company directors

ASSESSED ESSAY

A) What is the standard of skill and care expected of a company director? Should Brian attend all board meetings to avoid being in breach of these duties?

The standard of care and skill expected of a company director

It is the duty of a director to exercise a degree of skill and care in his performance of duties. Failure to comply leads to a charge of negligence. The degree of skill varies with company size and complexity, because directors in charge of small business’s position differ from multi-national companies. Both should act in good faith and put company interest first. This duty is described as ‘the care and skill that an ordinary man might expect to make in the circumstances’

An important case related is shown in:

RE CITY EQUITABLE FIRE INSURANCE (1925)

The directors entrusted company investments to its managing director, Bevan, who was a senior partner in a firm of brokers which handled company investments. £1 200 000 was lost due to Bevans fraud and incompetence, including £350 000 left with stockbrokers. The directors never enquired how these items were made up so were held in breach of duty of care i.e. negligent.

Due to this the measure of care and skill was laid down by Romer J:

A director need not show a greater degree of skill and knowledge than he has for the job.

This tells us directors have to run a company based on their skill and knowledge and need not be experts. They cannot be punished due to lack of knowledge. Brett L.J stated in

LAGUNAS NITRATE CO V LAGUNAS NITRATE SYNDICATES that:

‘A director must be guilty of negligence as would make liable an action. Mere imprudence or want of judgement is not negligence. It must be negligence that makes man liable in point of law’

This is seen in:

RE BRAZILIAN RUBBER PLANTATIONS AND ESTATES LTD (1911) CH 425

A rubber company made serious losses in Brazil as directors had limited knowledge and skill. They were sued for negligence.

Held: The directors did not have required skill and knowledge so cannot be sued as their actions were in company interest despite not having proper knowledge and skill.

A director does not have to give continuous attention to company affairs. He should perform duties at board meetings. He should attend when able but is not bound to all.
A director in the absence for grounds of suspicion can trust his official to perform his duties if he cannot perform them himself.

DOVEY V COREY (1901) AC 477

The director escaped liability for malpractice as he relied on information given by the chairman and general manager of the company.

Held: ‘The reliance on the chairman and manager was reasonable and so was not negligent.’ Now directors must monitor performance of delegated duties and be informed of company business E.G.

RE BARINGS PLC (2000)

Held: Exercise of the power of delegation does not stop a director supervising the discharge of delegated functions and enabling directors to have sufficient business knowledge and skill to properly perform their duties.

There are general standards required from executive and non-executive directors. Greater degree of skill and commitment is required from an executive director. A director is not liable for wrongful acts of his co-ordinators if he has no knowledge, but if board meetings are missed is held liable for their actions. In Romer J’s 2nd rule on attending board meetings, executive directors have greater emphasis to attend but non executives do not need to give up much time. If executive directors miss board meetings continually for 6 months they can be dismissed.

Proposed Reform

Reform has occurred in the ...

This is a preview of the whole essay

Proposed Reform

Reform has occurred in the subjective standard of care and skill required of directors in RE EQUITABLE FIRE INSURANCE CO. LTD as it is now seen as too lenient. A two fold standard has been set as shown in:

NORMAN V THEODORE GODDARD (1991)

A director relying on a solicitor giving information is reasonable. The solicitor was a partner in a firm, who acted for the company but misappropriated the company’s money. Hoffman J said ‘A director should have the skill that may reasonably be expected from a person undertaking those duties.’

The test suggested is subjective and objective.

OBJECTIVE= if director shows skill and knowledge of reasonable man

SUBJECTIVE= if director shows skill and knowledge.

The law commission stated the two fold test is used here as the standard of directors duties. The commission states:

A directors duty of skill and care is set out in statute
The standard is judged by two fold test and
This should be done according to company circumstance and particular director.

Should Brian attend all board meetings to avoid being in breach of his duties

Brian my advice to you as director of Gotham motors ltd is to show standard of care and skill to the best of your ability according to the reasonable man. You must commit to this company as if it is a fulltime job as you are an executive director. On the matter of attending board meetings you must attend whenever you possibly can but there is no need to attend every one. If you cannot attend you can find a suitable replacement to perform your duties for you, but you are responsible for their actions.

