‘In UK law, the directors have a fiduciary duty to their company. ‘Fiduciary’ means given in trust, and the concept of a trustee (as established in US and UK law) is applicable.
Question:
‘In UK law, the directors have a fiduciary duty to their company. ‘Fiduciary’ means given in trust, and the concept of a trustee (as established in US and UK law) is applicable.
The directors hold a position of trust because they make contracts on behalf of the company and also control the company’s property. Since this is similar to being a trustee of the company, a director has fiduciary duties.’
By reference to caselaw and academic articles:
1. Critically analyse the extent to which fiduciary duties are now reflected in the corporate duties of directors as set out in sections 170 -177 Companies Act 2006 and evaluate the remedies available to a company for breach of fiduciary duty.
2. Also In your submission critically assess to what extent these duties apply to defacto and shadow directors
Note:
the question seeks to assess whether directors duties have altered as a result of the CA 2006 or does the CA 2006 simply restate and codify the existing case law on this topic – certainly the remedies for breach remain the same but are the duties the same both pre and post Act?
Essay instructions:
1- Journals and Case Law Must be used in order to discuss this question. Journals can be found using numerous databases such as west Law, company lawyers and Lexis. In addition to Text Books most can be found in Google books such as:
• The Director’s Handbook: Your Duties Responsibilities and Liabilities By Institute of Directors.
• Mayson, French & Ryan on ‘Company Law’
31st ed OUP
2- I will attach several important articles/journals, which are related to the question, which must be used in writing this essay!
3- The essay must be fully referenced using OSCOLA Referencing with full footnotes (including the cases) and Bibliography page alphabetically.
4- I will copy lecture notes below.
Notes:
Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power”: per Dixon J. in Mills v Mills (1938) 60 C.L.R. 150
Part 10 of the Companies Act 2006 Act sets out the laws relating to company directors and; Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on director’s.
The general duties of directors are based on and replace those previously decided and set by case law.
s.170(3) of the CA 2006 provides as follows:
“The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.”
However, the statutory duties are to be interpreted as before.
s.170(4) of the CA 2006 provides as follows:
“The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”
Therefore, while the statutory rules act “in place of” the pre-existing case law, the statutory rules are nevertheless to be interpreted as though they were themselves case law principles. That means that the high-level principles set out on ss.171 through 177 of the CA 2006 are capable of being developed by subsequent case law.
The provisions of the Act extend to shadow directors (s.170(5) of the CA 2006 those who are not appointed directors but whose decisions the company follows) and de facto directors (those who act as directors although they have not been formally registered as a director at Companies House) in circumstances as before. They also apply to a person who ceases to be a director.
It is important that any director whether of a big or small company is familiar and complies with their duties. Ignorance is no defence and; the consequences can be severe both for the company and personally. As a director you must always act in the best interests of the company.
It is particularly important when starting a new business and considering which trading medium to use to consider the duties which are placed on directors. For example, in small companies where family members are appointed just to make up numbers, you must ensure that they are aware that they cannot simply sit back and have no involvement in the company.
It is reasonable to split the workload of directors based on the talents of the individuals. However, all directors are jointly responsible for the company and the duties towards it. If you are appointing directors with specific expertise such as an accountant as finance director they are also expected to use their professional skills in the best interests of the company.
Duties on each director in outline are: a duty to act within the terms of his powers under the company’s constitution; a duty to promote the success of the company as the director sees it in good faith; a duty to exercise independent judgment; a duty to exercise reasonable care, skill and diligence; a duty to avoid conflicts of interest; a duty not to accept benefits, such as bribes and secret commissions; and a duty to declare interests in transactions.
It should be noted that under s.179 of the CA 2006 that more than one of the general duties may apply at the same time.
The main point to remember is to treat the company as a separate entity. It has its own rights and can take its own actions against a Director and others.
The ambit of the statutory scheme is set out in s.170 of the CA 2006 in the following terms:
“(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.” Significantly, then the director owes the duties considered below to the company itself and not, for example, to the shareholders of the company.
Section 171 – Duty to act within powers – as a Director you should not exceed the powers conferred on you by the company’s Articles of Association. You should always check that you are using the powers conferred on you properly and that the Company does not exceed what it is allowed to do in its Memorandum of Association.
Section 172 – Duty to promote the success of the company – as a Director you must act in good faith for the success of the company and benefit of the shareholders having regard to the likely consequences of any decision long term. This will include considering the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company for having high standards of business conduct, acting fairly between members of the company and; subject to the legal requirements, to consider and act in the interests of creditors.
