S173 requires a director to exercise independent judgement. However it recognises that the director’s discretion may be limited if they act in accordance with an agreement which has been entered into by the company or in a way authorised by the company’s constitution. This duty codifies the general duty that a director must not fetter their discretion as demonstrated in the case of Kuwait Asia Bank EC-v- National Mutual Life Nominees Ltd [1991] 1 AC where the judicial committee argued ‘ in the performance of their duties as directors...the nominee directors were bound to ignore the interest of their employer, the bank’. This therefore supports the view that the director must exercise independent judgement therefore restating the existing principles. By allowing the possibility of limiting or fettering the director’s discretion to act or to take decisions, the CA2006 imports from decided cases the commercial reality that recognises that it may be appropriate for directors to bind the company to a certain course of future conduct.
The duty of care and skill is provided in the S174 CA 2006. It is provided that a director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with:
- The general knowledge, skill and experience that may be reasonably be expected of a person carrying out the functions carried out by the director; and
- The general knowledge, skill and experience that the director has.
The above is required for an objective standard but one raised by the actual knowledge, skill and experience of a particular director if this is greater.
Chuah, J (2007) points out that this very verbose provision in the act recognises the shift in the common law from a purely subjective test (whereby the directors competence and ability are measured based on a person with his knowledge and experience) to a more objective one. The more objective test is one that has its genesis in S214 Insolvency Act 1986. It requires that the director is tested against an objective standard, namely, what we can expect from a person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as the director, in relation to the company. The final report recognised that what ‘most people would regard as reasonable standards’ could be seen as ‘impractical and onerous’.
The common law duty was set out in Re City Equitable Fie and Insurance Co Ltd (1925) Ch 407. In what become the classic explanation of director’s duties of care and skill. Where a close examination of the judgement reveals a degree of objectivity in the standards plus a subjective standard.
The most concerning limitation of the subjective test is that it exonerates the incompetent but honest director from his actions on the basis that he can do no better. It is maybe viable to say that the CA 2006 helped solve this ‘defect in the present law’ and furthermore clarified it.
In order to restrict the potential abuse of power within the corporation, directors in exercising their powers are subject to a number of controls and restrictions imposed by statute, common law and equity. In law directors are fiduciaries and agree to undertake to act for, or on behalf of the company where they have been appointed. Fiduciary duties can be seen to be an umbrella term to cover many aspects of director’s duties in common law. It can now be argued that at times this can be seen as unclear therefore the introduction of the CA 2006 can be said to bring greater clarity as it breaks down all the duties separately.
A key principle applicable to anyone in a fiduciary position is that a director must avoid actual or possible conflicts of interests or duties. The case of Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461 where it was classically stated in the following terms, ‘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’.
CA 2006 S175 (1) accurately reflects the dictum above and codifies an approach long held at common law. Jason points out a very important issue that under common law, a conflict of interest caused by the director can only be excused or approved by the shareholders unless there are other procedures provided for in the articles of association (add case). However the new law thus makes it less onerous for directors seeking the conflict of interest to be authorised. S172 provides that a conflict may be authorised either by the members or by the directors. This can be seen to be a very radical structural change. Furthermore this can be said to clarify the law.
The CA 2006, S176 seeks to codify the common law rule, not to except benefits from third parties, which renders a director accountable for any benefit obtained by the virtue of his position.This duty derives from the common law concepts dealing with conflict of interest and creates a new specific duty. The common law duty was shown in the case of Regal (Hastings) Ltd-v- Gulliver [1942] 1 ALL ER 378 where it was held that, even if the director ‘s profit would not have accrued to the company, he must still account for it if the opportunity to make it arose though directorship. It can now therefore be argued that S176 has simply restated the law.
S177 state that a director must disclose any interest, direct or indirect, that he has in relation to a proposed transaction or arrangement with the company to the other director’s. Furthermore he must declare the extent of his interest to other directors at a meeting of the directors or by notice to all the directors either by notice in writing or by a general meeting. This has merely affirmed the common law position as demonstrated in the case of Aberdeen where the company was not bound by the transaction as the director did not disclose his interest.
In conclusion Chuah, J (2007) states that some have argued that a statue-based law reduces the necessary flexibility so effective in case law. However on the other hand the company law review however took the view that codification provides clarity on what is expected of directors and make the law more accessible. In addition it could be argued that the changes are not radical enough and there is little distinction between the new law and common law position. However chuah, J (2005) believes that the new regime does require certain significant adjustment to current practice and it is important to consider the wider and more policy-orientated approach to the evaluation of director’s duties.
