Directors Duties- Cheat Sheet PDF

Preview

Summary

Directors Duties- Care, Skill & Diligence- Cheat sheet.Introduction:Deirdre Ahern, ‘International Company and Commercial Law Review’-‘A director will be subject to an objective standard of care, skill and diligence. The test measures what can reasonably be expected of a director in a particu...

Description

Directors Duties- Care, Skill & Diligence- Cheat sheet. Introduction: Deirdre Ahern, ‘International Company and Commercial Law Review’‘A director will be subject to an objective standard of care, skill and diligence. The test measures what can reasonably be expected of a director in a particular role, and will allow for a higher standard to be expected of those with greater knowledge and experience.’ 

In other words, the more expertise a person has, the more that will be expected of them.

The adoption of an objective standard has not yet received express consideration in Ireland. No common entry in relation to qualifications and training unlike in the case of professions. MacCann, ‘Directors duties, to whom are they owed?’‘The directors do not per se owe any duty to individual members of the company. However, directors duties have been expanded in recent years to consider the interests of employees’. Courtney- ‘One of the most far reaching reforms of the Companies Act 2014 is the codification of the duties of directors’. 228 (1) A director of a company shall— (a) act in good faith in what the director considers to be the interests of the company; (b) act honestly and responsibly in relation to the conduct of the affairs of the company; (c) act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law…… (d) not use the company’s property, information or opportunities for his or her own or anyone else’s benefit (e) not agree to restrict the director’s power to exercise an independent judgment (f) avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests (g) exercise care, skill and diligence S 228 (1)(g) • (g) A director of a company shall exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both— (i) the knowledge and experience that may reasonably be expected of a person in the same position as the director Re City Equitable Fire Insurance [1925]    

Leading case on context of negligence in relation to directors duties. Facts: company lots 1.2 million because of bad investments and fraudulent activity by one director a ‘daring and unprincipled scoundrel’. It was sought to make the other honest directors liable. Action failed: specific clause in companies’ articles of association for losses not caused by the wilful neglect or default of the directors.

Romer J: It is necessary to consider not only the 1) Nature of the companies’ business but 2) The manner in which the work of the company is in fact distributed between the directors and other officials of the company. &

• • • • •

Act honestly and exercise some degree of skill and diligence Reasonable care to be measured by the care an ordinary man might be expected to take in circumstances on his own behalf Need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person with his knowledge and experience (contentious - SUBJECTIVE) Not bound to give continuous attention to the affairs of the company (may be if he is also fulltime employee) Can delegate his duties once he is justified in trusting that person’s competence

Principle encapsulated in C – Contentious. Because the standard appropriate to a company director is said to be a subjective one. Subjectively in this context has been interpreted as meaning that an idiot, provided he is honest, can avoid liability. Modern precedent for findings of negligence against directors: Daniels et al v Daniels et al:  The companies land was sold to a director for 4250 pounds.  Its probate value.  He subsequently sold the land for 120,000.  This was seen as negligence.  The minority shareholders could bring an action against him. Cohen and another v Selby:  Director delegated decision to 19-year-old son.  The decision: whether or not to get insurance on 400,000 pounds of jewellery.  Son decided not to.  Jewellery was stolen.  The court held that this did not breach the duty owed.  There was no evidence to indicate that the son wasn’t capable of making the decision.

Qualifications of Directors:  ‘’In law, a company director can be as thick as two short planks’’. This can be seen inRe Brazilian Rubber Plantations and Estates Ltd. Neville J: Neither director held to be liable. Facts: Company lost substantially after investing badly in the speculative business of rubber plantations in North Brazil. Thus it was said of a director that he was….  ‘’Not bound to bring any qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber without incurring responsibility for the mistakes which may result from such ignorance.’’ Sir Arthur: Absolutely ignorant of business. Was told it would give him little pleasant employment without incurring any responsibility.

HW Tugwell: Partner in a firm of bankers in a good position in Bath. 75 and very deaf. Joined after representations made to him.

Modern Practice: The foregoing remains true in theory. The modern practice is for directors to have more more qualifications than in the past and the modern trend is for company directors to have a certain business acumen. While qualifications are not necessary their presence will raise the standard of care which an uneducated director will be expected to exercise. Exhaustive analysis of director’s duties: Daniels v Anderson Supreme Court: ‘A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to preform.’ ASIC v Vines: Austin J said that the Daniels case: ‘established an objective duty, broadly in the region of competence, arising out of the director’s duty of diligence’ ASIC v Healey: Federal Court of Australia endorsed this approach. Middleton J:  ‘’In my view, the objective duty of competence requires that the directors have the ability to read and understand the financial statements’’. In that case, a number of executive and non-executive directors were found to be in breach of their duties in not taking reasonable steps to focus and consider the content of the company’s financial statements.

Diligence: The degree of diligence required of a director is dependant upon his abilities and is subjectively ascertained. Again, the older cases show the evolution of responsibilities from a very low point, the case of Re Cardiff Savings Bank (the Marquis of Bute’s case) being an example in point. Facts:     

Marquis became president of bank at tender age of six months. Inherited office from his father in a singularly blatant display of nepotism. Diligence of child bute could not have been much, obviously. His involvement in the affairs of the company did not keep pace with his own development, and his diary only permitted him to attend one meeting after he reached the age of majority. Some 20 years later the liquidator of the company sought to make the adult Bute liable to reimburse the finds which were fraudulently taken from the company by one of the officials of the bank.

Stirling J: he was not liable. He was not expected to attend board meetings. The fact that he received regular notice of the company’s meetings meant that he could assume that business was being transacted as usual. IRISH CASE: Jackson v Munster Bank Ltd.

Respondent bank lent money to several of its own directors notwithstanding that loans to directors were proscribed by the bank’s articles of association. One of the directors was made personally liable for the loan. This director did not participate in the meetings which the loans were sanctioned. The bank had two branches, one in Cork and one in Dublin. The director concerned worked in Dublin and had attended meetings held there. However, it was in Cork that the meetings were held at which the loans were sanctioned. His liability was in fact, ultimately held to be limited. Had he been more diligent, he might have escaped liability entirely. The objective element is important because you cannot let a director do whatever he wants. Sorely subjective would mean that once a director believed he was doing good, he could not be prosecuted.

Whether or not a director is guilty of not being diligent must depend upon the circumstances of each case. Hutton v West Cork Railway (1883) ‘‘A subjective test cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational’’. Duties of Executive v non-executive directors: The companies’ acts have not, traditionally, differentiated between executive directors and non-executive directors, or applied a different test to the duties and responsibilities owed by either category of director. The traditional decision can be seen in the High Court decision in Re Dublin Sports Café Ltd 2005 (From notebook)- Where Peart J held that even though you’re not an executive you are still going to be held to the same standard as everybody else. There is however, some recent evidence of a rethink. In the case of Tralee Beef and Lamb Ltd 2008, the director in question was a non-executive and had been appointed as a nominee director. The court didn’t restrict him. Because he was a non-executive he was not prosecuted. In the appeal of the High Court decision discussed above in Re Dublin Sports Café Ltd 2008, the Supreme Court again sought to distinguish the position of executive and non-executive directors. Finnegan J saying: ‘Each case will turn out in its own circumstances’. Consequences of breach under s228: where a director of a company acts in breach of his or her duty under section 228(1) (a), (c), (d), (e), (f) or (g), he or she should be liable to do either or both of the following things namely: (a) account to the company for any gain which he or she makes directly or indirectly from the breach of duty; (b) indemnify the company for any loss or damage resulting from that breach....