Company law - directors duties
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Directors - Vacation and Removal from Office
s 168 CA 06 - A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.
(1) Bushell v Faith - articles contained provision prohibiting shareholders to remove director. Held: legal, shareholders may change the articles in order to this out.
(2) Shareholders' agreement may contain clause preventing director to be removed under clause 168 CA
(3) Service contract (188 CA) (shareholders have to approve service contract of director longer than 2 years)
Grounds for disqualification of directors
- S 1(1) Company Directors Disqualification Act 1986 deals with disqualification orders, i.e.:
- -Conviction of an offense (s 2 CDDA 1986)
- - Persistent breach of the company legislation (s 3 CDDA 1986) (up to 3 years)
- - Fraud (s 4 CDDA 1986) (up to 10 years)
- - Disqualification following investigation (s 8 CDDA 1986) (ex. Looe v Fish - director was disqualified for 15 years for illegal allotment of shares)
Mandatory grounds for disqualification
- 6 CDDA 1986 - court shall make the order for disqualification if it is satisfied that
- (a) he was director of the company which became insolvent (whether while he was director of subsequently)
- (b) his conduct as a director of the company makes him unfit to be director of the company
Unfitness of director
- - s 9 schedule 1 CDDA 1986
- - Re Barings plc. - omission to do some actions which are quite serious to lead to disqualification
Statutory directors' duties (CA 2006)
- 171 - Duty to act within powers
- 172 - Duty to promote success to the company
- 173 - Duty to exercise independent judgement
- 174 - Duty to exercise reasonable care, skill and diligence
- 175 - Duty to avoid conflict of interest
- 176 - Duty not to accept benefit from third parties
- 177 - Duty to declare interest in proposed transaction or arrangement
To whom directors are owe their duties ( s 172)
- A director of the company must act in the way he considers, in good faith, most likely to promote success of the company fro the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
- - likely consequences of decisions in the long term
- - the interest of the company's employees
- - the need to foster the company's business relationships with suppliers, customers and other
- - the impact of the company's operations on community and environment
- - the desirability of the company maintaining reputation for high standards of business conduct
- - the need to act fairly as between members of the company
Duties of directors - overview
- - Statutory
- - Fiduciary
- - Common law
Fiduciary duties of directors
Standard approach: directors owe their duties to the company, but not to shareholders
- Nick Lesson and Re Barings Plc - Powers of directors could not be delegated. Main principles:
- - knowledge and understanding
- - boundaries of delegation
- Definition (derived from equity) -
- (1) to act bona fide in the interest of the company
- (2) to exercise powers for their proper purpose
- (3) to avoid conflict of interests and not to profit from directorial position
To whom directors owe their duties (other approaches)
- Re Pantone - Directors owe their duties to present shareholders and future shareholders
- Pluralist approach - Report of the second Savoy Hotel Investigation - directors also owe duties to the employees of the company
- Multinational Gas and Petrochemical Services Ltd v Multinational Gas and Petrochemical Services Ltd - duties are also may be owed to the creditors (in case of insolvency)
s 171 Duty to act within powers [ fid to exercise powers for their proper purpose ] (cases)
Hogg v Cramphorn - director issued shares in order to protect company from merger. Held: the only purpose of allotment of new shares is rising of finance, director committed wrongdoing
s 173 Duty to exercise independent judgement [ fid: duty to act bona fide in the interest of the company]
Fulham football club v Cabra Estates - courts have to look what evidences and information director had when he taken decision which is now challenged.
s 172 Duty to promote success to the company [ fid- duty to act bona fide in the interest of the company[ (cases)
Charterbridge Corpn Ltd v Lloyd's bank - objective test - whether an intelligent and honest man in the position of a director of the company concerned, could in the whole of existing circumstances, have reasonable believed that the transactions were for the benefit of the company
s 174 Duty to exercise reasonable care, skill and diligence (cases)
- Re Cardiff Savings Bank, Marquis of Bute's case - 6 months baby was one of directors of the company. Claim for breach of Duty to exercise reasonable care, skill and diligence was filed. Claim rejected as expectations should be very low standard
- Re City Equitable Insurance - no greater skill could be expected rather than concrete director has. Delegation is possible to some other official so long as honest belief in their ability is held
- (s 214(4) Insolvency Act - Now the standard is objective + subjective)
ss 175-177 Duty to avoid conflict of interest, not to profit from directorial position/take a personal benefit and duty to disclose personal interests (cases)
- Bray v Ford - in case director is of rule of conflict of interests, he is liable to account for any profit director made.
- Boardman v Phipps - dissented decision of lord Upjohn - held that Phipps and Boardman should not be liable because a reasonable man would not have thought there was any real sensible possibility of a conflict of interest.
- Regal (Hastings) Ltd. v Gulliver - strict position of UK law - held that the defendants had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. They therefore had to account for their profits to the company
Corporate opportunity doctrine (cases)
- Cook v Deeks - directors organized company and signed contract with third party instead of their employer. Held that they deprived their company and therefore all the profit should be paid to the company.
- IDC v Cooley - D received job offer from new employer and did not disclose it to the company. Held liable to all the salary he had as promoting new employer's business he used information he got from the former employer.
- Island export finance v Umunna - resigned from the company and joined another one which signed contract with third party with which his company had negotiations. Held not liable. As his former employer did not have mature business opportunity to sign this contract (because of no desire to do it). Resignation is due to dissatisfaction with his former employer.
Corporate opportunity (Bhullar v Bhullar)
- Bhullar v Bhullar - 3 directors decided not to buy property, 2 other directors did it by themselves and get profit. Held: not liable.
- - the reasonable man looking at the facts; was there a real sensible possibility of conflict?
- - equitable compensation (damages)
- - Duty to account
- - Constructive trust
- i.e. CMS Dolphin v Simonet - D resigned without giving proper notice, and so he was in breach of contract. He had made no proper disclosure and had misused confidential information. The maturing business opportunities were the company’s property, ‘where he knowingly had a conflict of interest, and exploited it by resigning from the company’.
Remedies: Knowing assistance (cases)
- Royal Brunei Airlines v Tan - test for being liable in assisting breach of trust must depend on dishonesty, which is objective (test). It is irrelevant what the primary trustee’s state of mind is, if the assistant is himself dishonest
- Twinsectra Ltd. v Yardley - introduces supplimentary subjective approach, i.e. test whether director could think that he is acting dishonestly (was critiseized many times)
- Barlow Clowes International Ltd (in liquidation) v Eurotrust - critisized Twinsectra and held that test is primaray objective
Release and Ratification
Statutory Ratification - approval of suspicious transaction (i.e. (a) any negligence breach; (b) any breach of statutory duty; (c) any breach of director's duty) or arrangement of director by the General meeting (s 239 CA)
- Ratification at common law -
- Earle v Burland - unanimous consent of shareholders is needed for ratification
Other statutory duties of directors
- Ss 188-226 CA 06
- Substantial non-cash transactions (s 190 CA 06)
- - asset less than 5 000 pound no need to approve
- - asset values of 10% of total asset value - consent is needed
- - asset more than 100 000 pound - consent is needed
Courts grant relief from liability
s 1157 CA 06 (courts are very reluctant to intrude in the corporate matters)
- honest and reasonable actions which fairly to be excused
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