Directors duties final mine. PDF

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Directors dutie’s mine final. A) SO WHAT IS THE BREACH ? DISCUSS IT. B) CONSEQUENCES. – REMEDIES. C) DEFENCES. If you have breached a duty for example you have also breached section 171. SOS. o

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Until recently: Directors duties were based in common law. Both Law Commission and Company Law Review recommended a statutory restatement. CA 2006 introduces a codified set of duties that is partially based on common law duties. PARKER HOOD* AIMS OF THE ARTICLE. the main objectives of these reforms to directors’ duties were to make the law on directors’ duties more widely understood and be more accessible, particularly with regard to small businesses, which do not necessarily have access to the battery of high-profile professional advisers, such as large firms of solicitors, senior counsel, accountants and investment banks, that large plcs have. Also the objective of statement was to promote an understanding of the basic principles underlying the area, while at the same time giving the courts interpretive scope when applying the principles. Central part of company law is concerned with providing a framework for rules which:Constraining potential abuse by directors of their broad powers AND Not constraining directors; - manage company freely take risks and create value for shareholders. Some of the constraints of directors include the Structure and composition of the board, Governance rights of members like special resolutions, the Power of shareholders to remove members of the board, the duties which company law lays directly on directors as to the limits within which they should exercise their powers. Relationship of common law and statute, ss. 170 (3) & (4) makes clear that the starting point for example in an exam is the statute and then analyse common law and equitable principles to support our case.

To whom are the duties owed and by whom? S170(1) CA 2006 states that The duties are owed by a director of a company to the company. This Codifies the law in Percival v. Wright What does this mean? This means that only the company will be able to enforce them. In certain circumstances, a shareholder may be able to bring a derivative claim on behalf of the company to enforce those duties (sections 260 to 264 CA2006).

 Are directors’ duties owed to individual shareholders? Act does not purport to answer this and issue left to common law. .Duties not owed to individual shareholders apply only to those duties, which directors are subject to simply by virtue of their appointment and actions as directors. But a duty of some sort is likely to be owed if there is dealing between director and shareholder.

Certain limited circumstances where special factual relationship arises between directors and individual shareholders a) If there is dealing between director and shareholder; or b) If there has arisen one of the established legal relations to which fiduciary duties are attached (e.g. agency)or c) In small family companies – the family exception. : where there is gross disparity of knowledge (therefore even in absence of agency) Coleman v Myers - in UK Re Chez Nico (Restaurants) Ltd – In Coleman – Court having stressed that the general law found in Percival was good law it found that in a small private domestic company where the shares were concentrated in the hands of a few family members a duty of disclosure arose which placed the directors in a direct fiduciary relationship with the shareholders.

d) In larger companies, if directors take it upon themselves to give advice (during a takeover) In Peskin v. Anderson, the court found that duties owed to shareholders are dependent upon establishing “a special factual relationship between the directors and the shareholders in the particular case

Duties to other Stakeholders: o If company law is reluctant to recognize general duties owed by directors to shareholders, it goes without saying that has not recognized such duties owed to individual employees or creditors or other groups. o There is a need to distinguish between duties owed directly to stakeholder groups from the question of how far duties owed to company require directors to take into account the interests of stakeholder groups. By whom 

Directors properly appointed as such;

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De facto directors: persons who act as directors even though they have not been appointed as such;

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Shadow directors: there are specific statutory duties, which apply to shadow directors by ch. 3 and 4 of part 10 - this is by virtue of Small Business, Enterprise and Employment Act 2015, section 170(5).

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Former directors. By section 170(2). A person who ceases to be a director continues to be subject to 2 of the 7 general duties—

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to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and

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to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.

1) DUTY TO EXERCISE REASONABLE CARE AND SKILL and DILIGENCE.  The traditional view was based on a very low standard because it was subjectively formulated with non-executive directors in mind meaning directors who had no serious role to play within the company.  Development of the law was due to more demanding standards for directors whose companies were facing insolvency. The modern formulation of the common law test is very close to the s.214 IA 1986 wrongful trading provision used by Lord Hoffman in ReD’Jan of London Ltd.

 S.174 CA 2006 (1) A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has. Section 174(2)(a) – this is objective Section 174(2)(b) – subjective standard. Subjective standard is to be applied only if it improves upon the objective standard What does this mean for directors? 

While there is objective standard of care, what the discharge of that duty requires is unlike to be uniform. But this does not mean that directorship is to be treated as a profession.

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The days of the wholly inactive or passive director days are numbered.

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Mr Justice Briggs in Lexi Holdings Plc v Luqman "Complete inactivity as a director is by definition unreasonable".

