Duty of Directors Flashcards
Duty of directors
A director is a trustee. They act for the benefit of the company not shareholders or themself.
Statutory Law
According to section 99 of the companies act, “Every director and officer of a company inexercising his powers and sicharging his duties is required to act honestly and in good faith with a view to the best interests of the company and is also required to exercise the care, diligence and skill that a reasonably prudent person would exercise under comparable circumstances.
This was established in cases such as Foster Parajo and Alicica Parajo, Mario Berment. The courts held that the defendants did not exercise the care and diligence expected of them as directors and therefore are liable for failing to manage the affairs of the third defendant so that it can pay its debts owed.
Stat law 2
A director is not bound to bring any special qualifications to his office. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
In Re Brazilian Rubber Plantations and Estates,Ltd
the company was contracting to buy estates in Brazil. Upon further discovery, it so happened that the reports were fraudulent and the directors continued the purchase with this information. The liquidator claimed damages for misfeasance snd gross negligence but it was held that the men were acting honestly and the appeal was dismissed.
Common Law
Misfeasance
Particular acts of directors may constitute breaches of trust or misfeasance for which they will be liable to the company. Misfeasance characterizes breaches of duty that result in pecuniary loss to the company. If the directors are acting honestly, it cannot be charged with misfeasance.
In Re City Equitable Fire Insurance Company, Limited, there was a shortage in funds of 1,200,006 due mainly in part to the managing director’s deliberate fraud. This does not count as misfeasance since it is unreasonable to expect the directors to inspect what every party does with signed cheques but just to ensure that they are authorized to sign said cheques. Extracted from liability.
Liability in tort
in the discharge of the particular duties, which they have assumed, directors are bound, to take reasonable care, and failure to exercise such care constitutes negligence.
In Re Brazilian Rubber Plantations and Estates, Ltd, the manager did take care in getting someone they reasonably thought could be trusted to advise them and they therefore believed that the contract was beneficial to the company. Aside from the discrepancies, this decision was not arrived at by negligence.
Criminal Liability
As to the criminal liability of directors, more than mere acquiescence is required to make them parties to criminal offences.
In Zee Tele Film ltd v Sahara India Co. Corp Ltd where a company was discharged from liability arising out of defamation where there was asbsence of mens rea which is considered as an implicit requirement under law.
Non-Intervention in Company’s affairs
A director is not bound to take any definite part in the conduct of the company’s business and a director who takes no part in the negligent or ultra vires acts of the board will escape liability
In Re Brazilian Rubber Plantations and Estates, Ltd it was held that an action by the company against its directors for negligence would have succeeded as the directors did not need to get involved.
Trustee and Fiduciary Duties
A company must act by agents, and usually the persons by whom it acts are termed directors. The Act does not define the exact position of the directors. Directors have been described as mere trustees of the company; trustees of the company’s money and property; and trustees in the transactions which they enter into on behalf of the company. Directors cannot use the company’s property for their own benefit.
It is a director’s duty to give his whole ability, business knowledge, exertion and attention to the best interests of the shareholders who have placed him in that position. Directors by reason of their fiduciary obligations in the exercise of their powers are bound to act with the utmost good faith for the benefit of the company. Directors must not act n bad faith.
Re Iron Clay Brick Manufacturing Co, Mt Turner is a trustee of the company for certain lands but he claims to hold the property for his own benefit. Mr Turner as a director has become liable for any profits on sale of the land and by refusing to pay over the profit he is guilty of a breach of trust. No one occupying a fiduciary relationship is permitted to do an act on his own behalf
Directors as agents
The rule that directors are agents in the transactions which they enter into on behalf of the company is established by numerous decisions.
In Ferguson v Wilson the court held that the claim of the plaintiff was a valid claim and that the plaintiff was entitled to the shares he so rightfully claimed. The directors did not take a proper care when it came to the claim so they are at fault.
