Uk Company Law Directors Duties - Essay Example

? UK-COMPANY LAW – DIRECTOR’S DUTIES- AN ANALYSIS Customarily, director’s duties in UK have been divided under the head self-regulatory and non-regulatory mechanisms. Under regulatory approach, directors are required to comply with their obligations and duties, which had been by chance, adhering to the statutory duties, fiduciary duties, common law duties, which had been inflicted on directors under various laws ,which are mentioned below ;1 “Companies Act 2006” “Company Director’s Disqualification Act 1986” “The Financial Services and Insolvency Act 1986” “The Financial Services and Markets Act 2000” “The Insolvency Act 1986” There is a legal duty on the director which requires him to act in the best interest of the stakeholders and the shareholders. The above mentioned laws require the director of a company to be the regulator within the company who has power to function and make decisions on behalf of the company under the authority entrusted to him under the constitution of the company, and the power delegated by the shareholders to the director of the company to run the day-to-day affairs of the company; the directors have the authority to make decisions and should limit their authority within the limits set by the constitution of the company2. Duty of Care as required to be demonstrated by a director Directors are fiduciaries and consent or agree to act on behalf of or for, or in the best interests of the corporation in which they have been appointed as directors. Directors are required to exercise their duties primarily to maximize the shareholder’s welfare. Directors should primarily implement their duties in an ethical manner towards profit maximization, balanced against the requirement for corporate survival and to have consideration for the broader stakeholders of the company. In Re D Jan of London Ltd3, it was observed that the duty of care which is to be demonstrated by a director of a company under common law is now enshrined in s.214 (4) of the Insolvency Act 2006. Under s.212 of the Insolvency Act 1986, the liquidator sued the erstwhile director D’ Jan for breach and negligence of duty. In this case , the director D’ Jan signed an insurance policy as the task of filling up and checking up the application had been entrusted with an insurance broker. The fact that D’ Jan had been a director in a company which went to liquidation earlier had not been disclosed in the application and due to which , the fire claim made by the company was rejected by the insurance company. In this case , Hoffmann L J found D’ Jan in breach of his duty of care as he failed to go through the filled-in form and hence , he acted negligently4. In Bairstow v Queens Moat House Plc5, Nelson J found the four erstwhile directors of the defendant company liable for over ?26 million as regards to earlier dividends authorised by them. Nelson J observed the following in this case; A director who had given his permission for the defrayment of illegal dividend in violation of his duty and as a quasi trustee , he would be accountable to return such unlawful dividends paid back to the company as he knew that the dividends so paid were not legally authorised whether or not that authentic knowledge tantamount to fraud; If he is already aware of the information about the improperness of such dividend payments despite the fact that he was not aware that such improperness made the payment illegal. If he ought to have taken in all the background to have familiarity to the whole of the background which made the payments not legal; If he ought to have been well-known, as diligent and logically capable director that dividend payments were not legal6. In Overend and Gurney Co v Gibb and Gibb7, in exercise of the power authorised under the company’s Memorandum and Articles of Association of the company, the directors decided to purchase a money dealing and bill broking business. Later, this investment was found to be disastrous for the company. House of Lords were of the opinion though the directors were said to be imprudent, but they cannot be accountable for this investment without demonstrating that the nature of the business so acquired was such as to have made it apparently obvious that it would fail. As regards to the financial dealings of the company, the directors should not act in lax. In Chapeleo v Brunswick Permanent Building Society8, where a secretary of the company who involved in the misappropriation of cash who had the confidence of directors of the company and in this case , the directors of the company had been held that financial loss incurred was due to director’s failure of duty9. Negligence Performance of the Directors As per Section 174 (1) of the CA 2006, a director of a company should apply reasonable skillfulness, care and meticulousness. The skillfulness , meticulousness connotes experience , general knowledge , talent which could be rationally be anticipated from an individual who carrying out the functions of a director as regards to administration of a company; and the meticulousness , vast experience , talent that the director has in general. As an agent will be held liable for the principal if he acts negligently, likewise, a company director, as an agent of the shareholders shall be held accountable if he acts negligently. Hence, the director, as an agent of the company, owes duty of care to the company. This has been explained in Ferguson v Wilson by Cairns LJ as follows; since, a company is a juristic person with no flesh and skin, it can function through the directors who are said to be agents of the company. As agents are liable for the principal, the