This statementrequires an extensive analysis of Directors duties in English Company Law.Along the lines of this analysis the core concepts surrounding directors’duties such as the codification of directors’ duties and s.172 which hasarguably made one of the most significant changes in the Companies Act 2006,will be highlighted.
This will thus help to give an understanding on whetherthe introductions of directors’ duties into the Companies Act has either justsimply codified the existing common law or if it has gone beyond that and hasclarified or improved this area of the law and how stakeholder’s interests areimpacted in English Company Law. The modern day CompaniesAct is the primary source of legislation used in UK Company Law. It replacesthe Companies Act 1985 and it it used to be the longest Act of Parliamentestablished with 1,300 sections1,however this has now been surpassed by the Corporation Tax Act 2009. The definition of director is presentin s.250 as including ‘any person occupying the position of a director, bywhatever name called’. As highlighted in Re Hydrodan (Corby) Ltd (1994), thereare three different types of director; de jure (formally appointed andregistered as a director),2de factor (not formally appointed but carries out all the duties and decisionsas a director)3 andshadow directors (person in accordance with those directions or instructionsthe director of the company are accustomed to act).
4Every company must have at least one director, however public companies musthave at least two directors.5In order to address agency problems and reduce agency costs, it is vital thatdirectors do not misuse their power, therefore directors in both private andpublic companies are subjected to various duties. Directors only owe their dutiesof loyalty to the company and not to individual shareholders, as reinforced bys.170(1).
6Directors are also considered as a company’s trustees or agent and are in afiduciary situation in relation to the company.7Furthermore, they must first and foremost act in good faith and in the bestinterests of the company.8Even before the codification of directors duties where implemented within theCompanies Act, directors still owed the duty of care and skill to the company.9 The Law Commissionrecommended that the complicated law on directors’ duties relevant to equitableattitudes and at common law should be reformed and made simpler by using astatutory form.
10It evaluated the advantages and disadvantages of codification such as certaintyand accessibility against its disadvantages such as loss of flexibility, whilstalso explaining why partial instead of full codification would be morepreferable in terms of directors’ principal duties. Eventually, the governmentimplemented the Law Commission’s recommendations and now the duties arecodified in the Companies Act 2006. Nonetheless, regardless of codification,previous case law is still relevant to its application and interpretation asdirector’s general duties ought to be interpreted and applied in the same wayas common law or equitable principles.11The general duties in s.170-177 are assessed by comparison with theircorresponding common law rules. S.171 states thatdirectors must act in agreement with the company’s constitution and that theyshall only exercise their powers for the purposes for which they have been deliberated.It codifies the common law duty to act for proper purposes which wasestablished in the cases of Hogg v Cramphorn (1967) which held that directorsshall only exercise their powers for a proper purpose and not for anycollateral purpose and Howard Smith Ltd V Ampol Petroleum (1974) which heldthat directors abused their fiduciary duties by authorising the issue if sharesfor the purpose of altering the voting power in the company and such issue washeld invalid.
Consequently, s.171has made the law more accessible while preserving the clarity of the commonlaw. Under s.
173, adirector is required to exercise independent judgement.12The provision distinctively paraphrases the principle in Fulham Football Cluband Others V Cabra Estates plc (1994), that a director should not restrain hisdiscretion and should have independent judgement. S.174 states that a directorhas a duty to exercise reasonable care, skill and diligence. If a directorbreaches any of these duties, the company is the proper claimant to sue him.
13The provision replaces the previous common law duties which where established inDorchester Finance Co Ltd V Stebbing (1989), where it was held that non-executivedirectors who were either qualified accountants or who had considerable accountancyand business expertise had been negligent in signing blank cheques which allowedthe managing director to misappropriate the company’s money. Johnathan Parker Jin Re Barings plc (2002), held that directors may delegate functions, howeverthey remain responsible for those functions being undertaken. Whilst little wasexpected from directors in relation to to care and skill previously, Gower andDavis states that more recent cases imply a more objective standard of care andthe applications of the tests in s.
