The Powers of the Company Board of Directors Under English Law - Research Paper Example

Understanding the Rights, Duties and Limitations of Powers of the Members of the Board of Directors of a Corporation I. Introduction The Board of Directors of the corporation are elected by the shareholders to act in their behalf and to as the ego of the company. By virtue of its position in the company, the Board of Directors has direct control over the affairs of the company (see Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame1). It has the power to decide what to do and what not to do for the good of the company and its owners. In addition to its business and financial responsibilities to the company, the Board of Directors also has the responsibilities of responding to issues connected to corporate social responsibility, governance and ethics. Although the Board of Directors has powers over the affairs of the corporation, these powers are not absolute. To protect the company and the shareholder, the Companies Act 2006 included several provisions that limit the powers of the Board of Directors. These limitations are not in anyway meant to curtail the ability of the Directors to respond to matters involving the affairs of the company but rather, these limitations are meant to focus the attention of the Directors on the things that are beneficial to the company. Aside from the limitations set forth in the Companies Act 2006, common law also limit the powers of the Board of Directors. There are several cases decided by the House of Lords regarding the scope and limitations of the powers of the Directors. To give us a clear picture of the limitations of the powers of the company Board of Directors under English law, let us look into the provisions of the Companies Act 2006 and review some of the leading cases decided by the courts regarding the extent of limitations of powers of the Board of Directors. II. Roles, Functions And Limitations Of Powers Section 170 paragraph 3 of the Act states that “The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director…” The duties of directors are covered under Chapter II section 171 to 177. According to section 171 of the Companies Act 2006, “A director of a company must (a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred.” In other words, the Board of Directors may only exercise its powers for a proper purpose at all times. According to the court in the case of Harlowe’s Mominees Pty v Woodside2, proper purpose in this case means legal and moral intentions that are beneficial to the company. In the light of this definition, the Board of Directors is prohibited from using its powers for unlawful or immoral purposes even their intention is to promote the interest of the company. However, the proper purpose provision of the law is not set in stone and it admits exceptions. There are certain cases when the otherwise improper acts of the Board of Directors may be considered as acts of the corporation when these acts are ratified by the members. The ratification of the acts of the directors can make the otherwise improper act proper. A clear example of this situation can be seen in the case of Howard Smith Ltd. v Ampol Ltd3. According to the decision of the court in this case, where the exercise of the powers of the Board of Directors is done to protect the best interest of the company, the act may be ratified to become official act of the company. Note that in this case, in order to defeat the majority shareholder and ensure the financial stability of the business, the Directors issued a large number of shares to the public. Such act of the Directors was considered by the court as within what is contemplated by the Companies Act 2006. The second limitation on the powers of the Board of Directors can be found in Section 172 of Companies Act 2006. According to this section, “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. The provision clearly stated that the duties of the Directors is towards the company and its shareholders thus is has the obligation to promote the interest of the company and its owners. When promoting the interest of the business, the Directors must look into the long term effects of its decisions, , the reputation of company, the interest of its employees and the relationship of the company towards its clients, partners, suppliers and the general public. In Hutton v West Cork Railway Co4, the court ruled that the duties of the Board of Directors include the obligation to take care of the company’s assets and its reputation. The Directors are therefore prohibited from using the assets or the money of the company for any other purpose other than for its benefit. In the case of Boulting v Association of Cinematograph, Television and Allied Technicians5, the court clearly stated that it is wrong to compel a person or an entity to act inconsistently with the duty of loyalty and fidelity which he or she has undertaken by contract or trust. Section 173 of the Companies Act 2006, provides another limitation to the powers of the Board of Directors. According to this provision, the Directors cannot compromise their discretionary powers unless the company expressly authorized them to do so. In other words, the autonomy of the decision-making powers of the Directors must be upheld at all time. According to the court in the case of Dawson International plc v Coats Paton plc6, Directors are prohibited from coming to an agreement among themselves as to how they will vote and decide certain issues which may be taken up in their next meeting. Such kind of agreement as to how they will vote on issues concerning the company may have some adverse effects on the company. However, the prohibition against compromise among members of the board is absolute and there are certain cases when such agreements are permissible. According to the court in the case of Dawson International plc v Coats Paton plc7, agreements that benefit the company are allowed, thus, if the acts of the Directors redound to the benefits of the company, such acts may be ratified by the members of the Board of Directors. Promoting the best interest of the company should always be the paramount consideration of the Board of Directors when performing it duties and functions. Section 174 Companies Act 2006 clearly states that, “A director of a company must exercise reasonable care, skill and diligence.” Reasonable degree of skills here means “(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.” (See Section 174 Companies Act 2006; see also Dorchester Finance Co v Stebbing8). In applying this provision to the case of Re City Equitable Fire Insurance Co9, the court said that where a director is expected to exhibit reasonable degree of skills in the performance of his or her duties, the failure of the Director to meet such expectations can be held against him or her. If such failure on the part of Director caused injuries or damages to the company, the Director may be asked to pay the company for the damages sustained by it. The duty of care of the Directors towards the company is also clearly outlined by the decision of the House of Lords in the case of Re Barings plc (No 5)10. According to the court in this case, where the Directors failed to properly monitor the affairs of the company, such failure can be considered as a breach of their duty to promote the best interest of the company. The court also said in this case that although the Directors have the right to delegate some of their functions to the right people, nevertheless, it is still their duty to ensure that these functions as carried on properly. The Director is therefore directly liable for the failure of the person entrusted by him or her to perform