Director Duties (Q3) Flashcards
(16 cards)
To whom are director duties owed?
All statutory duties under Companies Act 2006 s.170 are owed to the company itself - not to individual shareholders
What are the statutory duties of a director?
- Act within powers (constitution & proper purposes)
- Promote the success of the company
- Exercise independent judgment
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties
- Declare interest in proposed transactions with the company
Duty to Act Within Powers (s.171)
Directors must:
- act in line with the company’s constitution (Articles of Association)
- only use powers for proper purposes, not personal advantage
RELEVANT CASE: Howard Smith v Ampol
Howard Smith Ltd v Ampol Petroleum Ltd (1974)
Facts:
- Ampol (an existing shareholder) held 55% of shares in RW Miller Ltd.
- Directors of RW Miller wanted to sell the company to Howard Smith Ltd instead
- to achieve this, the directors issued new shares to Howard Smith, diluting Ampol’s control and giving Howard Smith majority voting power
- official reason given was to raise capital for company needs
Issue: Were the directors acting within their powers, or did they use their powers for an improper purpose?
Held:
- the share issue was legal in form, but the true purpose was to alter voting control, not to raise capital
- this was an improper use of power - directors breached their duty under s.171 (act for proper purposes)
Legal Principle: directors may have wide powers, but they must only be used for genuine company purposes, not to influence control or voting outcomes.
Duty to Promote the Success of the Company (s.172)
- Act in good faith for the long-term success of the company
- Directors must consider:
~ employees
~ business relationships
~ environment
~ fairness between shareholders
~ reputation
RELEVANT CASE: Re Smith & Fawcett
Re Smith & Fawcett Ltd (1942)
Facts:
- the company’s articles gave directors full discretion to refuse the registration of share transfers
- one of the two directors died
- the surviving director (Fawcett) refused to register the deceased’s shares in the name of the person entitled to inherit them
- issue was whether this was a proper use of power
Issue: Were the directors required to explain to justify their refusal, or could they act entirely at their discretion?
Held:
- directors must exercise their discretion in good faith and in what they believe is in the best interests of the company
- if they do this honestly, courts will not interfere, even if others would have acted differently
Duty to Exercise Reasonable Care, Skill & Diligence (s.174)
Two-part test:
- Objective: what a reasonable director would do
- Subjective: what this specific director is expected to do based on skills/experience
RELEVANT CASE: Re D’Jan of London Ltd (1993)
Re D’Jan of London Ltd (1993)
Facts:
- Mr D’Jan was the sole director and majority shareholder of a company
- he signed an insurance proposal form without reading it
- the form contained incorrect answers, and when the company later suffered a fire, the insurer refused to pay out due to the misstatements
- the company became insolvent, and the liquidator sued Mr D’Jan for negligence
Issue: Did Mr D’Jan breach his duty of care, skill and diligence by not reading the insurance form?
Held:
- Yes, he breached his duty by signing a legal document without checking it
- He failed to meet both the objective standard (what a reasonable director would do) and the subjective standard (what he was expected to do, given his position and experience).
- he was held personally liable for the loss, though partial relief was granted due to honesty and majority shareholding
Avoid Conflicts of Interest (s.175)
- must avoid any situation where personal interest conflicts or may conflict with company interests
- applies even where:
~ the company wasn’t harmed
~ the director meant no harm
RELEVANT CASES: IDC v COOLEY, REGAL (HASTINGS) v GULLIVER
IDC v Cooley (1972)
Facts:
- Mr Cooley was the managing director of a company called IDC (Interior Design Contracts Ltd)
- a potential client (Eastern Gas Board) told Cooley they didn’t want to contract with IDC, but they would be willing to contract with him personally
- Cooley resigned from IDC citing ill health, and then took the contract personally
- iDC later found out and sued him
Issue: Did Cooley breach his fiduciary duty by resigning and taking an opportunity for himself that had arisen while he was still a director?
Held:
- Yes he was in breach of fiduciary duty
- even though IDC had no chance of getting the contract, Cooley still had a duty to disclose the opportunity and not to profit from it secretly
- a director cant exploit an opportunity that comes to them because of their position, even if the company wouldn’t have benefitted
Regal (Hastings) Ltd v Gulliver (1942)
Facts:
- Regal (Hastings) Ltd owned a cinema and wanted to buy two more
- to complete the purchase, the company needed extra capital
- the directors personally bought shares in a subsidiary company to help fund the purchase
- when the cinemas were later sold, the directors made a personal profit from their shares
- the company sued the directors to recover the profits
Issue: Were the directors entitled to keep the profit, or did they breach their fiduciary duty by making personal gain from their position?
Held:
- directors were in breach of fiduciary duty
- they made the profit bc of their position ad opportunities they accessed as directors
- even though they acted honestly, and even though the company couldn’t afford to buy the shares itself, they still had to account for the profits
Legal Principles: Directors must not make any personal profit from their position unless fully authorised by the company
No Secret Benefit (s.176)
- directors must not accept benefits from third parties that arise from their position
- bribes, commissions, gifts, etc. without board approval = automatic breach
Duty to Declare Interest in Transactions (s.177)
- Must disclose any personal interest in proposed company transactions to other directors
- this protects against hidden agendas and ensures transparency
Consequences of Breach (s.178 & others)
- The Companies Act applies common law remedies:
~ damages (if company suffers loss)
~ account of profits (if director gained)
~ injunctions to prevent ongoing breach - Removal by ordinary resolution (s.168)
- Disqualification under Company Directors Disqualification Act 1986 - up to 15 years
- Even honest mistakes can result in personal liability
How can a director protect themselves from breaching duties?
They should:
- Attend board meetings and review board papers thoroughly
- stay informed about the company’s affairs and seek independent advice when needed
- disclose any conflicts of interest early and transparently to the board
- keep detailed records of decisions, votes and reasons for choices made
- take out a Directors’ & Officers’ (D&O) Insurance to protect against personal liability for claims made while acting as a director
