directors duties Flashcards
(37 cards)
1
Q
Who are directors?
A
- Section 2(1) of the Companies Act – any person who occupies the position of Director by whatever name called.
- There is no statutory requirement for the directors to hold shares in the company although it is often the case. However, when there is such requirement in the company’s constitution – if a director fails to meet the requirement – their directorship is void.
- The directors act via the Board, its purpose as per s 158(1) is to ‘manage…the business of the company’
2
Q
Powers
A
- Section 158(3) – apart from the general power of running the business, other powers include: borrowing money, giving security.
- Unless provided otherwise by the company’s constitution, they also have the power to allot unissued shares, refuse to register a share transfer, make Calls of Shares, declare dividends, call an AGM of the members as they deem fit, fix their own remuneration in the case of a private company – section 158
- Directors mut act subject to the Companies Act, provisions in the articles and directions in AGM – Royal British Bank v Turquand – the power to borrow was reserved by the members.
- The directions given by the members at general meetings cannot contravene with the Constitution of the Company or 2014 Act.
- Under Section 158(2): no direction given can invalidate prior valid acts of the Directors.
o Powers revert to members if a director dies, becomes incapacitated, or exceeds authority.
o Certain inalienable powers remain with the members, including:
i. Sanctioning matters by special resolution (e.g., restrictions on financial assistance for purchasing own shares).
ii. Legislative powers to alter the Articles via special resolution
3
Q
Status of directors
A
- Section 128(1) – private Ltd companies must have 1 director, all other types – 2.
- Section 137(1) – one of the directors must be resident in the State – under s 141(1) a person will be regarded as being resident if they are present in Ireland: the previous 12 months for 183 days; or the previous 24 months for a period of 280 days.
- Section 139(3) – if a director resident in the state ceases to be one and is aware that on the date of their resignation there is no other resident director, they must notify the Registrar of Companies of both within 14 days. Failure – liability for the payment of any penalties imposed on the company under Irish tax or company law – s 43(11)
- Section 137(2) – alternative requirement for a resident director – the company can put in place bond to the value of 25,000 against any fines and penalties that may be imposed.
- Section 140 – A company can be exempt from the resident director requirement if it proves a continuous economic link with Ireland. The Registrar can withdraw this exemption if the link ceases.
4
Q
Categories of Directors
A
- Section 130 – a body corporate cannot be a director.
- Section 132 – an undischarged bankrupt cannot be a director
- Section 131 – a minor cannot be a director
- Section 136 – the directors are not obliged to hold a certain amount of shares, although companies can set such limits in the articles.
5
Q
Formally appointed directors
A
- Section 144(2) – as the company starting its new life, the first directors will be those named in writing by subscribers of the Constitution.
- Section 144(1) – a director cannot be appointed without their consent, if is – void.
- Section 144(3)(a) – the directors are appointed according to the company’s constitution by the members in AGM – the names will appear on Company’s Register of Directors.
6
Q
Shadow directors
A
- Section 221(1) – someone who is not formally appointed, is deemed to be such because they are in accordance with those directions or instruction the directors of a company are accustomed to act unless the advice is given in a professional capacity. Conditions to be met:
1. Re Hocroft Developments Ltd – there must be a person issuing instructions and directions. The motive of the person may be relevant but not a deciding factor.
2. Re Hocroft Developments Ltd – the directions must be issued to the formally appointed or de facto directors
3. Re Devona Ltd – The Board’s consideration or discussion of “instructions” before following them does not change the fact that they remain “instructions” or “directions” to the Board.
4. De facto Directors must be accustomed to act on those directions or instructions. In this regard, there is no requirement that the Board should always act on the directions and instructions of the person
7
Q
De Facto directors
A
- Section 222(1) – de facto director is someone who occupies the position of a director without being formally appointed. A person will not be one because that they have given advice in a professional capacity to a company or its directors – s 222(4)
- Re Hydrodam (Corby) Ltd – difference between de facto and shadow director: those who claim or purport to act as directors even though they have not been appointed – de facto; and those who claim not to be directors even though they direct those who are formally appointed as ‘real’ directors – shadow.
