Directors

Question 1

Art. 3

Answer 1

“Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.”

Question 2

Art 4: (1)

Answer 2

The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.”

Question 3

Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34

Answer 3

Shareholders cannot override the articles by simple majority: they have to change the articles by special resolution. Note that at the time directors could be removed by default only by special resolution
The aim is to protect minorities who entered company on basis that the company would be managed by directors not majority in GM

Question 4

Directors’ management power

Answer 4

Very broad, includes
Making contracts, appointing agents, delegating to committees and managers
(Art 5 MAPC), litigating in the company’s name
Raising capital, including allotting shares (ss549-551)
Deciding whether to pay dividends (assuming profits are available (s830), directors include a recommendation in the directors’ report (s416(3)), shareholders declare the dividend by ordinary resolution (Art 30 MAPrivateC, Art 70 MAPublicC)

Question 5

s168(1)

Answer 5

Shareholder power to remove directors by ordinary resolution

Question 6

Default powers of shareholders?

Answer 6

Management power will revert to the shareholders in circumstances where the board is deadlocked, unable to act, or has ceased to exist (Barron v Potter [1914]

Question 7

Appointment of directors

Answer 7

First directors appointed upon registration (s9(4), s12(1)(a))
Subsequent directors appointed by ord res of GM (MAPC, Art 17(1) MAPublicC, Art
20)
GM must use power to appoint ‘for the benefit of the company as a whole and not to secure some ulterior advantage: Re HR Harmer Ltd [1959] 1 WLR 62

Question 8

Removal of directors

Answer 8

By ordinary resolution of GM (s168(1))
Mandatory power may not be restricted by articles, but weighted voting is permissible (Bushell v Faith)

Question 9

Removal of director may breach separate contract of employment

Answer 9

giving the director right to damages: Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701

Question 10

Remuneration of directors

Answer 10

As a director
As an employee
As an independent contractor

Question 11

Board decision-making

Answer 11

Art 7: At a director’s meeting, passed by majority
* Art 8: Outside board meetings, by unanimous written resolution
* Art 9: Board meeting called by any director by giving notice to other directors
* Art 11: Quorum two
* Art 13: Chairman has a casting vote

Question 12

De facto director

Answer 12

A de facto director undertakes functions in relation to a company that can only be discharged by a director: Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180
For directors’ duties, as well as many other statutory provisions, de facto directors will be considered as directors

Question 13

Shadow directors

Answer 13

Shadow director is a statutory concept, see s251(1) CA 2006: ‘a person in accordance
with whose instructions the directors of the company are accustomed to act’.

Question 14

Small Business, Enterprise and Employment Act 2015, s89: amending s170(5) CA 2006

Answer 14

The general duties apply to a shadow director of a company, where and to the
To the extent that they are capable of so applying.’

Question 15

Directors Duties Overview

Answer 15

s171 To act within powers (observe the constitution & use powers for proper purposes)
* s172 To act in good faith to promote the success of the company
* s173 To exercise independent judgment
* s174 To exercise reasonable care, skill and diligence
* s175 To avoid conflicts of interest (including duty not to make secret profit)
* s176 Not to accept benefits from third parties
* s177 To declare interests in contracts

Question 16

Duties are owed to the company

Answer 16

Owed to company not the shareholders individually
Percival v Wright [1902] 2 Ch 421
s170(1)
This is fundamental to enforcement

Question 17

Directors may come to owe duties to individual shareholders on the facts

Answer 17

Where director assumes responsibility for an individual shareholder
Where directors persuade dependent shareholders to sell
Under the law of misrepresentation, where they give advice
There is an Australian authority that states that if the director’s duty to the company conflicts
with a duty that has arisen in relation to individual shareholders, the duty to the
company must prevail

Question 18

Remedies for breach flow to company

Answer 18

s178(1): ‘The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.’

Question 19

BJR in the UK

Answer 19

The UK does not have an explicit BJR, but it is implicit in our law as the courts have
shown a proper reluctance to enter into the merits of commercial decisions’

Question 20

The duty of care, skill & diligence (s174)

Answer 20

Objective minimum standard with subjective ‘top up’ reflects modern case law in negligence, under s214 IA 1986 and directors’ disqualification
Allows a single standard to deal with all companies, large and small, and to differentiate between professional and non-professional managers

Question 21

Minimum standards of care for all directors

Answer 21

Passive directors cannot escape liability
Directors must maintain proper accounting records
Directors have collective responsibility when they approve the accounts under s414, and should engage in critical consideration of them as part of the process

Question 22

Negligence liability for ‘bad’ decisions

Answer 22

The quality of decision-making by the directors is a matter for the shareholders whilst the
company is solvent. The implicit BJR normally prevents negligence claims for ‘bad’
decisions.

Question 23

Duty to exercise independent judgment (s173)

Answer 23

An express exception (173(2)(a) where directors enter a contract which restricts their future discretion
Another exception (173(2)(b) where directors act in a way authorised by the constitution (i.e. delegation under Art 5 MAPC), but this duty requires directors to exercise residual supervision

Question 24

Duty to act within powers (observe the constitution & use powers for proper purposes) s171

Answer 24

Recall that directors not a party to s33 contract; under this section they have an obligation to adhere to limitations on their powers in the articles and to obey any special resolutions passed under Art 4 MAPC

Question 25

Duty to use powers for proper purposes

Answer 25

‘Proper purposes’ duty codified in s171(b): company directors must ‘only exercise powers for the purposes for which they are conferred’

Question 26

Howard Smith Ltd v Ampol Petroleum [1974]

Answer 26

What was the substantial purpose for which the directors exercised the power? This is a question of fact Was that purpose proper? There is no list of proper and improper purposes. Does the constitution say anything? Unlikely in most companies. Otherwise courts will look at type of company.

