Essay question
Company Law – Director Duties
A company director has got certain basic responsibilities. The
Companies Act 2006 has codified some of these duties.
Discuss in regard to relevant case laws.
Directors are appointed by the company's shareholders to run the company's affairs for the
benefits of the shareholders. The welfare of a company depends on the shoulders of the directors
and they are also responsible for the interests of the company as well as shareholders. Director's
general duties are initially based on the common law rules and equitable principles. Lord Judge
Bowen explains director's duties: ‘directors are described sometimes as agents, sometimes as
trustees and sometimes as managing partners’. Over the years, these basic principles have been
codified in Companies Act 2006. The law under s250 defines the position of a director: a person
occupying the position of the director by whatever name called. The s170 of the Companies Act
2006 states that the general duties of the directors owe to a company are those which are laid
down under s171 to s177 of the Companies Act.
Duty to act for proper purposes is a duty codified in s171 of Company Act 2006. According to this
rule, directors, the fiduciary agent of companies, have to use their powers within the company
constitution and only for the reasonable purposes in the best interests of the company and
shareholders. Where directors exceed their powers for their own benefits, shareholders can
challenge them in the court of law. This rule is explained in the case Hogg v Cramphorne where
the directors intentionally allotted new shares to those persons who can oppose the take over bid.
The reason behind this allotment was that they want to secure their jobs in the board. It was held
that the directors did not use their powers properly and the allotment of shares was not based on
honesty, so court declared this allotment void. Following the similar facts, it was further held that in
Howard Smith Ltd v Ampol Petroleum Ltd, any act or decision of directors which is not within
the company's constitution is a void act, if it merely exceeds director powers, then it is declared as
a voidable decision.
We can say that s171 of the Companies Act provides a parameter to judge whether director's
purpose was proper and that parameter is the constitution of the company. Under s172, it is the
duty of directors to act in good faith and to promote the success of the company as well as its
members. So controversy arises where director acts slightly beyond their powers to promote the
success of the company in the benefit of its members, it is unfair to declare those acts as improper
merely on the basis that these act are slightly beyond their powers and also not within the
constitution of the company.
This core duty is set out in the s172 of the Companies Act 2006. Lord Greene explained this duty
in Re Smith & Fawcett Ltd that directors are bound to exercise their power “bonafide in the way
they consider is the best interest of the company not what a court may consider”. In Hutton v West
Cork Railway Co, it was held that company may conduct itself in a way which benefits
stakeholders other than shareholders, but only insofar as that will in the end, albeit indirectly, be in
the shareholders' interest. This is known as the shareholder primacy theory established by A. A.
Berle. Dodd in contrast observed that where on one hand corporations are institutions to maximise
shareholders wealth, on other hand, they have a corporate social responsibility role to play as well.
S172(1)(a) to (f) of the Companies Act 2006 describes and imposes significant duties upon a
director, which they must discharge; (a) The likely consequences of his any decision in the long-
term on a company, (b) A director must watch interests of the company's employees first, (c) A
director must try to foster the company's business relationships with suppliers, customers and
others, (d) A director of a company should always watch the overall impact of the company's
operations on the community and the environment, (e) A director has a desirability of the company
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