8
Q
Limits
A
- S 142(1) – a director can’t hold more than 25 directorships, a parent/holding company counts as one – s 142(5). Rules for DACs and LTDs are the same.
- Any appointed directorship over 25 is void – s 143(2), a person who accepts a directorship shall be guilty of an offence – s 143(1).
9
Q
Fiduciary duties
A
- Section 228(1) – clarity for those who manage the affairs of the company.
10
Q
Statement
A
- The Codification takes the form of a Statement of Principal Fiduciary Duties of Directors. While this Statement is now the legal basis for these duties, common law and equitable cases should still be considered when applying and interpreting them – ss 227(4) and (5).
- The director has a duty to act honestly and responsibly in relation to the affairs of the company. Section 228(1): “The Director of a company shall:
a) act in good faith in what the Director considers to be in the best interests of the company;
b) act honestly and responsibly in relation to affairs of the company
c) act in accordance with the Company Constitution and exercise his powers only for the purposes allowed by law;
d) not use the company’s property, information or opportunities for his or her or anyone else’s benefit unless;
i. this is expressly permitted by the Company Constitution;
ii. the use has been approved by a resolution of the company in general meeting.
e) not agree to exercise director’s power to exercise an independent judgment unless-
i. this is expressly permitted by the Company Constitution;
ii. the case concerned is one where the Director considers in good faith that it is the interests of the company for a transaction or engagement to be entered into and carried into effect;
iii. The director agreeing to such has been approved by a resolution of the company in general meeting.
f) avoid any conflict between the Director’s duties to the company and the Director’s other (incl personal) interests unless the Director is released from this duty to the company in relation to the matter concerned whether by the Company Constitution or by a resolution of the company in general meeting;
g) exercise the skill, care and diligence which would be exercised by a reasonable person having both:
iii. the knowledge and experience that may reasonably be expected of a person in the same position as the director;
iv. the knowledge and experience that the Director has.
h) In addition to the duty under section 224 CA 2014 (to have regard to interests of employees), Directors must have regard to the interests of members.
11
Q
Case law
A
- Re W & M Roith Ltd – the controlling shareholder and director of the company entered into a service agreement with the company where after his death, his wife receives a widow’s pension for life.
o Held – void as there was no benefit or interest for the company. - The onus of proof lays on the ones who claim that directors have exercised their powers in bad faith.
12
Q
is it subjective or objective
A
- Re Smith & Fawcett – directors ‘must exercise their discretion bona fide in what they consider not what the court may consider to be in the best interests of the company ….’
12
Q
A
13
Q
No obligation to give reasons
A
- Re Dublin North Citty Milling Co. Ltd – I think the law is wise in refusing to compel directors to disclose their reasons…the law allows the directors to hold their tongues. It allows them to say that everything was done honestly and bona fide in the interests of their company…and according to my view I have no power to make them say more.”
- Although directors are not required to give reasons, their silence may lead to inference of bad faith – Clarke v Workman
14
Q
common law principles
A
To determine fiduciary duties of directors, the courts have developed principles: a) Directors must exercise their powers for a proper purpose; and b) Directors must not fetter their discretion when deciding how to act; and c) Directors must not put themselves in a position whereby their own personal interests and those of the company conflict.
15
Q
Duty to use powers for a proper use
A
- A difficulty may arise where multiple consequences for a transaction arise. As so, it is the dominant purpose of the transaction that will determine whether the powers have been exercised properly.
16
Q
acted in good faith but there was no proper reason
A
- Hogg v Cramphorn – The directors issued shares to the trustees of the employees’ pension fund to prevent a take-over bid they believed would harm the company. The shares were paid for with a loan from the company to the trustees. Despite acting in good faith, the court ruled that the directors breached their fiduciary duty to exercise power for a proper purpose, making the share allotment invalid.
