#16727 - Directors' Duties Ii

Dir = fiduciary – must not place self in position where there is a conflict between their duties to the company and their personal interests or duties to others – Lord Herschell per Bray v Ford [1896] – a strict rule needed as human nature is such that there would be ‘danger’ of the fiduciary being ‘swayed’ by improper motives.

The no-conflict rule is reflected in the CA 2006:

No self-dealing transactions – SS175(3), 177, Pt 10, Chs 3 & 4
Dir must not make personal use of company property, information or opportunities: SS175(1), (2)
Dir must not receive benefits from third parties in exchange for exercising their Dir powers a certain way: S176

These no-conflict rules form the core of the Dirs’ duties of good faith and loyalty, which by themselves are too vague to be meaningfully enforced.

The scope of the relevant position

S175 – general duty to avoid conflicts of interest but specific rules on self-dealing transactions are found in S175(3): ‘this duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company’.

The normal rules are relatively laid-back and typically just require proper notification and permission being granted by the board. Trustee-like relationship between company and Dir meant that self-dealing transactions could be avoided: Aberdeen Railway Co v Blaikie Bros (1854) – Lord Cranworth LC pointed out that a company may only act through its officers so any self-dealing transaction can be set aside regardless of how substantively fair it is.

Approval mechanisms

However, this is not a blanket ban on self-dealing: there may be good commercial reasons by contracting with a director, who would have good knowledge of the company’s requirements. At common law, this was shareholder approval but this was cumbersome. Many changed their AoA to simply require disclosure to the board not approval by members. This is the position in S177 now.

Proposed transactions – S177, Ch 2 of Pt 10; existing transactions – S182, Ch 3 of Pt 10.

Duty to declare interests in relation to proposed transactions or arrangements

Dir who is ‘in any way, directly or indirectly; interested in a proposed transaction or arrangement with the Co must declare to other Dirs the ‘nature and extent’ of that interest before Co enters into arrangement – S177(1); if declaration, once made, later becomes incomplete or inaccurate, further disclosure is required – S177(3).

Purpose of disclosure requirement

Aim of S177 is to put other Dirs on notice of conflict so they can take necessary steps to safeguard Co position – what exactly they must do is within their discretion but inadequate precaution would be a breach of their duties of care and perhaps good faith. Act allows conflicted Dir to vote and count towards quorum though model articles for public and private Cos (Arts 14 and 16) both exclude this power.

Who is subject to this duty?

S177 – wrt proposed transactions – is a general duty of Dirs, so therefore also applies to shadow Dirs although only ‘to the extent capable of so applying’ (S170(5)). S182 wrt existing transactions explicitly applies to shadow Dirs per S187(1). Of course there is the argument that shadow directors simply order the real directors what to do so disclosure would be meaningless but the de jure directors do not always do what the shadow director tells them to do.

The interests to be disclosed

Dir to disclose any interest in a ‘transaction or arrangement’, which includes both contracts and other arrangements – Re Duckwari (No 2) [1998]. Does not matter whether or not the contract is entered into by the board or by one of the subordinate managers.

Direct and indirect interests must be disclosed – eg of indirect – shareholding in company which is the other party or being member of a contracting partnership, reflecting the common law position – Aberdeen Railway Co v Blaikie Bros.

Dir must disclose nature and extent of relevant interest eg Dir X is a shareholder with Y% stake (board may decide risk of conflict is de minimis). Blaikie Bros per Lord Cranworth suggests that personal interests must be disclosed too. Note there is a de minimis requirement for disclosure – if situation is such that ‘if cannot reasonably be regarded as likely to give rise to a conflict of interest’: S177(6)(a).

S177(5) – Dir only needs to disclose interest where he is aware or ought reasonably aware of both the interest and the transaction.
S177(6)(b) – no need to disclose where the other directors are already aware or reasonably ought to be aware.
S177 – no disclosure wrt single-member boards.
S177(6) -- no disclosure needed wrt Dir’s service contract

Methods of disclosure

S177(2): three non-exhaustive methods –

At a meeting of directors
By written notice to the directors per S184
By general notice per S185

Meeting / written notice – methods of giving notice in relation to an identified transaction – must be included in the minutes of the meeting or the next meeting. A general notice need not be wrt a specific transaction but must be brought up at a board meeting or the subsequent board meeting so the board has the chance to discuss the conflict.

Remedies

Breach of S177 subject to civil sanctions – ‘the same as would apply if the corresponding common law rule or equitable principle applied’ (S178).

At common law – transaction voidable at option of the company unless third party rights have intervened – this was traditionally the only remedy: Re Cape Breton Co (1887). Only other possibility is if Dir also infringed some other rule in which case the Dir may be liable on that basis eg Gwembe Valley Development Co Ltd v Koshy (N0 3) [2003] – misuse of company property.

Continuing role for the AoA in setting tighter constraints

S177 compliance means that the remedy of rescission will not be available per S180(1), notwithstanding the common law position. However, S180(1) specifically operates ‘without prejudice’ to any AoA provision, so eg there could be a requirement for member approval.

Duty to declare interests in relation to existing transactions or arrangements

S182 – compulsory disclosure to board of existing self-dealing transactions unless that has already been declared wrt a previously proposed transaction. This catches newly-appointed directors who eg may have joined co from a long-term supplier. This disclosure may seem nugatory but may be important eg if company has power to unilaterally terminate if a director becomes conflicted.

Methods of disclosure

Similar to proposed transactions but must be made ‘as soon as reasonably practicable’ (S182(4)).
S182(2) – may only use the three statutory methods of disclosure mentioned in S177.
Sole director must only disclose where company is required to have more than one director but that is not the case at the time of disclosure – to be made in writing and deemed part of next directors’ meeting: S186.
Explicitly applicable to shadow directors – S187(1) – general or specific notice must be given in writing to the directors and will be minuted as part of the next directors’ meeting – S187(2)-(4)

Remedies

Criminal sanction (fine) imposed for failure to disclose here – S183. This is not part of the general duties of directors so the common law rules do not apply wrt remedies.

S177 CA not enough for all transactions – sometimes, more than board disclosure is appropriate. These provisions: Chs 4 & 4A, Pt 10

Relationship with the general duties

S180(3) – where...

#16727 - Directors' Duties Ii - Company Law

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