Directors' duties Flashcards
(17 cards)
what duty underpins D’s duties?
D owes a fiduciary duty.
The fiduciary duties were largely codified in CA 2006 (i.e. the below statutory duties.
Key principles underpinning the statutory duties:
o No conflict principle
o No profit principle
o Duty of confidentiality
which Ds owe a duty and to who? What is the effect of this?
all Ds (inc. shadow Ds and de facto Ds) owe these duties
The duties are owed to the company. Therefore, only the company can enforce them (i.e. not SHs or creditors)
explain shadow Ds and de facto Ds
Shadow director = a person whose directions/instructions the BOD has become accustomed to follow (generally not inc. the BOD relying professional advice)
De facto director = a person who has assumed responsibility to act as a D, but has never actually or validly been appointed
can these duties be disapplied?
no
what are the statutory duties?
- Duty to act within their powers (s171 CA 2006)
- Duty to promote the success of the company (172 CA 2006)
- Duty to exercise independent judgement (173 CA 2006)
- Duty to take reasonable care, skill and diligence (174 CA 2006)
- Duty to avoid conflicts of interest (s175 CA 2006)
- Duty to not accept benefits from third parties
- Duty to declare interests
explain D’s duty to act within their powers (s171), inc:
- limbs
- how the court assess this
- D must act in accordance with the company’s constitution +
o Constitution inc. any resolution, decision AAs etc - Ds must only exercise powers for the purpose for which they are conferred
re: ‘duty to act for a proper purpose’. The court must identify:
The power in question + the reason D was given the power
Why D exercised the power + if they did so in accordance with its purpose
explain D’s duty to promote the success of the company (s172), inc:
- explanation
- additional considerations
- how the court assesses this
Ds must act in good faith in a way they believe would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to:
o Likely long-term consequences
o Employee’s interests
o Need to foster good relationships (inc. suppliers, customers etc)
o Impact on the community and environment
o Maintaining high standards
o Need to act fairly between SHs
o Other matters (i.e. above is non-exhaustive. Other things (i.e. profitability) might be important to consider)
‘good faith’ = subjective. Q is ‘did D honestly believe their act was in the interests of the company?
‘have regard’ = Ds need to show they have considered these factors. If the decision would have a negative impact (i.e. on the environment), they doesn’t necessarily stop them from proceeding (i.e. it will increase profit/jobs)
how does the duty owed to promote the success of the company change when the company is insolvent (or nearly insolvent)?
Ds have a duty to take creditors’ interests into account
explain D’s duty to exercise independent judgement (s173), inc:
- when they will not be in breach of this duty
= Ds must act independently but will not breach this duty if they are acting:
1. In accordance with an agreement entered into by the company; or
2. In a way authorised by the company’s constitution
explain D’s duty to take reasonable care, skill and diligence (s174), inc:
- how the court assesses this
Two limbs to this duty. D must act with the level of care expected of someone with:
1. The general knowledge, skill and experience expected of a D +
o Objective. Minimum standard for a D.
- The actual knowledge, skill and experience the D has
o Subjective. Considers D’s specialist knowledge e.g. D is an accountant = they are held to the minimum D standard + the knowledge they have as an accountant
explain D’s duty to avoid conflicts (s175), inc:
- when the duty won’t be infringed
Ds must avoid situation in which they have a direct or indirect interest which conflicts with the company’s interests. The duty is not infringed if:
o The situation could not reasonably be regarded as likely to give rise to a COI; or
o It has been authorised by the BOD (i.e. OR)
Indirect inc. interest of another person
when does the duty to avoid conflicts of interest (s175) apply and not apply?
Applies to property, information or opportunity + irrelevant if the company could have taken advantage of it and chose not to
This does not apply to transactions/arrangements with the company - that would be s177 or s182. Key feature of s175 is that the company is not party to the transaction
explain D’s duty not to accept benefits from 3rd parties (s176), inc:
- when this will not be infringed
D must not accept a benefit from a 3rd party that is conferred because they are a D or anything they have (or haven’t done) as a D
Duty not infringed if acceptance of the benefit cannot reasonably be regarded as a COI i.e. standard corporate hospitality, but if this was given whilst negotiating a deal it likely would be a COI
explain D’s duty to declare interests (s177 + s182), inc:
- when D doesn’t need to declare
- extent of the declaration
- effect if D fails to declare
A D directly/indirectly interested in a proposed or existing transaction/arrangement with the company has a duty to declare the nature and extent of the interest, unless:
o D is a sole director
o D wasn’t aware of the interest and/or transaction (objective - should D have been reasonably aware?)
o The BOD were already aware or ought to have known (same objective test)
o The interest cannot reasonably be regarded as likely to give rise to a COI
o It concerns the terms of D’s service contract
D must explain nature + extent of interest (not enough to state they have an interest).
Failure to declare does not affect the validity of the transaction
when must D make a s177 declaration and how? What must D of if the subject matter of the declaration changes?
D must make the declaration before the transaction.
Declaration can be made at BM, in writing or by general notice
If the interest changes pre-transaction, D must update the s177 declaration.
If the interest changes post-transaction, then D should make a s182 declaration
when and how must D make a s182 declaration?
declaration must be made as soon as reasonably practicable
Declaration must be made at BM, in writing or by general notice
explain the relationship between the MAs and duty to declare
Under the MAs, D will not count for quorum or voting purposes in transactions they have an interest in. This can be disapplied by OR but s177 + s182 cannot.