Word Count: 2198
Bibliography
Cases
Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461
Bishopsgate Investment Managed Ltd (In liquidation)-v- Maxwell (no1) [1993] B.C.C. 120
Fulham Football Club Lt-v- Cabra Estates Plc [1994] 1 B.C.L.C 363
Kuwait Asia Bank EC-v- National Mutual Life Nominees Ltd [1991] 1 AC
Lee-v-Chou Wen Hsien [1984] 1 W.L.R 1202
Percival -v-Wright (1902) 2 Ch 421
Re City Equitable Fie and Insurance Co Ltd (1925) Ch 407
Regal (Hastings) Ltd-v- Gulliver [1942] 1 ALL ER 378
Hogg-v- Cramphorn [1967] Ch 254
Howard Smith Ltd-v- Ampol Petroleum Ltd [1974] AC 821
Statutes
Companies act 2006
Insolvency Act 1986
Journals
Chuah, J. (2007) The new Companies Act 2006 and Directors’ Duties. Finance and Credit Law.6 (3)
Mukwiri, J. (2008) Directors’ duties in takeover bids and English Company Law. International Company and Commercial Law Review.19 (9), 281-289
The Company Law Review, Modern Law Review for an competitive economy: final report. (London: DTI June 2006), Vol 1
[Anon.](2001) Company Law Review-Final Report Published. Jordans Journal. 73(2).
Books
Alcock, A. Birds, J. Gale, S. (2007) Companies Act 2006: The new Law. 1st Edition. Bristol: Jordan Publishing Limited
Bourne, N (2008) Bourne on Company law. 4th Edition. United Kingdom: Routledge Cavendish
Bruce, M. (2005) Rights and Duties of directors. Seven Edition. West Sussex: Tottel Publishing.
Pettet, B (2005) Company Law. 2nd Edition. London: Perason Education
Sheikh, S. (2008) A guide to the Companies Act 2006. 1st edition. United Kingdom: Routledge Cavendish Ltd
It is crucial to control or restrict the behaviour of someone in such a position of power and to impose upon him a standard of conduct which will protect people who stand to lose if the director is either incompetent or dishonest.
[Anon.](2001) Company Law Review-Final Report Published. Jordans Journal. 73(2).
Three main points were highlighted in the report as to why there should be legislation governing director’s duties. Firstly it will provide greater clarity on what is expected of directors and make the law more accessible. Secondly it will make defects in the present law to be corrected. Lastly it is a key element in addressing the question of ‘scope’.
This is therefore the shareholders.
Alcock, A. Birds, J. Gale, S. (2007) Companies Act 2006: The new Law. 1st Edition. Bristol: Jordan Publishing Limited
Bishopsgate Investment Managed Ltd (In liquidation)-v- Maxwell (no1) [1993] B.C.C. 120
the company’s directors issued shares that carried special voting rights for the trustees of a scheme established for the benefit of the company’s employees
Buckley J stated: ‘Unless a majority in a company is acting oppressively towards a minority, this court should not and will not itself intervene. With the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies favoured by the majority and the minority. Nor will this court permit directors to exercise powers which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to intervene with the exercise by the majority of its constitutional rights’
Alcock, A. Birds, J. Gale, S. (2007) Companies Act 2006: The new Law. 1st Edition. Bristol: Jordan Publishing Limited
Chuah, J. (2007) The new Companies Act 2006 and Directors’ Duties. Finance and Credit Law.6(3)
Lee-v-Chou Wen Hsien [1984] 1 W.L.R 1202, Here it was held that a provision that a director was removable under the articles if requested in writing by all his co-directors was seen to be for the benefit for the whole company.
In Fulham Football Club Lt-v- Cabra Estates Plc [1994] 1 B.C.L.C 363 the Court of Appeal held that there was no rule hat director’s cannot bind themselves, fetter their discretion, as to the future exercise of their power in a particular way if the contract is for the benefit of the company.
Mukwiri, J. (2008) Directors’ duties in takeover bids and English Company Law. International Company and Commercial Law Review.19(9), 281-289
This is where the liquidator sought to make the other directors liable in negligence for failing to detect the frauds.
A basic objective standard of reasonable care such as might be expected of an ordinary person acting on his or her own behalf.
That a director need not exhibit greater skill than can be expected of a person of his or her knowledge and experience.
Bruce, M. (2005) Rights and Duties of directors. Seven Edition. West Sussex: Tottel Publishing.
Bourne, N (1998) Principles of Company Law. 3rd edition. London: Cavendish Publishing
Chuah, J. (2007) The new Companies Act 2006 and Directors’ Duties. Finance and Credit Law.6(3)
On occasion this rule is regarded as the ‘secret profit’ rule.
Mukwiri, J. (2008) Directors’ duties in takeover bids and English Company Law. International Company and Commercial Law Review.19(9), 281-289
The House of Lords held that Regal was entitled to recover the personal profit made by the former directors, because the opportunity to make profit arose only through knowledge they had gained as directors.