17
Q
the test for determining proper use
A
- Howard Smith Ltd v Ampol Petroleum – Company A and Company B held significant shares in Company C, which needed capital. Howard Smith Ltd, with a smaller shareholding, offered a higher bid for the remaining shares. The directors of Company C allotted new shares to Howard Smith Ltd, diluting Company A and B’s holdings to ensure the takeover succeeded. Company A challenged the allotment, but the directors believed the bid was in Company C’s best interest. The court ruled the allotment invalid, finding the primary purpose was to dilute Company A and B’s stakes to facilitate the takeover, which was deemed an improper use of the directors’ powers.
o The decision was appealed to the Privy Council – decision upheld – it was held that the allotment was intra vires the company: ‘intra vires though the issue may have been, the directors’ power under this article is a fiduciary power, and it remains the case that an exercise of such a power though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was warranted.’
o The test:
1. The court must consider the dominant/substantial purpose behind the exercise of a particular power, with regard to the bona fide beliefs of the directors and their judgement in relation to matters of management.
18
Q
benefit to the director does not automatically infer improper motives
A
- Re Jermyn Turkish Baths Ltd – where directors benefit from the transaction, does not automatically give rise to an inference of improper motives. Here, an allotment of shares to the director, which gave him a majority stake was held to be vital to the survival of the company.
19
Q
Duty not to fetter their discretion
A
- The directors cannot contract with third parties as to how they vote at board meetings.
- Clarke v Workman – The chairman of a company promised to help ensure the approval of a controlling shareholding transfer to an outsider and used his casting vote to secure it. The transfer was challenged on the grounds that the board had insufficient time to consider it and had breached their fiduciary duty by restricting their discretion. The court examined the director’s intentions and perceived intentions in making the decision.
o Held: the directors must consider the interests of all shareholders, unfettered by any promise or undertaking by any intending purchaser. They must consider all offers and choose the most beneficial and desirable one. If they don’t do this, they failed in their duty to the shareholders and in the eye of the law they acted in bad faith’
20
Q
whether the fetter conferred a substantial benefit on the company
A
- Fulham Football Club v Cabra Estates plc – The Plaintiff company leased premises from D company, which applied for planning permission. They agreed that the Plaintiff would be paid to not object to the application. However, the Plaintiff later refused to support it, and the issue was whether this breached their agreement.
o Held – the plaintiff’s company was obliged to comply with the undertaking. The question should be asked whether the fetter conferred a substantial benefit on the company.
21
Q
Duty to avoid conflict of interest
A
- Aberdeen Railway Company v Blaikie Bros – the plaintiff contracted with the defendant to manufacture chairs at a certain price. Defendant sought to enforce the contract – plaintiff claimed it was not enforceable – at the time of the contract, the managing director of the defendant company was the chairman of the plaintiff’s company.
o The contract voidable – ‘it is a rule of universal application that no-one, having such duties to discharge, shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly, may conflict with the interests of those whom he is bound to protect’.
22
Q
the director benefiting from the transaction
A
- Unless the articles of association provide otherwise, a director is nor permitted to vote at board meeting concerning contracts in respect of which he is interested.
- Regal (Hastings) Ltd v Gulliver – The plaintiff company set up a subsidiary to acquire two cinemas, with 5,000 £1 shares. The directors bought 3,000 shares due to a lack of funds. Later, instead of selling the cinemas directly, both the subsidiary and parent company shares were sold, indirectly selling the cinemas. The directors made a profit from their shares, and the new owners sued the ex-directors to account for these profits.
o HoL held: The rule of equity requires that anyone in a fiduciary position who makes a profit must account for it, regardless of fraud, good faith, duty to the plaintiff, or whether the plaintiff was harmed or benefited. The liability arises solely from the fact of the profit being made, and the individual, even if honest, cannot avoid accountability.
o The directors had fiduciary duties to the company and obtained shares only by a reason that they were directors. As they made profit while exercising such duty – they were accountable for the profits which they had made – the motive was immaterial.
o The fact that they benefited from the transaction – put them in conflict of interests
o However, suggested that had the shareholders ratified the directors’ breach of duty, the decision would’ve been different: sympathy for the directors is reduced because, either before acquiring their shares or after acquiring them and before selling them, the directors could have sought a release from Regal at a General Meeting to avoid liability for any profit made from the transactions.