B) Advise Brian that he is under a fiduciary duty to avoid a conflict between his duty as a director and his own personal interests.

Explain to Brian what this means

Fiduciary duty to avoid conflict of interest

‘Fiduciary duties are duties of good faith in which directors’ act in utmost good faith when dealing with a company.’ Their duties should benefit the company and not cause harm to its interests. As a director it is allowed to make profit but not secret profits. ‘The more serious a conflict is; the less likely the courts are to permit company majority to ratify directors actions, particularly when there is dissenting majority.’ Directors act collectively through board meetings and decisions, but good faith is held individually so even though they act on company behalf they are still responsible for individual decisions. They must exercise powers for given purpose and not misuse for personal gain, as this leads to breach of duty. They must ensure their duties do not conflict with personal interest so should not involve company in transactions they will personally benefit from such as:

TRANSVAAL LANDS CO V NEW BELGIUM LAND AND DEVELOPMENT CO (1914)

Company A and company B entered in a contract. One director in A held shares in B on trust for somebody. It was held that the contract was invalid because of conflict of interest as director and trustee.

THE CORPORATE OPPORTUNITY DOCTRINE

This rule states no director must secretly profit from a company personally from corporate information or opportunity that comes their way in office. They must use all opportunities for company benefit and if used for personal benefit to make secret profits they must render the profit accounts to the company as are in breach of fiduciary duty.

A director must not misuse this information as seen in

REGAL HASTINGS LTD V GULLIVER (1942) ALL ER.378

A company which owned a cinema in Hastings wanted to buy two more to sell three together. It formed a subsidiary company to purchase them but could only come up with £2000 out of £5000. The directors bought shares in the subsidiary company to obtain necessary capital. They bought the two cinemas and Regal ltd shares and sold the subsidiary for a large profit.

Held: The directors must account to Regal company for the profit they made as only through knowledge and opportunity gained as directors they obtained the shares, so are in breach of duty.

A director who obtains a contract whilst employed must render profits to company even if it was unlikely to gain it as shown in:

INDUSTRIAL DEVELOPMENT CONSULTANTS LTD V COOLEY (1972) 1 WLR 443

In this case IDC ltd provided construction consultancy services for gas boards. Its managing director was Cooley. Cooley was informed that it was unlikely IDC would get the contract. He realised he could obtain it for himself and retired from IDC through illness. He obtained the contract for himself but was sued by IDC ltd and it was held that Cooley must account for the profits he made because he was aware of this opportunity as he was director of IDC ltd.

This occurred in:

CANADIAN AERO SERVICE LTD V O’MALLEY (1973) 40 DLR371

O and Z were directors of a plaintiff company. They were sent to Guyana by the company to negotiate a contract with the government. It became certain the company would receive the contract so both directors resigned and formed their own company. This new company was awarded the contract. The directors were in breach of their duty and liable to account.

There are cases which directors cannot be held in breach of duty after obtaining a contract. This is exception to the corporate opportunity doctrine as the contract is brought to the board’s attention. They fail to take it up and, if the director pursues the contract and makes profit it is not breach of duty as shown in:

PESO SILVER MINES V CROPPER (1966) 58 DLR 1

Peso silver mines was offered claims by the director but rejected it. The director resigned and formed his own company which bought the claim. A director of Peso became a shareholder in the new company and made large profits. He was sued by Peso for accounts but was rejected as Peso was told about the opportunity but refused to take up the idea.

The case of

ISLAND EXPORT FINANCE LTD V UMUNNA (1986) BCLC 460

The defendant was managing director of a plaintiff company who secured a contract for postal caller boxes for his company in Cameroon. The company did not proceed with it so he resigned. The defendant obtained two contracts for his company. It was held he was not in breach of duty and could not be restrained from using expertise and knowledge in exploiting a market as the company refused when offered contract.