directors are liable for the company. In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunningham10 , Lord Cozens-Hardy L.J was of the view that a director is more than an agent and can be termed as a managing partner. In Re Foure Electric Accumulator Co11 , Kay J described the director of a company as “managing agent.” It is to be noted that if a company wants to sue its director on the ground of negligence, it has to satisfy the court about the exact duties purportedly not carried over by the concerned director, and upon the fact that he has been negligent in carrying out his authority or power. It is to be observed as regards to duties and powers of directors , the court will give due significance to managing directors also and if necessary , it will delve into the company’s Memorandum and Article of Association and if any doubt arises as held in Harold Holdsworth and Co (Wakefield) Ltd v Caddies 12 which solidly turned down the suggestion that a managing director occupies an unique office with recognisable authorities which supersedes any provisions in the Articles of Association of the company as held in Collier v Sunday Referee Publishing Co Ltd13. To defeat the charge of negligent, a director may rely on any advice received by him before venturing into any specific act on behalf of the company. In Dovey v Cory14, the House of Lords found a director not acted negligently where a director of a banking company acquiesced to advance loan on inappropriate security and to make payment of dividends out of capital. In this case, the Lordships were satisfied from the facts of the case that the director had functioned honestly backed upon the information, judgment and advice tendered by the bank’s general manager and chairman. As the director had relied on the advice given by such competent persons, he was held not negligent. In Re Smith & Fawcett15 , it was held by the court that directors are obliged to function “bona fide in what they perceive and not what a court may perceive –that too in the best interest of the company.” In Howard Smith v Ampol Petroleum Ltd, the same view was reaffirmed16. In Charterbridge Corp Ltd v Lloyds Bank Ltd, Pennycuick J opined that whether a honest and intelligent man while holding the post of director could have rationally thought that the transaction was for the advantage of the company or not.17 In William v Natural Life Foods Limited18 , it was held that a director can be held liable if there has been an intentional postulation of accountability towards a third person. Only in the extraordinary scenario, as in the case of fraud, the directors may witness personal accountability to third parties19. In Standard Chartered Bank v Pakistan National Shipping Corporation20 (No2), a director wantonly and consciously issued an untrue statement so as to obtain a credit facility in the guise of a letter of credit. It was held by the House of Lords that a director cannot escape accountability for dishonesty on the footing that he functioned for the advantage of and on behalf of the company21. In Duomatic Ltd, Re- , it was held that a director has to function in such a style in which a man if he deals his own issues with the adequate care and in such a scenario which could be rationally be anticipated to act. Thus, any culpable negligence or willful misconduct will fall under the type of misfeasance. In city Aquintable Fire Insurance Company case, it was held that a director is needed to function meticulously and honestly by applying his mind and exercising out his duties as a man of discretion of his aptitude and knowledge would require. Justice Romer in the above case was of the opinion that a director should exercise due care or diligence as anticipated from him. Where an infringement of a fiduciary duty can be ratified by the majority of shareholders in a general meeting as held in Hogg b Cranphorn22 , a stay may be granted against an action by a shareholder pending the convening of a general meeting ,but the court may not allow for ratification in every case as held in Cook v Decks23. “Directors Duty to Avoid Conflict of Interest” As per s 175 (1) of CA 2006, a company’s director must shun a scenario in which he can or has have , either express or oblique interest that clashes or possibly clashes , with the larger interest of the company. This is applicable, especially to the abuse of any information, property or business opportunity. As per CA 2006, a director must shun a scenario in which he has or might have an interest that will clash or may divergence with the interest of the company. The new company law highlights that this obligation to shun divergence of interest extends specifically to the abuse of any asset or any business opportunities or information irrespective of whether or not the company could avail any benefit of them and that a conflict of interest includes conflict of duties and conflict of interest. The law is applicable despite the fact whether the interest of the concerned director is either indirect or direct. Under the CA 2006, every director of the company should disclose his interest to the other directors of the company under Section 182 or 17724. In Chan v Zacharia,25 it was observed by Deane J that meaning of fiduciary is that there should not be any conflict of duty; a director is accountable for any secret gain or monetary benefit, which has been received or gained in the background where there is a poignant chance of conflict subsisted between his personal interest and his fiduciary capacity in the venture of or possible gaining of such an advantage or benefit26. In Boardman v Phipps,27 Lord Upjohn viewed that the basic feature of the