Question 27

Improper purposes

Answer 27

Transfer of funds to another company to enable it to pay its creditors was not a proper purpose The transfer of assets for no consideration to another company was an improper purpose

Question 28

Consequences of improper purpose

Answer 28

If the purpose improper, the act is voidable, but may be ratified Alternatively, the company can sue the director, who will have to compensate for any loss caused, and third parties who know the improper purpose will not be able to rely on any contract

Question 29

Directors as fiduciaries

Answer 29

Directors have opportunity for fraud or mismanagement because of control (Art 3 MAPC) over company’s assets

Question 30

Section 172 - duty to promote the success of the company

Answer 30

Enlightened shareholder value not pluralism Non-exhaustive list - trade offs inevitable Subjective good faith rule preserved ‘Interests of company’ replaced by ‘promote the success of the company for the benefit of its members as a whole’ 'have regard' - what does this mean?

Question 31

s172 unenforceable by...

Answer 31

stakeholders (duty owed to the company such as employees), and very difficult for shareholders to challenge because of BJR (as long as directors honestly believe the decision will promote the success of the company…) Much weaker now as director owes all duties to company

Question 32

The duty to consider creditors: s172(3)

Answer 32

Creditor interests are not included in s172(1) but note s172(3): common law rules requiring directors to consider creditors are preserved Focus on directors’ duty to act in good faith in interests of company - gradually shifts from shareholders to creditors as the company gets closer to insolvency

Question 32

BTI 2014 LLC v Sequana SA and others [2022] UKSC 25

Answer 32

OBITER The Supreme Court considered that the point at which directors should have regard to creditors’ interests is When the company is insolvent or bordering on insolvency or that an insolvent liquidation is probable.

Question 33

S175 - duty to avoid conflicts of interest

Answer 33

Direct = something they are taking for themselves that is due to the company Indirect = director owns shares in another company that is taking something due to the company he is a director to

Question 34

The secret profit rule

Answer 34

The rule requiring directors to account to the company for any secret profit they make out of their position as directors of the company is long-standing.

Question 35

Competing directorships/ conflict of duties

Answer 35

Where a person directs two companies which are competing, their duties are ultimately likely to come into conflict Directing competing companies would not be a breach of duty per se. However, once a director took a decision which favoured one company over another, he would breach his duty of loyalty/good faith (and might also be in breach of the no conflict rule).

Question 36

s175(5) - board ‘authorisation of conflict’

Answer 36

Allows directors of private companies to ‘authorise’ (i.e., approve in advance) conflicts of interest, provided this is not applied by the constitution The conflicted director and other interested directors cannot vote

Question 37

Remedies for breach of no conflict rule

Answer 37

Account of profits, regardless of any loss to the company (Regal; s175(2)) - Alternatively, equitable compensation to make good any losses caused to the company by the breach of fiduciary duty (Target Holdings Ltd v Redfern) - Alternatively, declare that a benefit obtained by a director (at least where obtained by virtue of his position) is held on constructive trust for the company, giving it a proprietary rather than personal claim (FHR European Ventures, e.g. para 7, UKSC approving remedies in Cook v Deeks and Bhullar)

Question 38

Section 176 - duty to not accept benefits from third parties

Answer 38

Prohibition on benefits conferred on a director by reason of ‘his being director’, or ‘his doing (or not doing) anything as a director’ Bribes will be held on constructive trust for the company

Question 39

The rule against self-dealing: s177

Answer 39

If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the directors… Any declaration made required by this section must be made before the company enters into the transaction or arrangement.’

Question 40

Approval by shareholders of self-dealing

Answer 40

Shareholder (advance) approval still operates as an alternative to advance board approval under s175 and 177 Disclosure must be full and frank

Question 41

S177: limits of disclosure

Answer 41

Disclosure to board of directors must be full and frank and include the extent of interest Disclosure only required where a director is, or ought reasonably to be, aware of the interest or the transaction Not required: - cannot reasonably be regarded as giving rise to conflict - directors already aware

Question 42

S177: consequences of non-disclosure

Answer 42

In the absence of disclosure, the contract can be rescinded (s180(1)). Where rescission is impossible because third party rights have intervened, the director can be ordered to pay equitable compensation to the company for his breach of s172

Question 43

Ratification

Answer 43

permitted after the act, it has been forgiven, prevents the directors from being sued

Question 44

Shareholder ratification under CA 2006

Answer 44

s239 requires director’s votes (and those of any shareholders connected with him – defined in s252-5) to be disregarded

Question 45

Which breaches are unratifiable?

Answer 45

‘Fraud on the minority’ Self-serving negligence Breach of duty to consider creditor interests as part of interests of the company under s172(3)

Question 46

Which breaches are ratifiable?

Answer 46

Regular negligence Division of ‘mere’ opportunity Improper purpose

Question 47

Relief from liability

Answer 47

s1157 allows the court to relieve a director, prospectively or retrospectively, from liability for breach of duty where the director has acted honestly and reasonably, and the court considers that he or she ought to be excused

Question 48

Third-party liability

Answer 48

Third party may be constructive trustee if they are in ‘knowing recipient’ of company assets; no need to prove dishonesty, but must know the transfer was in breach of fiduciary duty; question is whether the recipient’s knowledge makes it unconscionable for him to retain the property