Company law - directors duties

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The company is not a natural person therefore someone must act on behalf of the company. The power of management is largely left to the directors. There is no precise definition of a director, however S250 Companies Act 2006(CA) states that a director ‘includes any person occupying the position of director, by whatever name called’. It is evident this is a very broad meaning.  S170 (4) provides that the general duties shall be interpreted and applied in the same way as common law rules or equitable principles.

The Company Law Review, Modern Law Review for a competitive economy: final report. (London: DTI June 2006), Vol 1 recommends a statement of director’s duties so that, particularly, directors of smaller companies are more aware of their duties. The final report further talks about how the duties in their present form were misunderstood, unclear and imperfect in a number of cases.

It is important to remember that the directors owe the duty to the legal person ‘the company’ which was understood to be the providers of capital. This duty is owed to the shareholders as a body and not the individual shareholders.  This point was illustrated in the case of Percival-v-Wright  (1902) 2 Ch 421 where it was held that the directors were not in a breach of duty when they failed to mention secret takeover negotiations to individual shareholders as the court took the view that  premature disclosure of the takeover negotiations would have been detrimental to the shareholders. The CA 2006 re-states the common law position in s170 (1) where it provides that the general duties specified in the subsequent ss171-177 are owed by a director of a company to the company and in this respect confirms the common law position that a director does not, by virtue of his position owe a duty to others especially shareholders (except in certain limited circumstances).

S171 CA provides that a director must:

  1. Act in accordance with the company’s constitution; and
  2. Only exercise powers for the purposes of which they are conferred.

The duty to act in accordance with the constitution appears uncontroversial, although it was not something that featured greatly in cases decided at common law. In addition, to act within proper purposes at common law featured under the heading of fiduciary duties. Hoffman L.J. stated that a director ‘must exercise the power solely for the purpose for which it was conferred’. A duty not to act for improper purposes arises where directors have acted in breach of their contracted purposes, or in breach of purposes inherent in their duties. This duty has long been a key duty of directors. This is evident in the case of In Hogg-v- Cramphorn [1967] Ch 254 where the director’s aim was to prevent a takeover bid. Buckley J held that this was an improper purpose but could be ratified by shareholders at a general meeting. It can therefore now be argued that S171 has merely restated the common law. Academics however believe this was not a primary duty as it now appears in terms of its appearance in statutory code.  

S172 states that the director must act in a way he himself considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so he must take into account a list of non-exhaustive factors. Mukwiri, j (2008) believes that this may limit good judgement were directors simply to adopt the list as a rule book and tick off the list. On the other hand, it may enhance what is already the practice of good governance. Therefore it is debatable whether this simplifies the law. It is argued that this restates the common law fiduciary duty including the duty to act bona fide. As seen in the case of Bishopsgate Investment Managed Ltd (In liquidation)-v- Maxwell (no1) [1993] B.C.C. 120 where Lord Hoffman states, ‘he owes a duty to act bona fide’ .In exercising each of the powers conferred upon them by a company’s constitution, directors act not on their own account but for the benefit of the company on whose behalf they are appointed to act. As fiduciaries directors must at all times act bona fide in what they believe consider (not what a court may consider) to be the best interests of the company. The CA 2006 restates this point by stating ‘what he consider’ giving a presumption that follows case law that it is not what a court considers.

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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 ...

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