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Summary Directors' Duties
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Lengthy but detailed notes, including all relevant case law and academic commentary on the law surrounding directors' duties.
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V. COMPANY LAWDIRECTORS’ DUTIES
PART I: INTRODUCTION
1. WHAT ARE DIRECTORS’ DUTIES?
- Directors are subject to certain standards of conduct imposed by law which govern their
management and supervision of a company’s affairs. The exist alongside (and sometimes subject
to) the contract in the Articles between directors and shareholders).
- This area of company law is a balancing act between constraining potential abuse of directors’
powers, whilst preserving the efficiency of a strong centralised management.
- Regal Hasting v Gulliver: Directors are sui generis (i.e. in a unique position). In some respects
they resemble trustees, agents and partners. What is certain is that they are fiduciaries, and
therefore they owe a core duty of loyalty to the company.
2. THE REFORM PROCESS
- The law on directors’ duties (both fiduciary and non-fiduciary) is codified in CA 2006, ss.170-181.
- The main aim behind the proposal for a ‘high level’ statutory statement of directors’ duties was to
promote understating of the basic principles underlying this area of law, especially amongst
directors themselves. Previously, as in equity, principles had to be deduced from a significant body
of case-law.
Company Law Review: The statutory statement should be comprehensive, setting out all
the duties to which directors were subject.
Law Commission: The statutory statement should include only the principal duties,
leaving the courts to develop duties which have not yet been clearly formulated in the
cases.
- The objection of the Law Society that such a reform was in danger of ‘freezing’ the law of
directors’ duties and impeding its further development can be refuted on two fronts:
1. The CA 2006 is a ‘high level’ statement, which gives the courts plenty of interpretative
scope when applying the principles to the changing circumstances of commerce.
2. Section 170(4) adds two important propositions:
The statutory general duties ‘shall be interpreted and applied in the same way as the
common law duties or equitable principles’ so that the existing case-law on the common
law duties will remain relevant.
‘Regard shall be had to the corresponding common law rules and equitable principles in
interpreting and applying the general principles’ i.e. the courts may take into account the
developments in the equivalent non-statutory duties applying to trustees and agents.
1
, - A second objection to codification was that it would cause confusion about the relationship
between the statutory statement and existing or future decisions of the courts.
Section 170(3) states that the general duties replace (“have the effect in place of”) the
common law principles on which they are based, while section 170(4) indicates how the
common law cases are to be used.
The difficulty arises where it is unclear whether the statutory statement is merely
codifying or departing from the existing common law: this has an obvious impact on
the relevance of common law decisions.
- The seven duties set out in Ch. 2 Pt 10 cover only the substantive content of the directors’ duties.
The CLR had intended to recommend codification of the remedies for breaches of duty, but did
not have enough time. This is regrettable considering that the area of remedies is confused and
inconsistent.
- Section 178: The civil consequences of breaches of the statutory duties are to be those which
would apply at common law.
3. WHO ARE THE DUTIES OWED BY?
3.1. Every de jure director of the company
- The general statutory duties are clearly owed by those who have been properly appointed as
directors of the company. This applies to both executive and non-executive directors.
3.2. De facto directors
- Section 250: A director is defines as “any person occupying the position of director, by whatever
name called”. It therefore remains open for the courts to apply the statutory duties to de facto
directors just as they had done under the common law.
Kaytech International
The central question which the courts seek to answer is whether the individual was ‘part
of the corporate governing structure’ or has assumed the ‘status and functions of a
director’.
Smithton Ltd v Naggar
A person may be de facto director even if there was no invalid appointment. The question
is whether he has assumed responsibility to act as a director.
To answer that question, the court may have to determine in what capacity the director
was acting. The court will also have to determine the corporate governance structure of
the company so as to decide in relation to the company’s business whether the defendant's
acts were directorial in nature.
The court is required to look at what the director actually did and not any job title given to
him. The question whether or not he acted as a director is to be determined objectively
and irrespective of the defendant's motivation or belief.
- This raises the question of whether a de jure director of one company can, in the course of acting
in that role, become a de facto director of another.
2
, Re Paycheck Services
Lord Hope: So long as the relevant acts done by the individual were entirely within the
ambit of the discharge of his duties and responsibility as de jure director of the parent
company, it was to that capacity that his acts had to be attributed. Important was the fact
that the parent and subsidiary companies were different legal persons.
Lord Walker and Clarke dissented from this approach: if a person takes all the important
decisions affecting a company and sees that they are carried out, he is acting as a director
of that company, regardless of any other role which he purports to be fulfilling.
3.3. Shadow directors
- Section 170(5): The general duties apply to shadow director where, and to the extent that, the
corresponding common law rules or equitable principles so apply. [This is unclear].
- Section 251: A shadow director is a person, not formally appointed as a director, but in accordance
with whose directions or instructions the directors of a company are accustomed to act.
- NB section 251(3): A body corporate is not to be regarded as a shadow director of any of of its
subsidiary companies.
A de facto director is one who claims to act and purports to act as a director,
although not validly appointed as such.
A shadow director, by contrast, does not claim or purport to act as director. On
the contrary, he claims not to be a director. He lurks in the shadows, sheltering
behind others who, he claims, are the only directors of the company to the
exclusion of himself.
- Which duties will apply to shadow directors?
Ultraframe v Fielding
Directors’ fiduciary duties did not automatically apply to shadow directors, on the
grounds that a shadow director, unlike a de facto or properly appointed director, had not
undertaken to act on behalf of the company and so had not put himself in a fiduciary
relationship with the company.
- If the purpose of the law of directors’ duties is to constrain the exercise of the discretion vested in
the board, it would be unfortunate if those rules did not reach all those involved in that exercise.
- Given that the two concepts (de facto and shadow) have in common the fact that an individual
who is not a de jure director is alleged to have exercised real influence in the corporate
governance of a company, it is questionable why the applicability of fiduciary duties is so
drastically different.
3.4. Senior managers?
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