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TURNING A BLIND EYE. In Lexi Holdings Plc v Luqman the court held that the two sisters were found liable for all losses - £37 million and £42 million respectively. the sisters ought to have known that a director's loan account in the company's statutory accounts was fictitious at an early stage in the fraud. As directors, the sisters had a duty to be on guard and pursue adequate explanations in response to "searching questions

However, there is the recognition that there is likely to be delegation of these functions as long as there is adequate monitoring of such delegated functions. The freedom to delegate does not absolve a director from the duty to supervise the discharge of delegated functions. Re Barings PLC Held: The power to delegate did not absolve them from duty to supervise the way in which delegated functions are carried out- i.e. proactive monitoring of operations of delegates. While all members of board have duties in common, it is also possible for division of functions. Similar principles to delegation apply here. -

Negligence could arise not only from failure to act (all decided English cases have arisen from this point) but also from acting.. However, the UK has been hesitant in allowing courts to assess business risks.There is desirability in avoiding the luxury of substituting the courts’ hindsight for the directors’ foresight.

! There are also difficulties in linking the breach of duty of care to the loss suffered by the company.  Remedy for breach of duty of care and skill:  Compensation to recompense the company for the harm caused to it by the director’s breach  May also show unfitness to be concerned in the management of the company and so lead to disqualification under CDDA 1986, S6 PART 2 Directors’ duties developed by analogy with the duties of trustees. Although to describe directors as trustees of the company or its property would be unhelpful. Neither can directors be thought to be agents of the company as their authority to bind the company as its agents normally depends on their acting collectively unless authority has been specifically conferred upon an individual director There are three distinct categories of directors’ fiduciary duties a) Remain within the scope of their powers; b) Act in good faith to promote the success of the company; c) Exercise independent judgment; The final three are situations which encompass the rule against directors putting themselves in a position in which their personal duties (or duties to others) conflict with their duty to the company:

a) Self-dealing; b) Personal exploitation of a company’s property, information or opportunities. c) Receipt from third party of a benefit for exercising their directorial functions in a particular way.

DUTY TO ACT WITHIN POWERS. S171 CA 2006: director of a company must— a) act in accordance with the company’s constitution, and b) only exercise powers for the purposes for which they are conferred Part A - Acting in accordance with the Constitution: 

Articles are main source of directors power but are also likely to have constraints/parameters on such powers;

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The term constitution goes beyond the articles and includes– resolutions, agreements, decisions taken by shareholders in general meeting).

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Directors do not need to be subjectively aware of the unconstitutional nature of their actions;

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Acting outside the constitution will not affect third parties-s.40 CA 2006. In fact the application of s.40 in fact increases the importance of the company’s potential remedy against the director, as third party is able to enforce such transaction against the company. Part (b): ‘Proper purposes doctrine’

 It is an objective test as to whether the powers were exercised by the directors for a purpose outside those for which the powers were conferred  But the test remains essentially subjective since one looks at the purposes for which the directors were exercising their powers (their motivation) *Re Smith & Fawcett, Greene MR (directors refused to register share transfer) - ‘Directors must exercise their discretion bona fide for what they consider-not what a court may consider- is in the interests of the company, and not for any collateral purpose’ - The first part of the statement relates to good faith (which is outside scope of 172 Proper purposes frequently applied in relation to power to allot shares as a consequence of which voting rights of majority may be affected  There is a tension between the duty of good faith on the one hand and the proper purposes doctrine on the other. Proper purposes doctrine operates to

limit the authority of directors even if their action was carried out in what they bona fide believe to be in the best interests of the company. Therefore, if action is bona fide but for collateral purpose (objectively determined) an action of directors can be set aside.  E.g. Where directors may believe it is in the best interests of the company to defeat a takeover bid by allotting shares to shareholders who they trust will reject the bid. This will probably be viewed as an improper exercise of the power to allot shares, as it was originally conferred to raise capital. This is an important point to note. Examples of proper purposes doctrine.  Hogg v Cramphorn A share allotment was held to be invalid notwithstanding that the directors had acted in good faith on the basis that their primary motive was to forestall a takeover bid and remain in control.  Howard Smith Ltd v Ampol Petroleum Ltd Ampol and its associated company (majority shareholder) held 55% of shares in Miller. Ampol and Howard Smith (HSmith) made rival takeover offers for Miller. Preferring Hsmith bid because it was more generous than Ampol’s and because they believed that long term future of the company would be more secure in the hands of Hsmith, Miller’s directors issued shares to Hsmith which in effect diluted Ampol’s shareholding from 55% to 36%. Directors contended that allotment was for obtaining capital, while Ampol sought declaration that allotment was an improper exercise of power. Held: Those directors were not motivated by self-interest. However, share allotment was not made to satisfy any further need for capital but to dilute Ampol’s majority shareholding in the company. The share issue was therefore held to be invalid. Lord Wilberforce (in the PC): the determination of whether power has been exercised for an improper purpose is a two-fold process. (a) Ambit of power: consider the power in question and in order to ascertain ‘on a fair view’ its nature and limits within which it may be exercised.

