Ratification/Defences RE Breach of General Duties

Question 1

What is the general law of the Ratification of Breach of Fiduciary Duties?

Answer 1

The common law view was that approving conduct that was a breach of a duty was allowed - the term used to describe this process is ‘ratification’.

Generally speaking, the general law said:

(i) the shareholders can ratify the acts of directors which are not ultra vires the company, and
(ii) a director who is also a shareholder may vote in a general meeting to ratify a voidable contract that s/he has an interest in: North-West Transportation Co Ltd v Beatty (1887) 12 App Case 589 (PC); cf Cook v Deeks [1916] 1 AC 554. (cannot vote where to do so would involve “majority” “oppress[ing] the minority” (see below in “minority protection”) - ignore references to “property” belonging to the company, in equity).

Question 2

What is the position under statute?

Answer 2

Under section s 239 the position has now changed.
⁃ Under this section there can still be shareholder ratification by resolution (written or at a company meeting) where a director’s conduct amounts to ‘negligence, default, breach of duty or breach of trust regarding the company.
⁃ The difference between this section and the common law is that if the director is seeking ratification of their conduct and that director is also a shareholder, then they cannot participate in the ratification process.

Now: S 239 CA 2006 (new) – relates “to ratification by a company” where the director’s “conduct” amounts to “negligence, default, breach of duty or breach of trust” regarding “the company” (s 239(1) CA 2006). The ratification has to be by shareholders’ “resolution” (s 239(2) CA 2006), and neither the director (as a shareholder) nor a “connected” shareholder can vote: ss 239(3), (4) CA 2006, ie, cannot vote.

This section does not seek to otherwise alter the general law on “ratification”: see s 239(7) CA 2006

Question 3

Eastford Ltd v Gillespie [2009] CSOH 119, para [9]; see too paras [7]-[8]

Answer 3

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Question 4

Eastford Ltd v Gillespie [2010] CSOH 132; 2011 SLT 434, paras [11]-[14].

Answer 4

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Question 5

What is Ratification of ‘Transaction’ Breaching s 40 CA 2006 [formerly s 322A CA 85] concerned with?

Answer 5

Concerns ‘transaction’ between a company, and either: (i) one of its directors (or a director of the company’s parent company), or (ii) ‘a person connected with such a director’. Such a ‘transaction is voidable’, unless ‘company’ (ie, shareholder) ratification ‘in general meeting’: ss 41(2), (4)(d) CA 2006.

• Other Remedies applicable even where ‘transaction’ ‘not … avoided’: (i) account of profits, and (ii) indemnity: see s 41(3) CA 2006.
• Defence – ‘connected person’ - unaware ‘directors … exceeding … powers’: s 41(5) CA 2006.

Question 6

What happens where transactions breach s 190 CA 2006 [formerly s 320 CA 85]?

Answer 6

there can be ratification ‘within a reasonable period’: s 196 CA 2006 [formerly s 322(2)(c) CA 85]. (See earlier discussion of ‘substantial property transactions’).

Question 7

What is the position for the Ratification of Breach of Duty of ‘Skill, Care and Diligence’ ?

Answer 7

again, under the general law, shareholders, generally, may ratify a breach of duty of ‘skill care and diligence’, and a director may also vote to excuse him/herself. Director cannot now vote: ss 239(3)(4) CA 2006.

However, under ss 239(3), (4) CA 2006, there can be ratification, but the director cannot now vote (as a shareholder), nor can a ‘connected’ shareholder.

Question 8

S 232 CA 2006

Answer 8

directors cannot seek to protect themselves from liability by having provisions in the articles of association exempt them see ss 232(1), (2) CA 2006 – ‘void’. [Formerly s 310 CA 85]
⁃ However, companies can now purchase liability insurance for directors – s 232(2) and 233 CA 2006. Other exceptions:
⁃ (i) ‘qualifying third party indemnity provision’ (ss 232(2), 234 CA 2006)
⁃ (ii) ‘qualifying pension scheme indemnity provision’ (ss 232(2), 235 CA 2006)

Question 9

S 1157 CA 2006

Answer 9

⁃ The court can excuse a director’s conduct. An ‘honest’ and ‘reasonable’ director can be excused, in whole or partially, by the court, which has a discretion to do so where the circumstances make it fair to do so. Company would normally sue (see later).
⁃ There can now be a pre-emptive application by a director (i.e. the director admits that they have breached a duty but acted honestly and reasonably etc and voluntarily goes to court to try to be excused): s 1157(2) CA 2006.

See Gillespie Investments Ltd v Gillespie [2010] CSOH 113, para 54, as to the three cumulative requirements of this provision.

Question 10

Re D’Jan of London Ltd [1994]

Answer 10

⁃ Mr D’Jan was a director of a company and he was partly excused a breach of duty.
⁃ He owned 99% of the insolvent company and suffered greatly when the company’s premises were burnt down and the insurance policy was invalid due to negligence. The company was insolvent with debts approximating £0.5m and went into liquidation.
⁃ The court considered the economic realities of the case and held that it was going to exercise its discretion since the breach of duty by Mr D’Jan was not gross. He had acted in an honest and reasonable way thus was partially excused.

Question 11

Dorchester Finance Co Ltd v Stebbing [1989]

Answer 11

Stebbing was not excused as a director since he didn’t meet any of the above criteria - he hadn’t been honest or reasonable.

Question 12

s 1157(2) CA 2006.

Answer 12

There can now be a pre-emptive application