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#16632 - Directors' Duties - Business Law and Practice

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DIRECTORS’ DUTIES

  1. NATURE of the breach and who’s committed it.

  2. What further INFORMATION might be needed to decide whether there has been a breach.

  3. What could be done to AVOID a breach.

  • S.170(1) Companies Act 2006 – The general duties specified in sections 171 to 177 are owed by a director of a company to the company.

  • In general, directors owe their company a fiduciary duty.

  • Aberdeen Rly Co v Blaikie Bros (1854): directors are agents of the company whose duty is to act as to best promote the interests of the company. Such agents have duties to discharge of a fiduciary nature towards their principal.
Section Duty Example
171

Duty to act within powers

Act in accordance with the company’s constitution and only exercise powers for which they are conferred (also see MA 3).

 Punt v Symons (1903): If the issuing of shares is to raise capital and not to help block an undesirable takeover, a director cannot issue new shares to people just so they will oppose the block. He is not using his powers for the purpose for which the powers were conferred – keeping themselves in office is not regarded as a ‘proper purpose’.
172

Duty to promote the success of the company

Act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

  • Must have regard (amongst other matters) to:

    • the likely consequences of any decision in the long term

    • the interests of the company's employees

    • the need to foster the company's business relationships with suppliers, customers and others

    • the impact 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 the members of the company

  • Regentcrest plc v Cohen (1988) – subjective test: did the directors think they were acting in good faith for the benefit of the members?

  • Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) – objective test: is the director an honest and intelligent person acting in the position of director?

  • difficult to breach – concept of business judgment, so the courts don’t like to intervene

  • unless the company’s survival is at risk, mere incompetence will not constitute a breach in fiduciary duty if the director honestly believed he was acting in the best interest of the company

  • Directors taking on an overdraft/more debt when there is substantial money owed on a current overdraft.

  • Not doing due diligence when entering into an agreement.
173

Duty to exercise independent judgment

Directors must make their own decisions but does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into.

  • can contract out under s.173(b)

  • Fullham FC v Cabra Estates (1994): if the director’s actions end up being in the best interest of the company, then the duty will not be broken.

  • When a director’s judgement is influenced by their appointment as a director for another company.
174

Duty to exercise reasonable care, skill and diligence

  • S.174(2)(a) – general objective test: judge each director against ‘the general knowledge, skill and experience that may reasonably be expected’ of an individual carrying out their director role

  • S.174(2)(b) – small subjective test: “as well as the knowledge and experience that the director actually has” (entitled to expect more from a more experienced director)

  • Also see s.214(4) Insolvency Act 1986: A reasonably diligent person [has] both– (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director [actually] has.

  • Re: D'Jan of London Ltd (1994): director was found negligent and liable for the company’s losses after signing an inaccurate proposal without reading it.

  • Re Barings plc (No 5) (2000): directors have a continuing duty to exercise care, skill, and diligence even when they have delegated things – this does not absolve them

  • Cohen v Selby (2001): sit back & do nothing = breach of reasonable care, skill and diligence
175

Duty to avoid conflicts of interest

The director must exploit property, info or opportunity for the benefit of the company and not themselves; it is irrelevant whether or not the company could take advantage.

  • S.175(5) & (6): the directors may authorise an activity which would otherwise be considered a conflict of interest

  • key example is potential corporate opportunities

  • Regal (Hastings) v Gulliver (1942): the director pursued an opportunity the company could not afford. The Court held that a director is in breach of his duties if he takes advantage of an opportunity that the corporation would otherwise be interested in but was unable to take advantage.
176

Duty not to accept benefits from third parties

A director must not accept a benefit from a third party given because he is a director or because he does (or does not do) anything as a director.

  • A director being given frequent use of another interested company’s hospitality boxes for sports
177

Duty to declare interest in proposed transaction or arrangement

If you are in any way, directly or indirectly, interested in a transaction or arrangement the company is considering/partaking in, you must declare the nature and extent of that interest to the other directors.

  • In the case of a proposed transaction the director must do this before it is entered into.

  • In the case of an existing transaction the director must do this as soon as reasonably practicable.

  • A director is a shareholder in a company that the company intends to do business with.
182

Declaration of interest in existing transaction or arrangement

A breach of s.177 will often eventually lead to a breach of s.182, which is a criminal offence.

  • “Where a director of a company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section.”

  • A director is a shareholder in a company that the company is already engaged in business with.
Consequences
178

Civil consequences of breach of general duties

  1. The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.

  2. The duties in those sections (with the exception of section 174 (duty to...
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