#16728 - Directors’ Duties I

Usually, CoAoA give boards unusually wide discretionary powers for reasons of efficiency. However, this creates a risk of misuse, particularly in the interests of senior management rather than the company. This is an age-old problem that continues despite CA 2006.

A few approaches:

Constitution and power of the board, and shareholder power to remove Ds
Extent to which shareholders can intervene in company management, or subject management performance to critical review
- Perhaps the best method is simply well-directed criticism of the board and the use of the threat of removal – a sort of soft power, rather than allowing shareholders too much power to interfere with good management
Restrictions from company law itself – fiduciary powers, which were previously entirely common law – Law Comm and CLR pushed for statutory restatement, which took place in Ch 2 Part 10 CA 2006
- Aim was to promote understanding of basic principles by directors themselves
- However, note that Part 10 is a general overview of directors’ duties not a detailed, comprehensive list
- Law Society and leading solicitors’ firms thought codification was dangerous as it would freeze the law in time but this is not true as the CA 2006 expressly preserves the common law principles and says common law and equitable precedents should be used as interpretative guides.
- However, sometimes, the Act is more than codifying – it also reforms – eg SS140(3),(4) – standard of care expected of directors; authorisation by independent directors of conflicts of duty – in such cases, the courts should not refer to the old common law precedents (Hansard)
- It was hoped a similar scheme on remedies for breaches of directors’ duties would be enacted in statute but the Government eventually abandoned this part of the proposal. However, Nolan’s work for the CLR paper has been published. As a result, S178 of the Act simply says remedies will be the same as they were at common law.

To whom are the general duties owed and who can sue for their breach?

The company

Duties primarily owed to the company – S170(1). This means the duty is not owed to individual shareholders or employees, and only those who act for or on behalf of the company can enforce these duties. Who can act on behalf of the company was an area of controversy until clarification and reform in CA 2006.

Although there may be an ex turpi causa issue where the actions of directors are attributed to the company as against third parties, this does not mean companies cannot sue directors for wrongdoing while in office or else this would undermine D duties. However, the actions of the director may be attributed to the company depending on the ‘nature and factual context of the claim in question’ per Lord Neuberger, Bilta (UK) Ltd (In Liquidation) v Nazir [2015]. One workable rule may be to say that no individual can rely on his own act counting as a corporate act so as to give them either a claim or defence against the company.

Individual shareholders

Statutory duties are only owed to the company but the Act does not purport to answer the question whether fiduciary or other duties are owed to others. At common law, there is a reluctance to recognise such duties. That would undermine the collective nature of the shareholders’ association in a company and the rule that the duties are owed to and are enforceable by the company. If this were the case, then the rules on derivative action could be easily circumvented.

However, there may be special factual situation where directors do owe fiduciary duties to individual shareholders, but this does not apply simply by virtue of their office. Peskin v Anderson [2001] per Mummery LJ – fiduciary duties may be owed where there is a ‘special factual relationship between the directors and the shareholders’.

What are examples of such a relationship?

Where shareholders have authorised Ds to sell their shares in the context of a takeover: Breiss v Woolley [1954] – agency relationship
However, there is no general duty owed to shareholders individually: Percival v Wright [1902]

Should the rule on special factual relationship be extended beyond the situation of agency? Coleman v Meyers [1977] NZCA found a fiduciary duty to arise even without agency in the context of a small family company where there was a gross disparity of knowledge between Ds and shareholders and where the shareholders of the company had traditionally relied on Ds for information and advice – held that Ds were subject to a duty of full disclosure of relevant facts about the company to the shareholders. Approved by EWCA in Peskin v Anderson [2001]. However, in that case, the Ds were not obliged to disclose their plans for the company even though the shareholders’ decision to sell their shares would have been affected where (i) the directors were not parties or otherwise involved in the sale of the shares, and (ii) it was arguably in the company’s interests to keep the plans secret for the meantime.

This indicates that the exception to this rule is a narrow one, primarily of interest to small, family-held companies. In Re A Company, Hoffmann J held that, in the context of a takeover, Ds did not have any duty to advise shareholders on how to sell their shares. However, if they did, they had to do so in a way which had a ‘view’ to allowing them to sell for the best price if they wanted, and not for an improper purpose like favouring one bid over another. This clearly falls short of a fiduciary obligation.

Other stakeholders

No such general duty owed to employees or creditors per Yukong Line Ltd v Rendsburg Investments Corporate (No 2) [1998] or to other groups per Bath v Standard land Co Ltd [1911]. However, rather than direct duties, the general duties of Ds owed to the company may require Ds to take into account the interests of the stakeholder groups. CLR wanted to make these explicit and this is reflected in CA 2006.

By whom are the general duties owed?

De facto and shadow directors

The general statutory duties are clearly owed by those properly appointed as Ds However, the courts have extended common law and statutory duties to de facto Ds. S250 CA – these duties apply to ‘any person occupying the position of director, by whatever name called’. Core test: has the person ‘assumed the status and functions of a company director’? Re Kaytech International Plc [1999]. De facto directors will be subject to the same duties as de jure directors.

However, this factual question is often difficult to answer. Within corporate groups, one particular problem is the question of whether or not by acting as a de jure director of one company, can someone become a de facto director of another company? Commissioner HMRC v Holland [2010] divided UKSC 3-2. Issue: was an individual who was the only active director of the sole corporate director of the principle companies also a de facto director of the principle companies? It was held he was not (by bare majority), and therefore did not owe fiduciary or other directors’ duties to them. This is because to hold otherwise would upset separate corporate legal personality. Where a corporate structure has been set up to facilitate a corporate directorship, then the individual behind that corporation should be shielded.

The minority, Lords Walker and Clarke, would have taken a more purposive approach – where an individual in fact is acting as a director ie taking all the important decisions affecting the relevant company, he is a de facto director and should be held accountable as such. Lord Walker found the view of the majority one of ‘arid formalism’ which would encourage abuse of the corporate structure and corporate directorship.

Shadow directors – a category created by legislation: a person not formally appointed director but in accordance with whose directions or instructions the directors of a company are accustomed to act...

#16728 - Directors’ Duties I - Company Law

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