Directors Duties - Remedies and rectification PDF

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Remedies and rectification for directors after breach of duties...

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Directors Duties: Remedies and Relief 

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As the duties are owed to the company (s170), it is for the company to sue. However, in limited circumstances a shareholder may sue derivatively on behalf of the company, but this is rare – they are more likely to pursue the broad unfairly prejudicial jurisdiction under s994 CA 2006 In reaching a decision to sue a director, the Board have to bear in mind their own duties, especially under s172 to promote a success and s174 to exercise care and skill – therefore they may legitimately decide it’s not in the company’s interest to sue!

Enforcing director’s duties: 

Directors duties very hard to enforce – hard to get shareholders together to take action, which is made even harder if directors are colluding together)

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Commentary: - Directors have the powers of management, the courts are reluctant to question business decisions, shareholders have very limited ability to act in respect of wrongs done to the company – liquidator is the person likely to take action - Burland v Ellis: the court will not interfere with the internal management of companies acting within their powers – Lord Davey - Re Bugle Press [1960]: in all commercial matters where commercial people are much better able to judge of their own affairs than the court is able to

Remedies for breach of duty: 

s178 CA 2006 states the remedies are those in existing common law, for breach of fiduciary duty

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The main remedies are: - Injunction - Compensatory damages - Restoration of company property - Rescission of a contact - Account of profits - Summary dismissal

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Injunction: where the breach is threatened but not yet occurred or where the breach has occurred but is likely to continue Damages: This is the most appropriate for breach of common law, duty of care, noncompliance with contract or constitution, breach of duty of good faith or acting for improper purposes. All the directors participating in the breach are jointly and severally liable Rescission: rescission is available for no-conflict contract breach, unless company has ratified it Account of profits: this is available for breach of no profit rule (use of company profit, info, opportunity) and the duty not to accept benefits from third parties. An account of

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profits to strip the fiduciary of any benefits is the most appropriate remedy. It is NOT conditional on loss by the property - Sinclair Investments v Versailles Trade: Lord Neuberger MR said account of profits is a personal remedy Restoration: return of company’s property taken in breach of duty - Harrison v Harrison [2002]. Facts: director acquired company property at undervalue in breach of his duty to act in the interests of the company. Held: profits held on constructive trust (where the normal remedy for the directors undisclosed conflict is rescission with the asset held by the director on CT until the legal title is retransferred to the company) - CMS Dolphin – Facts: D left C and set up new business and the staff and main customers followed him. Held: This deprived the benefit of business opportunities with existing clients. Director accountable for the profits derived from those contracts/opportunities plus a sum accounting for other contracts which might not have been won without the opportunity of cash flow derived from the contracts unlawfully obtained. - Gencor v Dalby – The court will pierce the corporate veil if the director diverts misappropriate funds through a company, treating the company’s gain as the directors - Hastings v Gulliver – liability is strict, even if the director is in good faith - Re Duckwari – Facts: company acquired an asset in breach of s190 without shareholder approval. The assets depreciated. Held: director must make full amount of the misapplication, including the loss as a result of a fall in the property market

Shareholder ratification 

All the general duties impose on directors are subject to any rule of law enabling the company to give authority for anything to be done or omitted by the director what would otherwise be a breach of duty

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s180(4)(a) CA 2006: consent approval or authorisation by members - may authorise breach in advance, if so no breach of duty arises: Sharma v Sharma - Murad v Al-Saraj [2005]: It is not enough for the wrongdoer to show that, if he had not been fraudulent, he could have got the consent of the party to whom he owed the fiduciary. The point is that the profit here was in fact wholly unauthorised at the time it was made and has so remained. Held: to obtain a valid consent, there would have to have been full and frank disclosure of all relevant matter. It is only actual consent which gets rid of liability

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s239 CA 2006: Ratification of acts of directors (after the events) 2) Decision to ratify such conduct must be made by resolution of the members of the company 3) Where the resolution is proposed as a written resolution neither the director nor any member connected with him is an eligible member 4) Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained disregarding votes in favour of the resolution by the director and any members connected with him Model Articles 14 – those who declare an interest cannot vote

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Commentary: - Can be ratified = negligence, default, breach of duty or breach of trust - Cannot be ratified = ultra vires conduct, fraud on creditors, misappropriation of company assets and property (not profits), expropriation of corporate property, such as the diversion of corporate opportunity, and wrongs involving dishonesty  Exchange Banking Company: misappropriation of company’s money (s239(7)) - Worthington: distinction between ratifiable and non-ratifiable breached has been criticised

Discretionary relief under s1157 CA

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If a director has acted honestly and reasonably, the court may relieve the director in whole or in part = broad protection Director can choose to apply in advance of any claim coming up against them

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s1157 CA: power of the court to grant relief in certain cases

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Test of honesty/reasonableness essentially objective: Coleman Taymar v Oakes [2001] - Robert Reid QC: “I do not see how the reasonableness requirement can be a subjective requirement. Any reasonableness test must by its very nature be objective” - Both “honesty” and “reasonableness” are objective measures: Bairstow v Queens Moat Houses [2001]

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Dorchester Finance Co Ltd v Stebbing [1989] – director had not acted “reasonably” in pre signing cheques

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Re D’Jan of London [1994] – although negligent in making errors on insurance policy, director had acted “understandably” (honestly and reasonably) has made an honest mistake – even though negligence so relief granted. - May seem odd that a person found to have been guilty of negligence, which involved failing to take reasonable care, can ever satisfy a court that he acted reasonably – but this section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes despite amounting to lack of reasonable care at common law BUT directors may step over the line from poor decision making into breach of duty if they continue with actions despite evidence problems: Roberts v Frohlic [2011]

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Limitation of liability clauses = invalid  

Cannot contract or add to articles, provisions to exempt a director from his duties. s232 – “Any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or truth in relation to the company is void” BUT There can be some indemnification provisions when relating to liability between director and third parties section 234 and 235

Liabilities of third parties

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Third parties may be liable on 2 grounds: 1. Dishonest Assistance by participating or assisting the director breach his duties 2. “Knowing Receipt” of company funds/assets

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Dishonesty Assistance: - Twinsectra v Yardley: Lord Millet – liability in knowing assistance is compensatory. It extends to everyone who consciously assists in the diversion of misappropriated funds. HL Held: dishonesty has 2 parts – 1. Is it objectively dishonest 2. Whether D knows his conduct is dishonest by those objective standards - Royal Brunei Airlines: established that dishonesty means conscious impropriety - so it is subjective dishonesty

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Knowing Receipt: - There must be a trust of assets in favour of a beneficiary, this depends upon whether the misappropriated asset is traceable…thus it is a proprietary claim - Belmont Finance v Williams Furniture. Buckley LJ: “D cannot conscientiously retain misappropriated funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds” - El Ajou v Dollar Land Holdings: Stated C must show:  A disposal of his assets in breach of fiduciary duty  Beneficial receipt by D of assets traces to the misappropriated assets  Knowledge by D that those assets are traceable to a breach of fiduciary duty o Bank of Credit: “Knowledge” was defined as not requiring dishonesty…it is whether D’s knowledge makes it unconscionable for him to retain the benefit of the receipt - unconscionable to retain...