23
Q
director made a contract with the third party and then resigned
A
- Industrial Developments Consultants Ltd v Colley – the defendant, managing director of the plaintiff company, unsuccessfully tried to secure a contract with the Gas Board for the company. However, the Gas Board offered him the contract personally due to his experience in the gas industry. He accepted the offer, resigned citing illness, and was immediately released by the chairman. The company later sought to make him account for the profit he made, but the defendant argued that the contract information came to him personally, not as a director.
o Roskill J – information which came to him…was information which it was his duty to pass on…because between himself and the plaintiff – fiduciary relationship existed.
o He was in breach of his fiduciary duty and had to account for his profits.
o Exception – rejection of the ‘Business Chance’ by the board – where the company bona fide rejects a business opportunity, and one of the directors takes it for himself, then the director will not be liable to account for any profits made.
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Duties of care & Competence
- While directors can be held negligent for corporate mismanagement, an American Commentator states: “The search for cases in which directors have been held liable for negligence uncomplicated by self-dealing is a search for a very small number of needles in a very large haystack.”
- The reasons why negligence actions are not pursued against directors: 1) the board of directors is unlikely to bring an action against one of their own; 2) liquidators are mindful about bringing an action since the assets could be depleted by an unsuccessful litigation; 3) judges have traditionally shown a marked reluctance to condemn business decisions made without benefit of hindsight; and 4) a problem arises with establishing a standard of care, as all directors judged based on their level of expertise.
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care, skill, diligence
- Re City Equitable Fire Insurance Co. Ltd – the chairman of an insurance company misappropriated funds and concealed it by manipulating short-term investments. The other directors, trusting him, didn’t question the accounts and left investment decisions to him and the general manager. The company failed due to misapplied investments, and the liquidator sued the directors for negligence. While the directors were found negligent, they were not held liable unless their actions were wilful. The case is important for the three propositions by Romer LJ regarding directors' care, skill, and diligence.
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skill
- The test is largely subjective – the reasonable man will be judged based on that particular individual’s knowledge and expertise.
- The director’s duty, as formulated, imposes little responsibility on unskilled directors, who may avoid liability unless gross negligence occurs. However, directors with specific skills, or those who claim to have them, must use that skill in decision-making. Failing to do so may make them liable for negligence, regardless of whether they are executive or non-executive directors.
- Dorchester Finance Co. Ltd v Stebbing – three directors of a moneylending company, including Stebbing (executive) and two non-executive directors with accounting expertise, failed to hold board meetings and left management to Stebbing. He used blank cheques for transactions outside the company’s licensed terms, causing irrecoverable losses. The court ruled that all directors must exercise their skills, not just executive ones, and found all three liable for negligence (all of them were qualified accountants).
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diligence
- A director is not bound to give a contentious attention to the affairs of the company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend, whenever, in the circumstances, he is reasonably able to do so.
- Jackson v Munster Bank Ltd ex parte Dease – a director was successfully sued negligence. He was put on notice of the fraudulent misappropriation of the property of the bank, it was his duty to attend those meeting and enquire into the matter. Because he had not done so – he was liable for the losses.
- Directors who attend the meetings but don’t pay attention, cannot escape liability by claiming that they have attended. The director who rubber-stamps a recommendation by the chairman is in a riskier position than the person who does not attend at all.
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Delegation
- Romer LJ – “In respect of all duties that, having regard to the exigencies of business and the Articles of Association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”
- While delegation is permissible, one should not delegate all the responsibilities.
- Re Hunting Lodges Ltd – the wife of the executive director got appointed as a non-executive director, although she did not pay any real role in the day-to-day management of the company. To avoid liability, she claimed that any business that she did undertake, was based on the instruction from her husband.
o Caroll J – a person who ‘abdicates al responsibility is not to be lightly excused’.
o Cannot abdicate duties
Securing the Assets of directors
- The court may on the application of an officer of a company or Director of Corporate Enforcement order a director not to remove his assets from the State if the court is satisfied that the applicant has a substantive civil cause of action or the right to seek a declaration of personal liability or claim for damage against a director and there are no grounds for believing that the respondent may remove those assets.
