Director Duties - Lecture notes 4 PDF

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Duty as in CA 2006 ExplanationDUTY TO ACT WITHINPOWERS (s. 171)Directors must: a) Act in accordance with a company’s constitution b) Only exercise powers for the purpose for which they were conferred (granted). Part (a) is less significant now since companies generally no longer have restrictive obj...

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Duty as in CA 2006

Explanation

DUTY TO ACT WITHIN POWERS (s. 171)

Directors must: a) Act in accordance with a company’s constitution b) Only exercise powers for the purpose for which they were conferred (granted). Part (a) is less significant now since companies generally no longer have restrictive objects clauses. Part (b) can be interpreted in line with the common law duty to act for a “proper purpose”. RELEVANT CASES – how courts determine “proper purpose”:  Hogg v Cramphorn Ltd  Howard Smith Ltd v Ampol Petroleum Ltd  Eclairs Group Ltd v JKX Oil & Gas plc Directors must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Directors must have regard to: a) The likely long-term consequences b) The interests of the company’s employees c) The need to foster the company’s business relationships with suppliers, customers, and others d) The impact on the community and environment e) Maintaining a reputation for high standards f) Acting fairly between members. RELEVANT CASES – Did director act bona fide, i.e., in good faith:  Re Smith & Fawcett Ltd  Regentcrest plc v Cohen  Extrasure Travel Insurances Ltd v Scattergood Directors must exercise independent judgement (s. 173(1)). Directors can still be independent when they act in accordance with a previous agreement of the company that restricts their discretion, or in a way authorised by the constitution (s. 173(2)).

DUTY TO PROMOTE THE SUCCESS OF THE COMPANY (s. 172)

DUTY TO EXERCISE INDEPENDENT JUDGEMENT (s. 173)

DUTY TO EXERCISE REASONABLE CARE, SKILL, AND DILIGENCE (s. 174)

Directors, however, may not improperly fetter their discretion, i.e., restrict their future discretion to exercise independent judgement, unless they show that fettering their discretion is bona fide in the interests of the company. o E.g., to always support a third party’s planning applications in return for the company receiving payment (Fulham FC Ltd v Cabra Estates plc). Directors must exercise reasonable care, skill, and diligence, which means: “The care, skill, and diligence that would be exercised by a reasonably diligent person with: a) The general knowledge, skills, and experience that might reasonably be expected of a person carrying out the functions [of a director] in relation to the company; and b) The general knowledge, skill, and experience that the director [actually] has.” (s. 174(2)). This is a two-part test, with a subjective and objective element. - General directors objectively must have a certain minimum level of knowledge, skill, and experience. - Individual directors will be expected to exercise any particular additional knowledge, skill, and experience that those individual

DUTY TO AVOID CONFLICTS OF INTEREST (s. 175)

DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTIES (s. 176)

DUTY TO DECLARE ANY INTEREST IN PROPOSED TRANSACTION OR ARRANGEMENT (s. 177)

directors have (e.g., if a director trained as an accountant they would be expected to have special care and skill relating to the company accounts). RELEVANT CASES – what is the objective “minimum level”:  Dorchester Finance Co Ltd v Stebbing  Re Barings plc (No. 5) A director must avoid any situation in which they have a direct or indirect interest that conflicts or possibly may conflict with the company’s interests (s. 175(1)). Such a conflict could involve exploiting a particular piece of property, information, or opportunity – regardless of whether or not the company could have taken advantage of it (s. 175(2)). Indirect interests could include a situation where a company’s director is also a member in another company and a deal may occur between these two companies. This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company (s. 175(3)). A breach of duty does not arise if the situation “cannot reasonably be regarded as likely to give rise to a conflict of interest.” (s. 175(4)(a)). If a conflict arises, or might arise, a breach of duty can be avoided if the matter is authorised by the directors (s. 175(4)(b)). Note that the director involved in the conflict is not entitled to vote on the authorisation (s. 175(6)). RELEVANT CASES – how far does this duty extend:  Regal (Hastings) Ltd v Gulliver  Industrial Development Consultants Ltd v Cooley  Island Export Finance Ltd v Umunna  CMS Dolphin Ltd v Simonet A director must not accept a benefit from a third party conferred by reason of: a) his being a director, or b) his doing (or not doing) anything as a director) (s. 176(1)). This duty can only be breached if accepting the third-party benefit would also reasonably be regarded as giving rise to a conflict of interest, i.e., a potential breach of s. 175 (s. 176(4)). If a director breaches this, the company can rescind the contract and recover the benefit or claim damages, and dismiss the director (Shipway v Broadwood; Boston Deep Sea Fishing v Ansell). If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, that director must declare the nature and extent of that interest to other directors (s. 177(1)). This is supplemented by s. 182, under which a director must declare their interest in an already existing transaction or arrangement. The declaration must be made before the company enters into the transaction (s. 177(4)). A director does not need to declare interest that he does not know about – but directors will be deemed to be aware of matters “of which [they] ought reasonably to be aware” (s. 177(5)). The disclosure need not be in writing: informal disclosure other members of the board will suffice (Lee Panavision Ltd v Lee Lighting Ltd).

DISCLOSURE AND AUTHORISATION REQUIREMENTS

s. 175

s. 176

Disclosure needed?

Authorisation needed?

When?

Best to avoid breach of duty in the first place – but see ss. 177 &182: Disclosure is good practice to avoid unauthorised conflicts and breaches of duty.

Best to avoid breach of duty in the first place – but see ss. 177 &182: Authorisation is good practice to avoid unauthorised conflicts and breaches of duty. Not explicitly – but in practice, yes. Authorisation should be obtained as the other directors could otherwise block the transaction.

Preferably before the transaction is entered into. A director should disclose all potential conflicts and third-party benefits anyway.

s. 177

Yes – disclose nature and extent of interest to other directors. s. 182

No.

Before the company enters into the transaction.

Any time – as soon as it is reasonably practicable....