(b) Substantial purpose for which power was exercised should be examined so as to determine whether that particular purpose was proper or not. (Thus, while court will not challenge commercial decisions of directors, in determining purpose, court is entitled to take an objective approach in order to estimate how critical, pressing, substantial alleged requirement may be.) [Can be cited as authority for proposition that it is nearly always a breach of directors’ duties to promote or defeat a takeover offer-as it is a decision, which must be left in the hands of the shareholders. This is supported by the City Code. Also see, the ‘no frustration’ rule]

Unusual case in relation to so-called poison pill arrangements. Criterion Properties PLC v Stratford UK Properties LLC was a US company and C a UK company, parties to a JV for investment in real property. Entered into a poison pill agreement- effect of protecting C in event of takeover by giving O the right to have interest in JV bought out at fair price, should another party gain control of C or in the event N and G cease to be directors of C. This agreement achieved its objective of deterring a takeover. Parties subsequently began negotiations to rescind agreement. Talks broke down and C brought action to have agreement set aside. Ct of A: found poison pill agreement to be an improper use of director’s power to bind C – because this agreement involved not the issues of shares but the gratuitous disposition of the company’s assets ... the buy back provision could be triggered not only by a hostile, but even one wholly beneficial or even the departure of N and G, which had nothing to do with a change of control. H of L: approached issue on the basis of the director’s authority and whether director’s had actual apparent ... authority and since this could not be determined case was remitted for trial [HL: did not really analyze the issue]. Glengary Overseas Limited v JKX Oil & Gas Plc; Eclairs Group Limited v JKX Oil & Gas Plc Lord Sumption explained the purpose of the proper purpose rule (now found in section 171 of the Companies Act 2006)(para. [37]): The rule that the fiduciary powers of directors may be exercised only for the purposes for which they were conferred is one of the main means by which equity enforces the proper conduct of directors. It is also fundamental to the constitutional distinction between the respective domains of the board and the shareholders. These considerations are particularly important when the company is in play between competing groups seeking to control or influence its affairs". According to court the purpose of the power to restrict rights attaching to shares had three purposes, namely: i. to induce a shareholder to comply with a disclosure notice; ii. to protect the company against having to make decisions without having relevant information; and iii.

as a punitive sanction for failure to comply with a disclosure notice. -

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Lord Sumption: But seeking to influence the outcome of shareholder’s resolutions where there was battle for the control of company not proper purpose. Lord Sumption and Lord Hodge considered that where directors have multiple concurrent purposes for acting in a particular way then a "but for" test should be applied, i.e. the court needs to consider whether or not the same decision have been reached even if there had not been any improper purpose. Lord

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Mance seemed to agree but along with the majority left this important question undecided. As it stands, therefore, NOT sufficient for directors to act in what they believe is the best interests of the company, unless they can also establish that their actions are also within the scope of the powers conferred on them. Scope of powers is grounded in the constitution, statute or at common law. Worthington - In short, this case provides a far more revealing exposÈ of improper purposes than previous authorities, but it also teases those seeking certainty: ultimately none of the three key questions on improper purposes is pinned down by robust ratio. Worthington In any proper purposes case, the court must proceed in steps: first, analysing the particular power in issue to determine as a matter of law the boundary between its proper and improper exercise; secondly, assessing as a matter of fact the reason(s) for the exercise of the power in the case before them, and applying some appropriate legal test if the directors acted for mixed purposes, as typically they do; and, finally, deciding the appropriate consequences. Regrettably for legal certainty, the Supreme Court in JKX was only required by the facts to deal with the first step.

**Extrasure Travel insurances Ltd v Scatterwood (2002)  Tests for determining whether or not power exercised for improper purpose  4 part test : i. Identify the power in question relating to whatever provision ii. Identity the proper purpose for which that power was given to directors (whether it is proper is discerned from company’s articles) iii. Identify the substantial purpose for which the power was in fact exercised and iv. Decide whether that purpose was proper  Application to facts of case: - Power in qn: Directors’ ability to deal with assets of Extrasure in course of trading - Purpose power conferred: To protect Extrasure’s survival and promote commercial interests - Substantial purpose in making transfer: Enable Citygate to meet its liabilities, not preserve survival of Extrasure - SO purpose for which transfer made was improper

 Appears to be nothing in views expressed by majority of SC in Eclairs Group that would challenge approach here Is the directors’ act for an improper purpose ratifiable? It was thought that the effect of an improper exercise of powers was to render the directors’ conduct capable of voidable and therefore capable of ratification by the company in GM but this is not always the case. -

Re Sherborne Park s. 459 unfair prejudice complaint. Court took view that complaint on allotment of new shares was not that wrong had been done to the company- but that his personal rights qua shareholder had been infringed and therefore, the issue of ratification by a GM of director’s conduct does not arise. Since shareholder will have a personal cause of action.

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Summary: if directors exercise power with mixed motives then court will seek to determine principal purpose of their conduct. If motive is found to be improper then voidable and maybe ratifie...