Flashcards in Directors' Duties s174-s180 Deck (67):
The duty of care, skill and diligence contained in s174 was inspired by which offence?
Wrongful trading (s214(4) IA 1986)
How is the duty of care, skill and diligence measured?
1. Objective element looking at the care, skill and diligence of the reasonable director;
2. Subjective element looking at the actual director in question's knowledge and experience.
How do the two elements of the duty of care, skill and diligence interact?
The objective element sets the basic standard while the subjective element acts to raise the standard if the director in question has more knowledge and experience. The subjective element will never allow the standard to fall below the objective standard of the reasonable director.
How were two non-executive directors found to be negligent in Dorchester Finance v Stebbings?
A director signed two blank cheques handed to him by the two non-executives who used them to misappropriate funds.
How was the director found negligent in Re D'Jan of London Ltd?
He didn't check the renewal insurance form before signing it, which was void due to inaccuracies and the company was uninsured when it set fire.
Which judge and in which case accepted counsel's argument that the test for wrongful trading in s214(4) IA 1986 should apply to s174?
Lord Hoffman in Norman v Theodore Goddard.
Is the duty under s174 held individually or collectively?
Which case tells us that directors must have sufficient knowledge and keep up-to-date with their business?
Re Brian D Pearson (Contractors) Ltd and Re Barings plc No 5.
Which case tells us that directors must supervise one another?
Re Westmid Packing Services Ltd
Which case tells us that inactivity is unacceptable to comply with the duty under s174?
Re Peppermint Park Ltd
Does the duty of skill, care and diligence derive from common law or equity?
What is the difficulty with claiming under s174?
It's difficult to prove that the director's negligence was the cause for loss.
What is the difference between the fiduciary duties and the duty of skill, care and diligence?
The duty of skill, care and diligence is based in tort of negligence (per Millett LJ in Bristol v Mothew).
Which two equitable rules make up the the duty to avoid conflicts of interest in s175?
What is the conflict between the company and the director otherwise known as? Why is this conflict not covered in s175?
The conflict between the company and director is better known as the 'self-dealing rule' and is codified under s177. Section 175(3) explicitly states that s175 does not apply to this section. This is because it has been hived off into s177.
In which case did Millett LJ describe the fiduciary duties as one of 'loyalty'?
Bristol and West Building Society v Mothew
In which case did Lord Herschell give the classic formulation of the no-conflict rules as an 'inflexible rule'?
Bray v Ford
From which case and which judgment has s175(4)(a) taken up the need for a 'real sensible possibility of conflict' before the court can hold that there is indeed a conflict of interest?
Lord Upjohn's dissenting judgment in Boardman v Phipps.
What does s175(4)(b) allow for if there is a conflict of interest?
The non-interested directors of the board may authorise the conflict.
Is there conflict and liability still if the company cannot take up the opportunity?
Yes (Regal v Gulliver and s175(2)).
According to Regal v Gulliver does it make a difference whether the directors act in good faith if there is a conflict of interest?
What is the situation if a director profits from a conflict of interest?
He holds on constructive trust for the company.
If non-interested directors wishes to authorise a conflict of interests does there need to be a provision in the articles allowing them?
In the case of a public company, yes (s175(5)(b)), but in the case of a private company the non-interested directors may authorise unless the constitution expressly prohibits it (s175(5)(a)).
Is it possible to hold multiple directorships and not have a conflict of duties?
Theoretically yes (London Mashonaland v New Mashonaland confirmed in Bell v Lever Bros) but practically no (per Millett LJ in Bristol v Mothew and per Sedley LJ in In Group Plus Ltd v Pyke). Section 175(7) allows multiple directorships but they must be authorised (s175(5)).
Is it possible to take up a corporate opportunity which the company will not take up?
No, even if the company will not take up the opportunity it will still belong to the company (Bhullar v Bhullar).
Does resigning from your post as director nullify any interest in the company and permit the director to take up a corporate opportunity which the company could not have obtained?
No, even when you resign you are not permitted to take up a maturing business opportunity which belongs to the company even if that company is not actually going to be able to take up that opportunity (s170(2) and IDC v Cooley).
What did Rix LJ say in Foster v Bryant, following CMS Dolphin v Simonet, must exist for a resigned director to be liable for taking up an opportunity?
There must be a link between the resignation and the opportunity.
In which case did Falconer J say that prohibiting directors from taking preliminary steps to compete with their company would be burdensome on trade?
Balson Ltd v Headline Filters Ltd
In which case did Blackburne J say that the director does not have the obligation to disclose he is taking preliminary steps to compete with his company?
Framlington Group plc v Anderson
Is a director permitted to use information or 'know-how' which he as acquired during work for the company for his own business endeavours?
Yes, but he is not allowed to utilise trade secrets (Dranez Anstalt v Hayek and FSS Travel and Leisure Systems Ltd v Johnson).
In which case does Lord Cranworth give the classic formulation of self-dealing?
Aberdeen Rly Co v Blaikie Bros
What was the conflict of interest in Aberdeen Rly Co v Blaikie Bros?
Mr. Blaikie was director of Aberdeen Rly and partner in Blaikie Bros. He set up the purchase of chairs from Blaikie Bros to Aberdeen Rly. His interest as director of Aberdeen Rly would mean he would want to secure lowest price possible while his interest as partner of Blaikie Bros would lead in the opposite direction.
In which case did Megarry VC say that a sale made by self-dealing is voidable however fair the transaction?
Tito v Waddell (No 2)
There are two provisions relating to self-dealing. Which are they and why are there two?
