The Business Transactions of Dydramol Board - Case Study Example

Introduction Each of the decisions taken by the board of directors of Dyramol Ltd. can conceivably be interpreted as a breach of directors’ duties.Directors’ duties have been codified by statute and expounded upon by equitable and common law principles.1 Broadly speaking directors are required to act in good faith at all times and in the company’s best interest.2 By extension, directors are required to act diligently and in a manner consistent with that of a business person.3 Sections 171-188 of the Companies Act 2006 takes the duty a bit further requiring that directors act in a manner calculated to promote the company’s success.4 In general a director has a fiduciary duty to govern the company honestly, diligently and in good faith. Directors’ Duties and the Business Transactions of Dyramol’s Board The company directors’ failure to register the floating charge in respect of the 4 million pound loan is negligent and a breach of the directors’ statutory duties pursuant to Sections 171-188 of the Companies Act 2006. Moreover, it has been a firmly established principle of company law that in the course of exercising his duties as a director, the director was subject to a certain standard in law. That standard is the reasonable skill and care that was generally expected of a business man possessing the relevant skills and training.5 Certainly, as directors of Dyramol, merely forgetting to register a floating charge is negligent and certainly a breach of the directors’ fiduciary duty to the company it governs. The same principles will apply to the unsecured loan of 3 million pounds. The directors’ duties as previously exemplified under the Companies Act 1985 have been incorporated under the Companies Act 2006 and that duty includes the duty to safeguard the interest of the companies’ members.6 By taking out an unsecured loan the company’s directors have exposed the members to liability in the event the company cannot repay the loan. The court in assessing the best interests of the members of the company and its employees will require, to some extent at least an objective application of the test for how a reasonable business man might exercise his duties.7 Converting the unsecured loan to a floating charge against a substantial portion of the company’s assets cannot be interpreted as the conduct of a reasonable man of business. The subsequent sale of the company’s guesthouse at £930,000 when independent valuers assessed it at a market value of only £350,000 is suspicious at the very least. As previously stated by virtue of the Companies Act 2006 the directors are required to promote the companies’ success. This includes taking into account the company’s business reputation and standing in the community, the company’s business relations and maintaining high business standards.8 This sale is obviously a breach of the directors’ statutory duties. The sale of the company’s vehicle at a gross undervalue is likewise suspicious and has undertones of insider dealing or at the very least a conflict of interest. It is conceivable that the vehicle was sold to a director or a connected person. The courts have demonstrated little or no tolerance for directors making personal use of their company’s information or property. Obviously persons acting in fiduciary positions are required to adhere to strict principles of confidentiality and permitting them to use information that arises out of company business transactions runs counter to this principle of confidentiality. Implicit in this duty is the principle that directors are forbidden to make personal use of the company’s property or any knowledge of information derived as a result of their fiduciary relationship with the company.9 In each of the transactions described and considered above the directors acted improperly and in breach of their fiduciary duties to the company. By doing so they acted in a manner that was detrimental to the members of the companies and it is hardly surprising that a petition was filed for winding up the company’s business. The conduct was collectively and singularly “unfairly prejudicial” to the members of the company.10 Section 459(1) provides as follows: “Any member of a company may apply to the Court by petition for an order under this section on the grounds that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to some part of the members (including at least himself) or that any actual or proposed act of omission of the company (including an act of omission on its behalf) is or would be so prejudicial.”11 Disqualifying Dyramol’s Directors Taking into account the cumulative consequences of each of the acts described above it is very likely that the court would make an order disqualifying the directors of Dyramol Ltd. The Company Directors Disqualifying Act 1986 makes provision for disqualifying directors in circumstances where the conduct complained off renders the director unfit in that his conduct amounts to a breach of contractual, statutory, tortuous or equitable duty.12 As previously discussed the conduct of the directors in each of the scenarios described amounted to, at the very least a breach of fiduciary duty within the meaning of the Companies Act 2006 and as such represented breaches of statutory, contractual and equitable duties. In considering an application for disqualification under the Act of 1986 the Court of Appeal ruled that: “Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.”13 Competence and honesty are intricately tied.14 In most cases the court will require a finding of incompetence alone will not guarantee that a director will be disqualified. Dishonesty together with incompetence will certainly be sufficient grounds to warrant a disqualification.15 It is very likely that the sale of the company’s vehicle and the sale of the guesthouse will be viewed as dishonest conduct. It is the consequences of those sales for the company’s business reputation that when viewed at is highest level can only be interpreted as conduct with disingenuous intentions. The cumulative impact of the sales together with the negligent conduct of the loans render the directors individually and collectively unfit to manage a company. For this reason they should be disqualified under the Company Directors Disqualifying Act 1986 for at least the minimum period of two years.16 Conclusion The conduct of the directors was such that one of its creditor lost faith in the company to such an extent that it petitioned the court for winding up. That in itself indicates that the directors did not successfully promote the companies business and conducted the company’s affairs in such a way as to damage its reputation. As such the directors are in breach of their statutory duties within the meaning of the Companies Act 2006. Moreover, the conduct was such as to raise serious questions of their individual fitness to govern a company. It is therefore conceivable that the court will make an order disqualifying the directors of Dyramol following the winding up of the company. Bibliography Boyle, A.J. (2002) Minority Shareholders’ Remedies. Cambridge: Cambridge University Companies Act 2006 Companies Act 1985 Company Directors Disqualifying Act 1986 Farrar, J.H.; Hannigan, B.M. (1998) Farrars Company Law London, Edinburgh and Dublin: Butterworths Gower, L.C.B., (2005) Gowers Principles of Modern Company Law. London, Sweet & Maxwell Parke v. Daily News Ltd [1962] Ch 929 re Barings plc (No 5) ([2001] 1 BCLC 523 Re City Fire Equitable Insurance Co. Ltd. [1925] Ch 407 re Dawson Print Group Ltd ((1987) 3 BCC 322 Software (UK) Ltd v. Fassihi (2002) EWHC 3116 Read More