rule is that a person in his fiduciary power must not benefit out of any secret profit from his trust as the trustee must be above any suspicion where his interest, and his duty may clash28. In Crown Dilemun v Sutton,29 it was held that by Peter Smith J that the defendant had no privilege to make any choice to avail windfalls, which came on his way while he was acting as the director of the claimants. Further, it is the duty of the director not to avail any chances, which happened that might place in a clash with his director’s duty to the claimant. As the director of the plaintiff company, the defendant had a privilege to seize every chance that he became conscious of the advantage of the plaintiffs. However, if the director has made a honest and full admission to the board of the claimant and if the board had accorded its informed and full contents, then, the director may be exempted from the clash of interest30. Findings Issue 1 As regards to the purchase of land for ?500,000 and the development of that land found not possible as there is obstruction in the main way which prevents access to the road. If a thorough inspection of the land had been made before the purchase by the directors of Standard Constructions Ltd, this problem would have come to light. The issue will fall under negligence performance of the directors and under the duty of care as required to be demonstrated by a director. Directors are required to exercise their duties primarily to maximize the shareholder’s welfare. In Chapeleo v Brunswick Permanent Building Society, directors were held liable as they had excess confidence over the secretary who had embezzled the company’s cash. In Ferguson v Wilson Cairns LJ held that since a company is a juristic person with no flesh and skin, it can function through the directors who are said to be agents of the company. As agents are liable for the principle, the directors are liable for the company. As held in Dovey v Cory, to defeat the charge of negligent, a director may rely on any advice received by him before venturing into any specific act on behalf of the company. But, in the given case, no such advice was taken by the directors and hence, directors are held to be negligent. As held in Standard Chartered Bank v Pakistan National Shipping Corporation, a director cannot escape accountability for dishonesty on the footing that he functioned for the advantage of and on behalf of the company. In city Aquintable Fire Insurance Company case , it was held that a director is needed to function meticulously and honestly by applying his mind and exercising out his duties as a man of discretion of his aptitude and knowledge would be required. However, in Overend and Gurney Co v Gibb and Gibb, directors cannot be held accountable if the investment failed later, but they had acted genuinely without any ulterior motives. In view of the above, the court will find Michael, Kevin and James liable to the company as they have not exercised the duty of care and acted negligently as they failed to make a thorough inspection of the land which ought to have been made by them before the purchase. Issue II One of the directors of Standard Constructions Ltd, James is working as a consultant for another rival company that also develops property in Oldchester. As per s 175(1) of the CA 2006, a director of a company is having a duty to avoid conflict of interest. Under CA 2006, shareholders of the company Standard Constructions Ltd are now having power to sue directors namely Michael, and James for their misdeeds through derivative actions with prior approval from the court. Under derivative claims, now shareholders can initiate action against the present or past directors of a company for his alleged breach of duty or negligence. In Kiani v Cooper 2010, both the claimant and defendant were the shareholders and directors of a company. Kiani alleged that Cooper was responsible for financial loss to the tune of ?300000 due to poor contract decision and as such Cooper was in violation of his fiduciary duty. In Stainer v Lee 2010 , it was alleged by Stainer , who was a minority shareholder , that company lost revenue as loans were sanctioned to directors of the company with free of interest. Thus, Stainer argued the directors were not functioning in the company’s best interest31. Following the above principle in Kiani v Cooper and Stainer v Lee, the shareholders of Standard Constructions Ltd can bring a derivative action with the prior approval of the court, against James and also Michael, who had connived with him for the loss sustained by the Standard Construction as James was working in a rival company which was not in the best interest of the Standard Constructions Ltd. References Anderson H, Director’s Personal Liability for Corporate Fault: A Comparative Analysis.(Kluwer Law International 2009) Birds J, Hildyard R, Miles R & Boardman. Annotated Company Legislation (Oxford University Press 2010) Booth, C D. Hong Kong Commercial Law: Current Issues and Developments. (Hong Kong University Press 1996) Business Database.’ Director’s Liability –Should You Worry About Shareholders’ New Powers?’ accessed 8 March 2012 Dunne P & Morris G D. Non-Executive Director’s Handbook.(Butterworth-Heinemann 2008) Hicks A & Goo S.H. Cases and Materials on Company Law (oxford University Press 2008) Sealy. L. & Worthington, Sarah. Cases and Materials in Company Law (Oxford University Press 2010) Sheikh, S. A Guide to the Companies Act (Taylor & Francis 2008) Storach S & G Ellis J. Business Law 2007-2008. (Oxford University Press 2007) Sweet& Maxwell. The Insurance of Commercial Risks: Law and Practice. (Sweet & Maxwell 2011) Read More