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Summary Business Law and Practice - Directors Duties, Breach of Duties and Remedies
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Business Law and Practice - Directors Duties, Breach of Duties and Remedies
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Directors Duties, Breach of Duties and Remedies(WS8 – Prep Task 1)
Outcomes
1) Explain the legal framework of responsibilities which apply to company directors and
determine whether directors may be in breach of their duties. (PT1)
Previous Exam questions:
a) Explain, with reasons, whether the Company could request that Sienna account to
the Company, under s175 CA 06, for the profit she has made on the contract.
Company agreed that Sienna could take personal advantage of the contract which
the company was offered and declined to enter. (6 marks)
A possible claim arises against Sienna under s175 CA 06 because the contract could
be said to be an opportunity, which despite the company declining it, Sienna
exploited in her own name. On this basis Sienna had a direct interest that either
conflicted or potentially conflicted with the interests of the Company. However,
Sienna cannot be made to account if an exception applies under S175(4) CA 06 i.e.
(a) If the situation cannot reasonably be regarded as likely to give rise to a conflict; or
(b) If the matter has been authorised by the directors.
Whilst it could be argued that (a) applied Sienna will have a defence under (b) all the
directors, including Sadie, authorised her taking the contract in her own name. Even
though Sienna appeared to take part in the authorisation, the meeting would have
been quorate and a majority was still in favour without her.
The Company will not be able to take action against her on this basis.
CA 2006 imposes duties on directors. Both equitable “fiduciary” duties (aimed at
stopping directors from abusing their position) and common law duties of care, skill and
diligence (aimed at preventing incompetence and carelessness).
CA 2006 - 7 General Duties – All duties apart from s174 are equitable “fiduciary” duties
1. s171 – Duty to act within powers
2. s172 – Duty to promote the success of the company
3. s173 – Duty to exercise independent judgment
4. s174 – Duty to exercise reasonable care, skill and diligence
5. s175 – Duty to avoid conflicts of interest
6. s176 – Duty not to accept benefits from third parties
7. s177 – Duty to declare interest in proposed transaction or arrangement
Section 179 makes it clear that a case can fall under more than one of the duties in the
Act –
, Section 175 Section 177 Section 182
Applies where Company is NOT party to the Company is party to a Company is party to
proposed transaction proposed transaction an
existing transaction
Duty to Avoid conflict by not Declare any possible Declare any existing
proceeding conflict arising conflict
Unless exception(s) apply or Exemption - s 177(6) Exemption – s
Directors give authorisation 182(6), same as for
s 177
Look for … Diverting property/opportunity Inclusion in procedure
planning template
Consequences Breach of duty Breach of duty Criminal offence
of breach
Section 175 – duty on directors to avoid situations that cause conflict – all situational
conflict. E.g. where director is involved in something or has been doing something that
the company is not a party to/ involved in the transaction. This gives rise to conflict of
interest because directors interest is torn between those of the company and the other
situation that the director finds himself in. If this duty applies then the director should
not proceed with the situation / transaction unless one of the exceptions apply or other
directors give authorisation. NOTE: company is not a party to the proposed
transaction.
Example = opportunities that director has found out through being a director of the
company e.g. director is involved in meetings and client has talked about some
work and director has taken that opportunity for himself personally = conflict arises
even if the company has said they do not want to take the work themselves.
Section 177 – company is going to be a party to a transaction (proposed – something
they are talking about). Any director who has any interest I the transaction must
declare the nature and extent of their interest. E.g. if the company is proposing to
enter into a transaction with the director themselves = director has an interest /
company is proposing to enter into a transaction related to the director e.g. spouse or
business associate then director has to declare the interest
Exception – s177(6): there's no need for a director to declare an interest if it's:
a) not likely to give rise to a conflict –
b) the other directors are already aware of the conflict, or –
c) if it concerns the terms of their own service contract.
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