certain functions on his or her behalf. As with the other limitations set under English law, Section 174 of the Companies Act admits exceptions. Technically, a member of the board is not expected to deliver more than what he or she is capable of giving. Thus, if the Director exercises his or her duties with care and to the best of his or her abilities, he or she may not be held accountable if he or she failed to protect the company from losses (see Dorchester Finance Co v Stebbing11). We have to understand that there a lot of circumstances that are beyond the controls of the Directors, thus, for reason of equity, if the Directors did their jobs to the best of their abilities but still failed to prevent damages to the company for reasons that are beyond their control, they cannot be held liable for damages. As the representative of the company, the Board of Directors is bound to show loyalty to the company. As it is, the Directors cannot engage in activities that may result to conflict of interest. According to Article 175 Companies Act 2006 “A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflict, or possibly may conflict, with the interests of the company.” In the case of Aberdeen Ry v Blaikie12, the court said that since a company operates through its agents, it must demand loyalty and fidelity from its agents. The Directors, as agents of the company, must promote the best interest of the company and should not refrain from engaging in any business that may directly compete with the business of the company. Note that the company is a legal entity of its own and it enjoys autonomy from its shareholders. As it is, the Board of Directors only represents the company and is not the company itself. According to the court in the case of Regal (Hastings) ltd v Gulliver13, as fiduciaries of the company, the directors are prohibited from putting themselves in a position where their interests and duties come in conflict with the duties that they own to the company that they represent. If a Director is found guilty of directly competing with the company, he or she may be removed from office and may be required to restore to the company whatever benefits it may have taken away from it. The governing principle for the rule of equity in the case of Directors is penned by Lord Russell of Killowen in the case of Regal (Hastings) ltd v Gulliver14. According to Lord Russell, the rule of equity in case of a fiduciary that profited from his or her position is that the fiduciary must be held liable to restore the profit. Section 175 can be applied in connection with section 177 Companies Act 2006. According to Section 177 of the Act “If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.” Disclosure is very important in this case as members of the Board are strictly prohibited from competing against the company. As decided by the court in the case of Hoggs v Cramphorn Ltd15 since directors cannot compete directly with the company without causing conflict of interests, directors should refrain from engaging in a business or activity that directly competes with the same. Does this section admit any exceptions? Yes, there are exceptions to the need for disclosure. Paragraph 6 of Section 177 Companies Act 2006 states that a director do not need to declare his or her interest in certain transactions if he or she can show that (a) such interest “cannot reasonably be regarded as likely to give rise to a conflict of interest” (b) if the other members of the board are already aware of the interest of their fellow member and (c) if such interest “concerns terms of his service contract that have been or are to be considered” by the directors or by a committee constituted for that purpose. Aside from being held liable for failure to disclose their conflicting interest with the company, the Directors can also be held liable for breach of their fiduciary duty if they use the assets or the opportunities that are supposed to be enjoyed by the company for their own benefit. According to Section 176 Companies Act 2006, “A director of a company must not accept a benefit from a third party conferred by reason of (a) his being a director, or (b) his doing (or not doing) anything as director.” By virtue of their fiduciary duties towards the company, Directors are prohibited from using the properties, opportunities and information, gained through their participation in the company’s management, for their own benefits. As decided by the court in the case of Regal (Hastings) Ltd v Gulliver16 , if the Directors of the company used corporate opportunities for their personal benefits, they are liable for breach of their fiduciary duties and may be required to restore the profits they made out of the transaction and at the same time pay the company compensation for damages. Note that the information gained by the Directors through their office is deemed privilege communication and may not be used for other purposes other than for the good of the company (see Regal (Hastings) Ltd v Gulliver17). The obligation of the Directors to protect the interest of the company may subsist even after they resigned from their office. According the to the court in the case of CMS Dolphin Ltd v Simonet and another18, even after leaving the company, the duty of the Director as fiduciary of the company still continue and he or she may not misuse any information gained through his or her former office for his or her own gain. Likewise, he or she is also prohibited from diverting business opportunities that the company may be interested in. Note that in this case, the Director, after leaving his office, formed a corporation that has similar interest as the company which he used to serve. After forming his new company, the Director pirated the staff and the clients of his former company. Clearly, the Director here committed a breach of his fiduciary duty towards the company that he used to serve. III. Conclusion As stated by lord Cranworth LC in the case of Aberdeen Ry v Blaikie19, the Board Directors have control over the affairs of the company and as such, they have the duty to promote the best interest of the company that they are serving. As the representatives of the company, the Directors have the duty to stay loyal to the company and serve the company to the best of their abilities. The duty fiduciary duties of the Directors do not end once they step down from office. As stated by the court in the case of CMS Dolphin Ltd v Simonet and another20, the fiduciary duty continue even after the Director left his office. Consequently, the former Director can still be held liable for breach of duty even if he no longer sits as a member of the Board. Bibliography Books 1. Gower and Davis (2008) The Principles of Modern Company Law. Sweet & Maxwell 2. Hannigan, B. (2003). Company Law. Oxford University Press Laws 1. Companies Act 2006. retrieved January 31, 2010. http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_1 Table of Cases 1. Aberdeen Ry v Blaikie (1854) 1 Macq HL 461 2. Dorchester Finance Co v Stebbing [1989] BCLC 498 3. Howard Smith Ltd v Ampol Ltd [1974] AC 832 4. Hutton v West Cork Railway Co (1883) 23 Ch D 654 5. International plc v Coats Paton plc [1989] SLT 655 6. Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 7. Regal (Hastings) Ltd v Gulliver [1942] All ER 378 8. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34 9. Harlowe’s Nominees Pty v Woodside (1968) 121 CLR 483 (Aust HC) 10. Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 11. Dawson International plc v Coats Paton plc [1989] SLT 655 12. Re City Equitable Fire Insurance Co [1925] Ch 407 13. Re Barings plc (No 5) [1999] 1 BCLC 433 14. CMS Dolphin Ltd v Simonet and another [2002] BCC 600 Read More