ADVISE TO BRIAN ON HIS FIDUCIARY DUTY TO THE COMPANY

My advice to you Brian is that as director of Gotham Motors ltd and owning your own business this can easily lead to breach of duties. As a director you must conduct business duties in good faith and company benefit. You cannot abuse your power in office or put your interests before the company’s. You must not allot shares in an unfair way that will affect company running. You cannot personally profit from information, if against company benefit, you will have to render accounts of the profits to the company. This is a serious crime as you are acting in breach of your fiduciary duties and can lead to dismissal or fine. Where the articles provide that the rule will not apply CA 1985 you must first disclose your interest to the board of directors and tell them you are a sole trader dealing in cars. If you disclose opportunities to the company and they refuse, you will not be in breach of duty if you personally take it up and make profit as long as your departure is not motivated by your pursuit of a contract.

C) If Brian thinks that there maybe a conflict of interest between his interests as a sole trader and his interests as a company director of Gotham motors Ltd what steps should he take to inform Gotham Motors Ltd of this?

A director cannot make a contract with a company if his personal interests might conflict with company duties. This is voidable at the company’s option. This is explained in:

ABERDEEN RAILWAY CO V BLAIKIE BROS (1854) 1 MACQ 461

A railway company entered into a contract with a firm for the supply of goods. The company’s chairman was, at the time of making the contract also the firms managing partner. Held: The company was not bound by the contract.

DISCLOSURE OF INTEREST UNDER CA 1985 s317

The articles provide that a director may enter or have interest in a contract with a company (Article 85).

Section 317 tells us a director interested in company contract must disclose at first board meeting. ‘They specify that a director interested in the contract cannot vote as it will not count in the quorum present (Articles 94, 95).’ If the director becomes interested at a later date he must disclose his interest at the next board meeting.

A director may give notice to the board that he has interest in a contract made with a firm. Notice must be given or read at the next board meeting (Section 317).

A shadow director must declare notice to directors not a board meeting which is either:

A specific notice given before the meeting ; or

A general notice which is a sufficient declaration of interest.

Failure to comply with section 317 leads to a fine and assumption of conflict of interest.

Interest is normally declared at a board meeting but informal disclosure can be made. This means declaration not needed at board meeting if all directors aware as shown:

RUNCIMAN V WALTER RUNCIMAN PLC (1992) BCLC 1084

The plaintiff was unfairly dismissed from office and sued for damages. The company wanted to reduce pay owed to him as the contract of the plaintiff had been extended without him disclosing his interest to the board of directors so argued the contract is void. Held: The plaintiff made it clear to everyone about his interest in his contract so there was no need of declaration.

Section 317 points out ‘no disclosure to sub-committee needed’ as seen:

GUINESS PLC V SAUNDERS

A committee of Guiness plc agreed to pay Saunders, £5.2 million in connection with a takeover bid made by Guiness. Held: As payment not approved by the board of directors, Saunders not entitled to retain payment.

Conflict of interest can occur with one director.

NEPTUNE (VEHICLE WASHING EQUIPMENT) LTD V FITZGERALD (1966)

The director failed to act in company interest when he never informed other directors of the facts concerning development of land owned by the company which he then purchased before selling it at profit.

Where a company has only one director, it has been held that interest in a meeting is recorded even if attended alone.

ADVISE TO BRIAN ON CONFLICT OF INTEREST

Brian if you think conflict of interest will occur between your car business and Gotham Motors Ltd, avoid this as it conflicts against your duty as a director. It is allowable for you to take shares in Gotham ltd but one factor you have to take into account to avoid conflict of interest is that you have to tell the board of directors that you are a sole trader dealing with cars. Failure to disclose will lead to a fine and assumption of conflict of interest as he has gone against Sec 317. If you disclose to directors informally, no declaration at a meeting is needed.

BIBLIOGRAPHY

BOOKS USED

Dine, Janet

Company law 5th edition (2005)

(Palgrave Macmillan)

Thomas, Colin

Company law 5th edition (1996)

(Stodder and Houghton)

WEBSITES USED