsibilities of Directors

Question 1

Who do directors owe their duties to? How does this change when they are in financial difficulty?

Answer 1

The directors owe their duties to the company.

If a company is in financial difficulties then the directors owe their duties to creditors.

Question 2

Who is the correct claimant in proceedings for breach of duty by a director?

Answer 2

The company is the correct claimant.

Question 3

What must directors do under the duty to act within powers (s 171)?

Answer 3

Directors must act within the company’s constitution (in accordance with the articles) and they must exercise powers for the purposes for which they have been conferred.

Question 4

What must directors do under the duty to promote the success of the company (s 172)?

Answer 4

Directors must act in good faith, in a way which would most likely promote the success of a company for the benefit of its members as a whole.

Question 5

What secondary factors must the directors have regard to under the s 172 duty to promote the success of the company?

Answer 5

• the likely consequence of any decision in the long term
• the interests of the company’s employees
• the need to foster the company’s business relationship with suppliers, customers and others
• the impact of the company’s operations on the community and the environment
• the desirability of the company’s operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company

Question 6

How do company’s demonstrate compliance with the s 172 duty to promote the success of the company?

Answer 6

Most companies ensure board minutes note that consideration has been given to the duty when taking board decisions.

Question 7

What must directors do under the duty to exercise independent judgement (s 173)?

Answer 7

Directors must exercise their judgement independently and not fetter the future exercise of that discretion. They cannot blindly follow other’s views without taking into account the interests of the company.

Question 8

What must directors do under the duty to exercise reasonable care, skill and diligence (s 174)?

Answer 8

Two elements to this:

they must act with the level of skill, care and diligence which would be exercised by a reasonably diligent person with:

• objectively the general knowledge, skill and experience that may reasonably be expected of someone in their role
• subjectively the general knowledge, skill and experience of that director

Question 9

What must directors do under the duty to avoid conflict of interest (s 175)?

Answer 9

They must 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.

Question 10

Can the directors themselves authorise a breach of a duty to avoid conflict of interest (s 175)?

Answer 10

Yes, provided such interests are declared.

Question 11

What is covered by the duty to avoid conflict of interest (s 175)?

Answer 11

Any ‘exploitation of any property, information or opportunity’

Duty not infringed if situation cannot be regarded as likely to give rise to a conflict of interest or if conflict arises:

• in relation to transaction with company OR
• in relation to a matter which has been authorised by the directors

Question 12

What must directors do under the duty not to accept benefits from third parties (s 176)?

Answer 12

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.

Question 13

Can the directors authorise a breach of duty not to accept benefits from third parties (s 176)?

Answer 13

No - shareholders can though - either prior approval or ratification

Question 14

What must directors do under the duty to declare an interest in a proposed transaction (s 177)?

Answer 14

If directors has an interest, direct or indirect, in a proposed transaction, they must declare the nature and extent of their interest to the other directors before the transaction is entered into.

Question 15

What is caught by indirect interests under s 177 duty?

Answer 15

Interests of the directors spouse, other relative or through company in which director is a member.

Question 16

How can a director declare an interest?

Answer 16

Either at a board meeting or in writing in advance of board meeting by giving notice to all directors.

Possible to give a one-off general notice but best practice to declare an interest every time.

Question 17

When does a director not need to declare an interest under s 177?

Answer 17

When the director is not aware of any interest in the transaction or arrangement in question.

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

Conflict arises because it concerns their service contract.

Question 18

Can a director vote on a matter they have an interest in under s 177 at a board meeting?

Answer 18

Under MA 14, no. They cannot vote or count as part of the quorum.

They can if MA 14 is misapplied by OR for that vote or MA 14 has been removed by special resolution or is not part of the company’s articles.

Question 19

What are the remedies for breach of directors’ duties?

Answer 19

Same as remedies under common law or equitable principles:

• injunction
• setting aside the transaction
• restitution and account of profits
• restoration of company property
• damages

Exception for breach of duty of care, skill and diligence - only damages available

Question 20

Can shareholders approve a breach of duties in advance?

Answer 20

Yes provided there has been full disclosure and the breach is not an unlawful act (these can never be approved).

Question 21

Can shareholders ratify a breach of duty?

Answer 21

Can by ordinary resolution (subject to articles) ratify breach of directors of:

• negligence
• default
• breach of duty
• breach of trust

Directors who own shares or connect people (spouses, children, parents or company they control) cannot vote