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DIRECTORS DUTIES
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Problem with having a concentration of power vested in directors:
o may be tempted to use their powers to benefit themselves,
o or engage in acts that are not in the company’s interests
...

o Typically makes the party account for their ill-gotten gain
...

o unclear, inaccessible and out of date
o Difficult to codify very subjective common law
Therefore, the law relating to directors’ duties was collected and set out in statute
o Provided authoritative, accessible, and more modern statement of directors’
duties
...

o Reflects political agenda – government wanted to change the law to a wider
stakeholder approach
...
g
...

o Wide in scope (s180(5)) possibility of non-company law statutory liability
 Bungay v Saini [UKEAT]
Introduction of the Fraud Act 2006 criminalises breaches of fiduciary duties
(including certain director’s duties)
...


WHO ARE DUTIES OWED ‘BY’ AND ‘TO’
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Duties owed by Directors (as defined by s250), former directors for some
purposes (s170(2)), and shadow directors in certain circs (s170(5) and s223)
...

 Percival v Wright (Shareholders)
 Platt v Platt (Shareholders
 West Mercia Safetywear Ltd v Dodd (Creditors)

GENERAL DUTIES
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Newly codified duties are referred to as ‘general duties’ - they are ‘based on
certain common law rules and equitable principles as they apply in relation to
directors’ (s170(3))
...

Content not radically altered, but has merely restated in a more appropriate
manner (although some notable reforms)
...

o s170(4) - ‘regard shall be had to the corresponding common law rules and
equitable principles in interpreting and apply the general duties’
...

o It would not have been unduly burdensome for Parliament to set out what
remedies are available for each general duties, but it chose not to
...

Generally only the company itself can commence proceedings to remedy a
breach of director’s duties
...


S171-177 – 7 GENERAL DUTIES (plus supplementary duty in s182)
DUTY TO ACT WITHIN THE COMPANY’S POWERS (s171)


s171 (JKX Oil v Éclairs) - amalgamation of two prior common law duties:
(a) duty to act in accordance with the company’s constitution
- Powers of the company are predominantly set out in the company’s
articles
 However, it’s common for companies to impose limitations on
director’s power
 Directors who breach limitations (e
...
acting ultra vires) will likely
breach s171(a)
 A director who breaches s171(a) is liable to compensate the
company for any loss sustained due to the breach
...

 If directors have acted for dominant purpose of manipulating
themselves in office, manipulating voting power or benefiting
themselves financially – likely breach of duty
...

- If the dominant purpose is proper - no breach of duty will occur, even
though some improper purposes may exist
...

Can be avoided if the members approve breach of duty
...
Must act bone fide in the interest of the company (subjective);
2
...


DUTY TO PROMOTE THE SUCCESS OF THE COMPANY (s172)
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Old duty of loyalty
s172 - reformulation of common law duty to act bona fide in the interests of the
company
...
’
Arguably, most important general duty and has undergone the most change as a
result of codification and is therefore the most controversial
...

 Charter Bridge Corp
- Attempt to impose an objective test support by Andrew Keogh
- Closest court has come is Dryburgh v Scott’s Media
Broad duty which can impact on other duties
...

 British Midland Tool Ltd v Midland International Tooling Ltd

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- Obligation extends to disclosing breaches of fellow directors
...

 GHLM Trading Ltd v Maroo
- (Newey J) went further…
- Disclosure duty could extend to matters beyond wrongdoing and that
may be justified to a person other than a board member
...
g
...

o Providing that the decision of the directors was honest, it does not matter that
it was unreasonable
...

 Hutton v West Cork Rly Co
- Bowden LJ - if the duty was entirely subjective then ‘you might have a
lunatic conducting the affairs of the company, and paying away its
money with both hands in a manner perfectly bona fide yet perfectly
irrational’
...

 Charterbridge Corporation Ltd v Lloyds Banks Ltd
- Pennycuick J proper test:
- ‘whether an intelligent and honest man in the position of the director of
the company concerned, could
...
’
- Subjective test is not always appropriate
‘Promote the success of the company for the benefit of its members’
o CA2006 does indicate how the success of the company is determined
...

o In many cases, the interests of the company and members align, so no
problem arises
...

- Preference given to the interests of the company
...

 Mutual Life Insurance Co of New York v Rank Organisation Ltd
- Directors of the defendant exercised their powers in the interest of the
company – no breach of duty
Common criticisms of previous common law duty
...

o CLR Steering Group recommended: ‘enlightened shareholder value
approach’
- Members’ interests retain priority, but directors also required to take
into account wider factors
...

o Parliament accepted CLR recommendation: s172(1) provides that when
directors are considering what would promote the success of the company
for the benefit of its members, regard must be had (inter alia) to:
(a) Likely consequences of any decision in long-term
...

(b) Interests of the company’s employees
...

(d) Impact of the company’s operation on the community and environment
...

(f) The need to act fairly as between members of the company
...

o Phrase was used in s309 CA1985 which imposed duty on directors to
have regard to the interests of employees but it was acknowledged that
this duty was extremely weak
...

o Lord Goldsmith stated in Hansard that s172(1) was subordinate to the
overall duty in s172
...

Where the act also causes the company to sustain loss - directors in breach are
required to indemnify the company for loss
...


o s414A was implemented placing a duty on directors to prepare strategic
reports to help members assess how directors have performed their duties
under s172
...

o The impact that strategic reports will have remains to be seen
...