1. Section 177 applies to transactions which have not yet been entered into. These transactions are voidable.
2. Section 182 applies to transaction which have been entered into already. This is a criminal offence and the contract is no longer voidable because of third party rights.
In which case did Lord Upjohn say self-dealing conflicts could be permitted if the board were made aware? Why did he say this?
In Boulting v Association of Cinematograph Television Lord Upjohn outlined how directors in positions of conflict could 'give their services to both sides and serve two masters to the great advantage of both.'
According to the common law to have a conflict of interest ratified by the board is formal disclosure required?
No formal disclosure is required if all relevant parties are made known (Lee Panavision v Lee Lighting, Runciman v Walter Runciman Ltd and McPherson v European Strategic Bureau Ltd), but if the board only have general knowledge that a colleague is in conflict this will not be enough (Gwembe Valley Development v Koshy), and if there is only one sole director then a formal record should be made in the minutes (Neptune v Fitzgerald).
According to CA 2006 is formal disclosure required if other directors are aware or ought reasonably to be aware of their colleague's actual or potential conflict of interest?
No (s177(6)(b) and s182(6)(b)). This includes where there is only one director.
What is the duty under s176?
The duty not to accept benefits from third parties for the reason of being a director or doing or refraining from doing an act as a director.
What is the meaning of 'benefit' in relation to s176 and where do we get it from?
'Benefit' may include a benefit of any description, even non-financial. This is not defined in the CA 2006 but is evident from the Parliamentary debate and Bill (Lord Goldsmith Committee).
What is the meaning of a third party in relation to s176?
Anyone except the company, its holding company and subsidiaries (s176(2)).
Is it possible to ratify or authorise a benefit taken by a director from a third party?
Yes, but only the members may ratify (s180(4)).
What are the remedies for a breach of duty under ss171-177?
The same as under the common law or equitable rules (s178(1)) ie profits must be disgorged and held on constructive trust.
Which specific transactions in relation to directors require the approval of members?
1. Long-term service contracts (s188);
2. Substantial property transactions (s190);
3. Loans or quasi-loans (ss197-214);
4. Payments for loss of office (ss215-222).
How long is a long-term service contract?
More than two years.
What happens to a long-term service contract if it has not been authorised by members?
It is deemed void and may be terminated by giving reasonable notice (s189).
What kind of resolution must be passed to authorise a long-term service contract?
If the long-term service contract is between a director and a subsidiary company who must pass the resolution to authorise the contract?
Both the parent and the subsidiary (s218(3)).
What is the definition of a substantial property transaction?
The property (a) exceeds £100k or (b) is not below £5k and is more than 10% of the company's assets (s191(2)).
Is it possible for a director to enter into a contract to purchase or sell a substantial property without member approval?
Yes, a contract may entered on the condition that it will be authorised by members (s190(2) and (3)).
Who else does the provision on substantial property transactions (s190) and loans and quasi-loans (ss197-8) apply to other than the directors?
Connected persons (s252) eg family members, companies which the directors or connected persons owns 20%, trustees, or partners of the director.
In what situations will a substantial property transaction not required formal consent?
Unanimous informal consent (NBH Ltd v Hoare).
In what situations will a substantial property transaction not be voidable if entered into and no authorisation has been given?
Section 195 states transactions are voidable unless:
1. Restitution is impossible;
2. Bona fide purchaser for value without notice;
3. Company is indemnified;
4. Retrospective approval.
In Re Duckwari plc (No 1), the director sold land to the company for market value of £495k. The directors approved but the shareholders had not. The price of the property fell to £177,970. How much was the director liable for?
The director was liable for the entire sum for which the property was paid (£495k) and not the difference.
The rules regarding loans, quasi-loans, credit transactions, and guarantees differ between private and public companies. Public companies are not allowed to take part in any without authorisation. Which are private companies not allowed to take part in without authorisation?
Loans or guarantees (s197).
What happens to a loan etc given to a director in breach?
It is voidable (s213) and the director who received the benefit as well as the directors who approved the arrangement must indemnify the company. The director who received the benefit must also account for any gain (s213(3)).
When will a loan etc not be voidable?
Restitution is impossible, the company has indemnity or third party rights will be infringed (s213(2)).
What happens to payments for loss of office made without prior approval from members?
The payment is held on constructive trust (s222(1)(a))
Who is liable for any payments for loss of office made in breach?
Any director who authorises payment is jointly and severally liable (s222(1)(b)).
Do payments to connected persons fall under the provisions for payments of loss of office?
Are payments made other than in cash also caught under the provisions governing payments for loss of office?
If a director has a service contract and is removed from office before the end of his fixed term by the company is he entitled to compensation despite no express provision in the contract?
Yes, the court will imply a right to sue for damages (Shindler v Northern Raincoat Co Ltd)
If a director does not have a service contract but is appointed through the articles is the director entitled to compensation if removed before the end of his contract?
No, the court will not imply a right to sue for damages in the articles (Read v Astoria Garage).
In Shuttleworth v Cox Bros the articles stated there were only six ways a director could be removed. Could the members add a seventh reasons and then remove a director without compensating him?
When is the court able to give relief from liability to a director?
The court can give relief under s1157 CA 2006 if the director has been negligence, is in default, or in breach of duty or trust where the director has acted honestly and reasonably. The court will have regard to all the circumstances of the case.
Is a director able to get relief from the court when he has benefited from his breach of duty?
Very unlikely (Re Marini Ltd).
How is it possible for a director to be negligent and reasonable?
Lord Hoffmann said in Re D'Jan Ltd the director's omission in checking the company's fire insurance policy could happen to any business man and as the director was 99% shareholder he was really the only person affected by his negligence.