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Disclosure & Transaction duties
- Section 231 – statutory duties imposed on directors which are primarily focused on director’s dealings with the company in a personal capacity and which supplement the above fiduciary duties.
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To whom the duties are owed
- The corollary principle of separate legal personality – the directors owe duty only to the company – this was upheld in Circuit Systems Limited v Zuken-Redac (UK) Ltd
- Dawson International plc v Coats Paton plc – directors owe fiduciary duties to the company, not directly to shareholders, as they are the company's agents, and their duty is to act in the company's best interests. What benefits current shareholders selling their shares may not align with the company's interests, and creating parallel duties could lead to conflicts.
- While directors owe a duty to the company, they sometimes extend the duty to individual shareholders, employees, and creditors.
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Individual shareholders
- Crindle Investments, Roche and Roche v Wymes & Wood – If a director puts himself in a position whereby, they have undertaken some additional obligation to act on behalf of the shareholder – the courts will impute a fiduciary duty.
- Allen v Hyatt – the directors negotiated a merger and obtained options to purchase shares at par value, misleading the shareholders by not disclosing they could resell at a profit. The court ruled that the directors, acting as agents of the shareholders, had to account for the profit. A similar approach may be applied in Irish law, especially where shareholders are given insufficient or inaccurate information about a takeover.
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Employees
- Parke v The Daily News Ltd – the directors do not owe a fiduciary duty to employees. Here, the court struck down an agreement for ex gratia payments to employees, as it didn't benefit the company financially. However, Section 52 of the Companies Act 1990 requires directors to consider employees' interests, though the duty remains owed to the company and can only be enforced by the company itself.
33
Creditors
- No duty, unless the company is insolvent.
- Kinsella v Russell Kinsella Property Ltd – a company facing imminent collapse granted a lease to two directors at an undervalue, without a rent review clause, and included an option to purchase at below market price. The lease was approved by the company in a general meeting. After the company went into liquidation, the liquidator sought to have the transaction set aside, claiming it breached the directors' duties.
o Street CJ – ‘…but where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and the directors to deal with the company's assets.’
While shareholders could ratify a breach of duty which affected their interests, where: ‘Once it is accepted, as in my view it must be, that the directors' duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors ... the shareholders do not have the power or authority to absolve the directors from that breach.’
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irish case
- Parkes v HSBC – Irish case – whether the fact a company was insolvent meant that a disposition of its assets from that company to another company was unlawful. Blayney J observed, quoting Street CJ, that directors of insolvent companies do owe duties to the creditors. In this case, there was no evidence that the director knew of the company’s insolvency.
o Courtney observes that this decision: ‘marked a novel departure in company law, since it represented the first inroad in Irish common law corporate jurisprudence to the general principle that officers' duties are only owed to their company.’
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once it is clear that it will be wound up - duty to the creditors
- Re Frederick Inns – a group of nine companies owed the Revenue Commissioners, and three companies owned pubs that were sold to pay off the group’s debts. When the three companies went into liquidation, the liquidators sought to recover proceeds used to pay debts of the other six companies, challenging the payments on several grounds:
o 1. the payments...were misapplications of the respective companies assets because they were made when the companies were insolvent and the payments were in disregard of the rights and interest of the general creditors;
o 2. the payments...were made by the authority of the directors of the respective companies in breach of the duty which the company and the directors owed to the general creditors of these insolvent companies; and
o 3. Once the company had to be wound up and its assets applied...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.
o HC – the payments were made in breach of the duty owed to the creditors, and went beyond what they owed were considered voluntary, unapproved payments to third parties without any corresponding benefit or legal obligation – ultra vires.
o SC – as soon as a winding-up order has been made the company ceases to be the beneficial owner of its assets, with the result that the directors no longer have power to dispose of them ... Once the company clearly had to be wound up and its 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 a
o t least not to dissipate them.
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