Section 173 – Duty to exercise independent judgment – the company is a completely separate entity to you as director. Therefore, as a director you must consider whether a deal with the company which you own will be the best deal for the company as opposed to yourself. At the time a decision is made the matters raised in the rest of Chapter 2 of the Act need to be considered so that you are you acting in good faith and solely for the benefit of the company taking all the circumstances into account and not for example, creating a conflict as set out in Section 175 below.
Section 174 – Duty to exercise reasonable skill and care and diligence – you should act in a manner that any reasonably skilled director would generally act in your particular area of management. You should go to as many board meetings as you can and make sure you know at all times what is happening. As stated, ignorance is no defence and as a director you will be jointly liable for any mistakes made as well as placing your company at risk of claims against it should it fail to use skill and care in providing its services to others or complying with other statutory requirements for example health and safety (Section 178) for example.
Section 175 – Duty to avoid conflicts of interest – as a Director you must avoid a situation in which you have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company. If there is a conflict of interest between you (personally) and the company, ensure that the company always wins. The way to avoid there being any issues over conflicts is to disclose all matters to the board of directors so that the company (acting through its directors) can make a decision with all the facts in front of them.
Section 176 – Duty not to accept benefits from third parties – as a Director you should refrain from dealing in your own interests rather than the company’s when dealing with company business and property and must not, for example make a secret profit from any undisclosed and unauthorized transaction or divert work away from the company for your own benefit. Any benefits obtained in this way will have to be account for to the company even if the company benefits as well. You should not accept loans or the benefit of guarantees from the company. This section coincides with and extends Section 175.
Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – as a director, you must disclose all interests in relation to all transactions for example property, information, shares held irrespective of whether or not the company could take advantage of it. You should obtain directors and shareholders approval when it is required before steps are taken. Again, this coincides with and extends the other duties in Sections 171 to 176 above.
Directors exercise all the powers of the company save those required by statute to be resolved upon by members. Shareholder resolutions and the articles may further restrict directors’ powers, as may any shareholders’ agreement and a director’s service contract.
Directors therefore generally have responsibility for the day to day running of the company and the management of its business. Simply speaking, a director must exercise reasonable skill and care in carrying out these responsibilities. To make matters more complicated, however, the degree of skill and care required is judged from both objective and subjective standpoints [[Re D’Jan of London [1993] BCC 646, per Hoffman LJ; Companies Act 2006, section 174]. . There is no single professional standard for company directors. The standard required therefore varies according to the directors’ personal knowledge and experience, functions carried out and the amount of time that they are required to devote to their duties
It is provided in s.178(1) of the CA 2006 that the consequences of any breach or threatened breach of a director?s general duties under ss.171 to 177 of the CA 2006 “are the same as would apply if the corresponding common law rule or equitable principle applied”. Except for the duty in s.174 to exercise reasonable care, skill and diligence, which takes effect as a common law principle, the directors? general duties are “enforceable in the same way as any other fiduciary duty owed to a company by its directors”.184 Therefore there is no codification of the appropriate remedies relevant to each duty, and instead one is thrown back on the case law remedies which were considered in relation to each section in the discussion above.
Section 180 of the CA 2006 deals with consent, approval or authorisation by the company’s members. In cases where the duty to avoid conflicts of interest or the duty to declare an interest in a proposed transaction or arrangement) is complied with, then “the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company”.
Relief for Directors
A company can ratify acts in breach of his duty as a director, under s.239 CA’06 if it relates to negligence, default or breach of duty or trust – i.e. it can relieve the general duties. However, only ‘disinterested’ members can now vote s.239(3)&(4). Note that some acts, for example illegal actions, are incapable of being ratified (s.239(7)). Fully informed consent for ratification to be valid is needed:
Kaye v Croydon Tramways [1898] 1 Ch 358 (CA)
Section 1157 CA’06 gives the court power to relieve a director from liability if he acted honestly and reasonably:
Re Produce Marketing Consortium Ltd (In Liquidation) (No.1)[1989] 1 WLR 745 (Ch)
The test for acting reasonably is an objective test:
Re Duomatic Ltd [1969] 2 Ch 365 (Ch)
The test whether someone is acting honestly is subjective
Place this order with us and get 18% discount now! to earn your discount enter this code: summer17 If you need assistance chat with us now by clicking the live chat button.