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Company Law: Directors' Duties
- Module
- Company Law
- Institution
- Kings College London (KCL)
Comprehensive notes on Company Law in the UK: Director's Duties.
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Company LawRevision Notes
DIRECTOR’S DUTIES
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INTRODUCTION
Purposes of Company Law
A central part of company law is concerned with providing a framework for rules which:
constrains potential abuse by directors of their broad discretionary powers (as conferred by articles);
and
does not constrain the directors so that efficiency gains from having a strong centralized management
are not dissipated.
! The statutory general duties are based on case law, which must still be referred to when considering directors’
general duties (s.170, CA 2006).
Powers conferred by Articles
Articles of association may confer extremely broad discretionary powers upon the board (common for
large companies). This requires a balance of efficiency and ensuring that the power may not be used for
improper purposes/in the interests of the directors.
Constraints on directors’ powers
By controlling the activities of directors:
(i) by imposing rules relating to the structure and composition of the board itself;
(ii) the governance rights of members (passing of special resolutions, the taking of some managerial
decisions, critical review of management); and
(iii) the power of shareholders to remove members of the board in order to constrain the exercise of the
powers of the board and produce accountability.
By imposing duties: Duties which company law imposes directly on the directors as to the limits within
which they should exercise their powers. These rules/duties are developed by analogy to the rules applying
to trustees. General fiduciary duties and duties of care and skill have until recently remained within the
common law, but have changed since CA 2006.
General duties of a director
The Part 10, CA 2006 sets out the main general duties of a director.
Apart from the duty of care, skill and diligence, other duties include of fidelity, honesty and loyalty,
which are similar to the duties owed by trustees or agents, whom are required to put the company’s
interests before their own.
These statutory duties are cumulative (s. 179, CA 2006) hence more than one of the general duties
may apply in any given case.
Statutory statements of duties are not exhaustive: s. 170(3), CA 2006 provides two things.
(i) General duties are based on certain common law rules and equitable principles governing the
behaviour of directors.
(ii) Statutory restatement shall have effect in place of those principles: s. 170(3) and s. 170(4) which
directs the court to interpret and apply the general duties having regard to the pre-existing case law.
,Company Law
Revision Notes
CRITICISM: Taking these two subsections together, some doubt remains over the extent to which the restated
duties merely replicate or, indeed, replace the pre-existing duties. Such uncertainty runs counter to the declares
objectives of the CLR to provide greater clarity on what is expected of directors and to make the law more
accessible.
EXAMPLE: ss. 175 and 176 (respectively the no conflict duty and the prohibition against accepting benefits from
third parties) are not framed so as to reflect precisely the applicable equitable principles and terminology found in
the case law.
COUNTER ARGUMENT: On the other hand, in the interests of clarity, s. 170(2) does restate the point that
emerges from case law that the duties encompassed in ss. 175 and 176 continue to apply after a person ceases
to be a director:
(a) as regards the exploitation of any property, information, or opportunity of which he became aware at a
time when he was a director (duty to avoid conflict of interests); and
(b) as regards things done or omitted by him before he ceased to be a director (duty not to accept benefits
from third parties).
__________________________________________________________________________________________
, Company Law
Revision Notes
__________________________________________________________________________________________
TO WHOM AND BY WHOM ARE THE DUTIES OWED
To whom?
The company (not to individual shareholders or employees) : s. 170 (1), CA 2006.
What does this mean? The importance arises in relation to the enforcement of those duties. This
means that only the company will be able to enforce them.
! Note: In certain circumstances, a shareholder may be able to bring a derivative claim on behalf of the company
to enforce those duties (s. 260 – 264, CA 2006).
Percival v Wright [1902]: Shareholders accepted an offer for purchase of shares from the directors of the
company, the defendants (D). D had not disclosed at time of purchase that they were negotiating with a TP for
sale of the company at a higher price. Shareholders claimed that D were in fiduciary position and therefore,
as a result of the transaction not being disclosed, it should be set aside.
Held: D were held not to be in breach of duty through non-disclosure. Swinfen J stressed that to hold
otherwise ‘would place directors in a most invidious position, as they could not buy or sell shares without
disclosing negotiations, a premature disclosure of which might well be against the best interests of the company’.
It should be noted, however, that in reaching its decision the court stressed that there was no unfair dealing by
directors. Further the fact that the shareholders had themselves first approached the directors requesting the
share purchase was material to the court’s directions.
Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983]: In
this case Dillon LJ explained that: ‘directors indeed stand in a fiduciary relationship to the company as they are
appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the
creditors, present or future, or to individual shareholders.’
CRITICISM: TO SAY THAT DIRECTORS OWE THEIR DUTIES TO THE ‘COMPANY’ IS NOT
PARTICULARLY ILLUMINATING.
What are a company’s interests? Which of the following is it?
(i) the shareholders, as a contractarian analysis would demand, constitute said interests; or
(ii) more pluralist approach adopted by realist theory whereby the company’s interests are aligned
with those of the shareholders, creditors, employees, and the general public.
The court cleverly fudged the answer.
Greenhalgh v Arderne Cinemas Ltd [1951]: Evershed MR took the view that: ‘the phrase
“the company as a whole” does not … mean the company as a commercial entity, distinct from
the corporators: it means the corporators as a general body’. Thus, he rules out free floating
corporate interest that corporate realists would advocate and identifies the company’s interests
with the shareholders as the general body indicating contractarian bias.
But, there is a conflict.
Report of the Second Savoy Hotel Investigation: Here, a Board of Trade Inspector was
appointed to report on the legality of the directors’ actions in trying to remove an asset from the
company’s control so as to take it beyond the reach of a takeover bidder.
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