17. Directors Duties

Question 1

What are the common law duties of directors?

Answer 1

1. Act in the interests of the company
2. Act responsibly and honestly
3. Act in accordance with the constitution and in accordance with law
4. Not to make a secret profit and avoid conflict of interests
5. Not to fetter their discretion
6. Duty of care, diligence, and skill
7. Have regard to interests of members
8. Have regard to creditors

Question 2

What section of the act outlines the duties?

Answer 2

Section 228

Question 3

Exercising powers bona fide in the interests of the company case law

Answer 3

Regencies plc v. Cohen

Nash v. Lancegaye

Question 4

Duty to act responsibly and honestly case law is also what?

Answer 4

A defence to the making of a restriction order

Question 5

How is the duty to act in accordance with the constitution and within the law enforced?

An example of any activity prohibited by this duty?

Answer 5

Through misfeasance proceedings

The diversion of company funds

Question 6

Are there any circumstances where the making of a profit/entering a conflict are permissible?

Answer 6

Yes. Where permitted by the constitution

Or

Where a special resolution is passed by its members

Question 7

Regal Hastings v. Gulliver

Question 8

Competing with the company case law

Answer 8

Cooley

Peso Silver Mines

O’Malley

Anderson

Question 9

Disc,owing a conflict of interest remedies

Answer 9

Profit held on constructive trust for company

Unduly harsh order

Damages

Question 10

Can a director ever fetter his discretion?

Answer 10

Yes.

Where it is permitted by the constitution.

Where he is acting in good faith

The restriction has been approved by special resolution

Question 11

Fulham football club Ltd v. Cabra Estates Plc

Question 12

Duty of care, skill, and diligence case law

Answer 12

Re Cuty Equitable Fire Insurane Co.

Question 13

What kind of test is used to ascertain the duty of care, skill, and diligence?

Answer 13

A wholly subjective one

Courtney: “subjectivity in this context has been interpreted as meaning that an idiot, provided he is honest, can avoid liability”

Question 14

Re Brazilian Rubber Plantations and Estates Ltd

Question 15

Duty of diligence

Answer 15

Where directors are put on notice of impropriety they must act to prevent it

Jackson v. Munster Bank Ltd

Question 16

Duty of care - case law

Answer 16

Nowadays directors are more qualified, thus a higher standard is required of them.

Dorchester Finance Co v. Stabbing
- two non executive directors
- signed blank cheques which the managing director used to misappropriate funds
- one chartered account, one with vast experience
Held both had been negligent
Held the duties of directors, whether executive or not, are the same

Question 17

Duties of a non executive director

Answer 17

Less extensive than an executive director as they will not be so involved in the dealings of the company and will rely on the executive director to inform them of performance and other matters.

Re Mitek Holdings
- “there will usually be a real difference between the duties of an executive and non executive director”

Question 18

Re Barings Plc

Answer 18

Bank collapsed. Rogue trader left unsupervised and granted permission for significant funding by three directors.

Three directors had left him in control.
Allowed him to doctor accounts, and report profits while trading at a huge loss.
Ignored internal audit recommendations.

Held: “ each individual director owes duties to the company to inform himself about its affairs and to join with his codirectors and supervising and controlling them”

Question 19

Directors owing duties to shareholders

Answer 19

Allen v Hyatt

Coleman v Myers
- set out factors to be taken into account when deciding whether a duty to shareholders exists

1. Dependence upon information and advice.
2. Existence of a relationship of confidence.
3. significance of the transaction
4. Extent of any action taken by the director to promote it

Question 20

Directors owing duties to creditors?

Answer 20

Kinsela
“Where a company is insolvent the interests of the creditors intrude”

Re Frederick Inns Ltd

SC endorsed Kinsella decision
“ Once the company clearly had to be wound up and it’s assets applied pro tanto in discharge of its liabilities the directors had a duty to the creditors to preserve the assets to enable this to be done or at least not to dissipate them.”

Question 21

Do directors owe duties to employees?

Answer 21

No duties owed at common law.

But a statutory duty owed under s.224.

Directors only need to have regard to the interests of employees.

Question 22

Statutory duties of Directors

Question 23

Preventing transfer of substantial non cash assets

Answer 23

Can be approved by ordinary resolution

And informal agreement of all shareholders to enter into a transaction deemed to be sufficient.

Must be of requisite value. Not worth less than 5 thousand and exceeds 10% of the companies assets

Question 24

What are the effects of a breach of the duty to prevent transfer of substantial non cash assets?

Answer 24

1. Contract is voidable unless
   - restitution no longer possible
   - company has already been indemnified
   - avoidance would affect an innocent third party
   - approval of the company has been given within a reasonable period after the transaction
2. Directors and connected persons may be liable to account to the company for any profit made, as well as any loss the company suffered
3. Company is also entitled to damages at common law (or equitable relief) provided it doesn’t produce a double benefit

Question 25

Defence to a breach?

Answer 25

Director can show he took reasonable steps to secure compliance

Connected persons can also show they did not know the circumstances giving rise to contravention

Directors should seek certs of compliance

Question 26

2. Not to accept a loan, a guarantee, etc from the company

Effects of a breach

Answer 26

Director or connected person who benefitted from transaction must indemnify the company for any losses or account to it for any gains made.

Transaction is voidable at the instance of the company provided:

Restitution is possible
The company has not already been indemnified for loss/damage
There is no third party who has acquired rights bona fide for value and without actual notice of the contravention

Question 27

Ruby Property Company Ltd v. Kitty and Superquinn

Question 28

Effects of breach

Answer 28

Officers in default may be found guilty of a Category 2 offence

Did the loan contribute materially to its insolvency?

Or did it substantially impede the orderly winding up of the company?

If so, any who benefitted from the loan may be held personally liable for the company’s debts, with or without limit

Question 29

Exceptions to s.239 prohibition

Answer 29

1. Where loan is less than 10% of the value of the company’s assets
2. Does not prevent money being advanced to a director for vouched expenses
3. Main exception - Summary Approval Procedure is properly pursued
4. Where the company gives loans, etc in the ordinary course of its business
5. Holding companies and subsidiaries can make loans, etc to one another

Question 30

3. To disclose an interest in certain contracts

Question 31

4. To disclose an interest in shares and debentures

Answer 31

Specified exceptions in Part 5

Question 32

5. Duty to comply with the Companies Act

Answer 32

Every director must ensure company complies with the act

Must make “acknowledgement” of this fact upon taking office

Question 33

Indemnification of Directors

Answer 33

Constitution cannot exempt directors from liability

Indemnification from the company

Company can get negligence insurance in respect of its directors

Court can also relieve directors who have acted honestly and reasonably