 Scottish Co-Op v Meyer
o This duty was not absolute and courts recognised that directors could
fetter discretion and bind themselves to act in a certain way if they bona
fide believed it to be in the interests of the company
...
’
s173(2)(b) – duty not breached where director acts in a way that is authorised by
the company’s constitution
...

 Norman v Theodora
o Accordingly, a director with little skill or experience would be subject to an
extremely low standard of care
...

o Courts added objective element to the duty – incorporated into s174:
o S174(2) - the standard of care, skill and diligence expected of a director is
based on that of a ‘reasonably diligent person’ with:
(a) The general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the director in
relation to the company
...

- Can no longer use lack of skill or experience as shield
...

(b) The general knowledge, skill and experience that the director actually has
...
g
...

Accordingly, case law remains highly relevant:
 Re Barings plc (No 5)
- CofA upheld disqualification and, more importantly, affirmed a series of
principles laid down by Jonathan-Parker J in first instance:
a
...

b
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c
...


DUTY TO AVOID CONFLICTS OF INTEREST (s175)
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s175 contains the first of several duties relating to conflicts of interest
...

 Regal (Hastings) v Gulliver
The fact that the profit made by the director is negligible is also irrelevant
...

Duty is extremely strict:
 Bhullar v Bhullar
- Although defendants acquired knowledge of the property in a ‘private’
capacity, the opportunity to purchase property was for the company
...

- Case heavily criticised, largely because the company agreed, at the
claimants’ request, not to acquire any more properties and the court
allowed the claimants to act opportunistically
...

Where a director fails to obtain valid authorisation, any resulting contract is
voidable, provided that the 3rd party involved had notice of the breach
...

 Aberdeen Railway Co v Blaikie Bros
 Industrial Development v Cooley

DUTY NOT TO ACCEPT BENEFITS FROM A THIRD PARTY (s176)
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s175 motive is irrelevant and is no defence for a director to argue that he acted in
good faith
...

Accordingly, the duty only arises in relation to benefits that are likely to give rise
to a conflict of interest
...

o Significant overlap between the two but a key difference:
 A conflict under s175 can be authorised by directors, whereas a
conflict under s176 can only be authorised by the members in
general meeting (s180(4)(a))
...

 Shipway v Broadwood
The company can instead claim damages in fraud from either the director (and
given summary dismissal) in breach or third-party
...
’
The declaration must be made as soon as is reasonably practicable, before the
company enters into a transaction or arrangement (s177(4))
...

o Therefore, the director does not actually need to be a party to the
transaction/arrangement in order for a breach
...


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o Existing transactions or arrangements are covered by s182
- Director must declare the nature and extent of interest
...

Where a director enters into a transaction in breach of s182 - he commits an
either way offence (s183)
...

o No liability (Civil or Criminal) for a breach of s177
...

o Arguably no justification for differentiation because if s177 is breached and
the proposed transaction/arrangement is adopted, then s182 is also
breached if the director fails to declare the interest
...

 Coleman Taymar Ltd v Oakes
o Although remedies may be obtained if a breach of any other general duties
has occurred
...

Compliance with the general duties is insufficient (s180(3)) and member approval
is also required
...

o Directors cannot have a guaranteed term of employment over two years,
unless approved by a resolution of the members
- (Principle D
...
5 of the UK Corporate Governance Code recommends
contracts or notice periods be no longer than one year)
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SUBSTANTIAL PROPERTY TRANSACTIONS (s190-196)
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Under general duties, a director with a conflict of interest can avoid committing a
breach if he discloses the interest to other directors (although ss175 and 176 also
require authorisation)
...

Two types of arrangement require such approval:
1
...
Where the company acquires, or is to acquire, a substantial non-cash
asset from such a director or person so connected
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(i)
Over £100,000; or
(ii)
Exceeds 10% of the company’s asset value and is more than £5,000
A substantial property transaction entered into without member approval is
voidable at the company’s instance unless: (s195(2))
...


LOANS, QUASI-LOANS AND CREDIT TRANSACTIONS (s197-214)
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CA1985 - companies generally prohibited from making any form of loan to
directors and breach constituted a criminal offence
...

The requirement for member approval does not apply in certain cases (e
...
loans
or quasi-loans that do not exceed £10,000 do not require approval)
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PAYMENTS FOR LOSS OF OFFICE (s215-222)


The law requires a the member approve certain voluntary payments made by the
company to directors losing office, defined by s215(1)
...
g
...


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Where approval is not obtained, the recipient holds the payment on trust for the
company, and any director who authorised the payment is jointly and severally
liable to indemnify the company for any loss resulting from payment (s222(1))
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 Such provisions are void (s232(1))
...

o S239, for the first time, imposed a statutory scheme concerning ratification
of acts committed by directors that amount to negligence, default, breach
of duty, or breach of trust
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o When an officer is deemed liable for negligence, default, breach of duty or
breach of trust, then s1157 allows the courts to grant, either wholly or
partly, relief from liability on such terms as it sees fit
...


TERMINATION OF OFFICE
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Company articles may provide that a director’s office will terminate upon the
occurrence of a specified event
...
g
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The director can surrender office at any time by giving notice and the company
must accept resignation
...
In practice, it is
only public companies tend to require this
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o Must be written resolution
Power granted to members by s168 is substantial, but two factors mitigate it:
(1) Removal does not deprive the director of compensation which may be high
depending on contract length and pay (s168(5))
...
Such a clause usually provides that, in the event of a vote
seeking to remove a director from office, the voting power of the director will
be increased, usually to such an extent as to enable him to defeat any
resolution seeking his removal
...

o The advantage of using a separate board power is that it will not be
subject to the procedural requirements of s168

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