214 Insolvency Act 1986. S.174 consolidatesthe previous common law and introduces the objective standard of care whichcould be enhanced by actual knowledge, skill and experience of a certaindirector.14 S.
175 codifies thecommon law on the rules of no-conflict and no secret profit. A director mustavoid a scenario in which they have, or can have, a direct or indirect interestthat conflicts or potentially can conflict, with the interests of the company.15It applies specifically to the misuse of any property, information oropportunity16.
This duty is not breached if the matter has been effectively approved bydisinterested directors.17 In Cooks V Deeks, a Canadian case (1916),a corporate opportunity was seen as a company’s asset which could not be misappropriatedby the directors, this rule correspondingly applies to the scenarios where a directorcomes across an opportunity personally instead of there capacity as director.18 S.176 states that a director must not accept abenefit from a third party conferred by reason of him being a director. He mustalso declare the nature and extent of any interest to other directors, if he isin any circumstance interested in a proposed transaction or arrangement withthe company.19 S.177codifies the self-dealing rules as established in the cases of Bentick V Fenn(1887) and Aberdeen Railway Co Ltd V Blaikie Bros (1854).
S.182 Companies Act, worksin correlation with S.177 as it states that a director, who is in any way,directly or indirectly, interested in a transaction that has been entered intoby the company, must declare the nature and extent of that interest as soon asis reasonably practicable. Overall it does seem that the courts are willing tostill take a strict approach in terms of the no-conflict and no-profit rules,however, such a difficult approach is controlled by the potential authorisationand ratification of a breach of the duties.
20 S.172 is relevant tothe concern to promote the success of the company. It states that a director isobligated to act in a way which he considers, in good faith, would be mostlikely to promote the success of the company for the benefit of its members asa whole. In doing so, they are required to have specific regard, between othermatters, to the interests of the company’s employees, the effect of thecompany’s operations on the community and the environment and the need to actfairly between members of the company.21In Bristol and West Building Society V Mothew (1998), it was held that this issubjective in nature in the scene that it is view as what a director considers,not what a court considers, would be most likely to promote the success of thecompany.22 Notonly does S.
172 codify the common law duty to act bona fie in what the directorconsiders and not what a court may consider,23as held by Lord Greene MR in Re Smith and Fawcett Ltd (1942), but it alsowidens the scope of previous common law as it establishes the new concept of 1 Boyle,A & Bird, J (2007) Boyle & Birds Company Law (7th edn)Bristol:Jordans 2 Ma, F. (n.d.). Companylaw. 2nd ed.
University of Portsmouth: Pearson.3 ibid n.24 S.252 Companies Act 20065 S.154 Companies Act 20066 Pervial V Wright (1902) 2 CH 4217 Bristol and West Building Society V Mothew (1998)8 Pervial V Wright (1902) 2 CH 4219 Re City Equitable Fire Insurance Co Ltd (1925) Ch 40710 Law Commission (1998) Company Directors: Regulating Conflicts ofInterests and Formulating a Statement of Duties (Consultation, Paper No.153)London: The Stationery Office 11 S.170 Companies Act 200612 Southern Countries Fresh Foods Ltd, Re (2008) EWHC 2810 (Ch)13 Foss v Harbottle (1843) 67 ER 18914 Gower and Davis (2008) Gower and Davies Principles of ModernCompany Law (8th edn).
p.494 London: Sweet & Maxwell 15 Bray v Ford (1896) AC 4416 Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 37817 S.175(4) Companies Act 200618 Industrial Development Consultants Ltd v Cooley (1972) 2 All ER19 S.177 Companies Act 2006 20 Lowry, J and Edmunds, R. (2000) The no conflict-no profitrules and the corporate fiduciary: challenging the orthodoxy of absolutism.
Journalof Business Law 12221 ibid n.122 Carlen v Drury (1812) 1 Ves & B 15423 Re Smith and Fawcett Ltd (1942) 1 All ER 542