Company Law - Directors Duties

Question 1

What are the sources of Directors duties?

Answer 1

• Statute (CA 2006 ss 170-177)
• Common Law rules
• Equitable principles

Question 2

2. What is the relationship among the 3 above?

Answer 2

• the statutory duties (have effect in place of = replace) common law principles – s 170
• the statutory duties are subject to the interpretation of analogous common law and equity
• clarify areas of uncertainty in the common law
• consequences of statutory breaches are determined by appropriate common law and equity.

Question 3

Common Law Duties:

Answer 3

• Fiduciary Duties – duty of loyalty (equitable principles)
• Duty of care

Question 4

3. What are the differences between English and Scots law on Equitable principles.

Answer 4

• English = “equitable principles” can have a remedy beyond damages, that something should be done or not done (restoration of company property, recission when this is possible etc.)
• Scots = “equitable principles” is not a term in Scots law, but courts of Scotland can still take account of the intent behind the principles, as in Scotland it is perfectly permissible to petition the court for a particular remedy, as opposed to seeking damages.

Question 5

What are the duties of loyalty? 1

Answer 5

• Duty to act within power s 171. – objective test of articles of associations, and only exercise powers for the purposes for which they are conferred.
• Duty to promote the success of the company s 172. – A reformulation of common law duty to act in good faith in the best interests of the company. Also constitutes a debate between the shareholder primacy model and the pluralist model. Also important is the ‘enlightened shareholder value’. Duty to disclose misconduct to the company.

Question 6

What are the duties of loyalty? 2

Answer 6

• Duty to exercise independent judgment s 173.
• Duty to avoid conflicts of interest s 175.
• Duty not to accept benefits from TP S 176.
• Duty to declare interest in proposed transaction or arrangement s 177.

Question 7

What is the cumulative effect from the Companies Ac 2006 (311 - 314)?

Answer 7

• Many of the general duties will frequently overlap, as the effect of the duties is cumulative, so that it is necessary to comply with every duty that applies in any given case.
• The cumulative effect of the duties means that where more than one duty applies, the director must comply with each applicable duty, and the duties must be read in this context.

Question 8

What is the significance of the fact that duties are owed to the company?

Answer 8

• only those who could claim to act as, or on behalf of, the company can enforce the duties.
• The company is the proper plaintiff to seek redress for any wrong committed by the company.
• Any profits recovered via a shareholder derivative action will be recovered for the company.

Question 9

Role of Directors

Answer 9

• Shadow directors will be equally subject to the general duties ‘where and to the extent they are capable of applying.’
• Difference between de factor directors and the shadow directors should not be the main focus of attention while determining the applicability of the general duties of directors.

Question 10

What is the significance of the fact that duties that are owed to the company?

Answer 10

• Only those who could claim to act as, or on behalf of the company can enforce the duties.
• The company is the proper plaintiff to seek redress for any wrong committed by the company.
• Any profits recovered via a shareholder derivative action will be recovered for the company.

Question 11

What about the company groups? Success of the group or a single company?

Answer 11

• A reformulation of common law duty to act in good faith in the best interests of the company.
• Shareholder primacy – directors owe their duties primarily to shareholders.
• Criticised for overly prioritising that interests of shareholders and failing to acknowledge the effect that the directors actions can have on other shareholders.

Question 12

What is independent judgment?

Answer 12

Common Law – duty not to fetter the exercise of discretion.
Statute puts it in positive terms – s 173(1) A director must exercise independent judgment.
This duty does not prevent taking advice and delegating authority.

Duty does not prevent exercising future discretion.

Question 13

What are the limits to this duty?

Answer 13

• This duty exists only in order to support the boards management of the company’s business in an efficient and competent manner.
• It does not entitle an individual to act outside the boardroom independently of the board.

Question 14

What is the case and principle in Common Law?

Answer 14

• No conflict principle = no conflict and no profit
• Case is Bray v Ford (1896)

Question 15

What are the statutes involved?

Answer 15

• Self-dealing transaction rules – ss 175(3) and 177
• Duty to declare interest in proposed transaction or arrangement.
• Duty to avoid conflicts of interest.
• Duty not to accept benefits from TP.

Question 16

What are the 3 rules in S 177 Proposed transactions?

Answer 16

• If a director of a company, is in any way, directly or indirectly interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
• Note only disclosure to other directors and before the company enters into the transaction or arrangement.
• Accurate and complete, or needing further disclosure.

Question 17

What are the methods of disclosure?

Answer 17

• At a meeting of the directors – for identified transaction.
• By written notice to the directors, for identified transaction.
• By a general notice – absence of specific identified transaction but regarded as interested in the scope of disclosure.

Question 18

Directors do not need to disclose:

Answer 18

• If it cannot reasonable be regarded as likely to give rise to a conflict of interest
• Unless the director is aware or ought reasonably to be aware of both the interest and transaction
• If other directors ought to be aware of it
• If it convers terms of the directors service contract that has been considered by the board.

Question 19

What is the corporate opportunity?

Answer 19

• Executives should not abuse the positions within the corporation as it is their job o act in the best interests of the corporation.

Question 20

What is the case of Regal (Hastings) Ltd v Gulliver (1942)?

Answer 20

• Regal owned a cinema, and took out leases on 2 more cinemas, through a new subsidiary, in order to create a viable sale package.
• The landlord wanted person grantees from the directors, but they refused. The director then sold the company, and the buyers brought a class action against their directors saying that they had breached their fiduciary duty.
• House of lords held that the directors had made the profits by reason of the fact that they were directors of Regal.
• They were not in breach.

Question 21

What is the possibility of authorisation?

Answer 21

• Authorisation can be by the directors, and it is conditioned, unless LTD constitution says otherwise, or if the PLC constitution expressly permits.

Question 22

What happens in cases of breach?

Answer 22

• Liability generated from a director co-director.
• The consequences (in legislation) are the same as would apply if the corresponding common law rule or equitable principle applied.

Question 22

What is the duty to exercise reasonable care, skill, and diligence?

Answer 22

• Although directors, executive and no executive are object to a uniform and objectively a duty of care, what the discharge will not be uniform.
• This duty does not necessarily require a directorship to be regarded as a professional.
• Directors are still required of being a position to guide and monitor the management.

Question 23

The Company can have the directors:

Answer 23

• Injunctions and declarations
• Common law damages/equitable compensations where the company has suffered loss.
• Disgorgement of the profit’s
• Members can DISMISS the Director

Question 24

Who is the company in this case?

Answer 24

• The company can only act through directors or shareholders.
• The risk with directors is the mutual back scratching.

Question 25

What is excusing a breach of duty?

Answer 25

• Ratification – amounts to negligence, default, breach of duty or breach of trust.
• Ratified by ordinary or written resolution.
• Power of the court to grant relief in certain cases.
• Contracting out of liability – company provides indemnity for the director.