Aberdeen Railway Co v Blaikie Brothers - Case Study Example

Company law Case Study Name Course Professor Date Directors’ duties are contained in several statutes that ensure their obligations over the company. Directors owe duties to a corporation and the core among them is to remain loyal to the corporation they serves and avoid any conflict of interest. In addition, they ought to display a very high standard of skill, diligence and care and act in good faith in promoting success of the corporation. In UK, directors’ duties are divided into some categories including; acting within powers, promoting company’s success, care and skill, independent judgment, loyalty as well as conflict of interests1. This discussion evaluates the conduct of Epping Ltd directors in accordance to part 10 of Companies Act 2006. In turn, individual or collective action and decisions can be interpreted in accordance of breach2. S 172 mandates the directors to promote success of the company. It elaborates that a director must act and considers actions in good faith in a way that they think would bring success to the company. The benefit should promote the interests of members as a whole3. In addition, they have to have regard to matters by considering the likely consequence of a decision in long term. Their action should be suitable in a way to safeguard the interests of company employees. They also have to foster business relationships with customers, suppliers and others. They should also choose to act to promote desirability of maintaining reputation for high standards through business conduct. In Dorchester Finance Co. v. Stebbing [1989] case involved a wrongful trading that led to insolvency. The directors did not act in good faith and to company’s interests. Mr. Stebbing and other non-executive directors signed cheques that were later counter-signed leading to insolvency4. Generally, all the directors are responsible for breaching s 172 (e). The subsection requires directors to act in regard to the desirability of their company maintaining reputation through high standards of conducting the business. However, it is noted from the discussion between Jamal and Big Brand Ltd that the company has a bad reputation. Company’s reputation and image is damaged due to lack of good corporate governance and application of ethics in boardroom decisions. The directors may have possibly failed to come up with standards and principles that promote ethics. It is their responsibility to communicate and act in accordance to manner that supports ethical concerns. In In re Walt Disney Co. Derivative Litigation [2005] strong criticism resulted from a director action to promise investors good return which failed and affected the company’s reputation5. Similarly, it seem that they image is tarnished and that is a matter of concern by all shareholders as it affects the way the company leverages many opportunities. Secondly, the first case involves the directors; Jamal, Erik, Alice and Kelly vote to purchase a smaller competitor, ACSE Ltd. Their action has breached s 172 (a) where they ought to regard to the likely consequences of decision in the long-term. Despite the clear information that Lu gave on the transaction, the directors did not act in discretion. Directors should always foresee any risk and ensure all efforts to protect the company from incurring such risks. This particularly applies to financial risks as it was in this case. They need to have market information and project the trend of a business in the industry before moving on with a major investment decision and action. In Howard Smith Ltd v. Ampol Ltd [1974], the directors used the majority voting to defeat and block discretion but did not ensure future financial stability for the company6. Hence, they did not act properly in acquisition bid. S 172 (c) requires the directors to act in a manner to foster company’s business relationships with its suppliers and others. However, in this case, the directors have massively terminated their relationships with local suppliers which leave them reliant with the international suppliers. Generally, that affects the company’s bargain power when it has reduced suppliers. Though International Supplier GmbH is cited to offer lower prices on its goods, termination of relationship is against the duty of promoting success of a company. As a result, s 172 (b) was breached as the actions by the directors that led to losses led to a unanimous decision by Lu, Erik, Alice and Kelly terminate 500 employees. Directors are mandated to safeguard the interests of company’s employees. Decisions that may affect financial flows directly have implications on employees due to the need for recurring costs. The decision for acquisition without discretion leads to circumstance of redundancy. Collectively, the decision by the four directors towards acquisition should a breach of s 174 which obliges directors to exercise a reasonable care, apply skills and diligence. Sub-section (2) further necessitate that care be exercised with general knowledge, experience and skills that a director may reasonably exercise or as according to expectations of a person carrying out those functions in relation to the company. The general knowledge, skills and experience as shown by Lu should have been used and not relying on the past success of the company on similar transactions. Chapter 3 of Part 10 covers the major sections 182-187 where a director is required to declare his interests in any existing arrangement or transactions. It also makes it an offense for any failure to declare interest either orally during director’s meeting or in writing. That gives the other directors an opportunity to evaluate the core reasons that might necessitate a director to take an extreme or alternative action. It is subject to acting in good faith where every action should aim to promote the best for the company without having to put personal interest before those of the company. The highest form of breach is seen through Jamal action to conclude the contract and inaction to notify the directors about the reasons for such an action. Any action without other directors’ approval is taken not to be in line with the principle of good faith. The breach of fucidity duty was confirmed in Foster Bryant Surveying Ltd v Bryant [2007] case where Mr. Bryant had established a company during the period of resignations7. Jamal breaches in this case following resignation after concluding contractual engagement with the company’s client. S 175 (2) requires a director to avoid situations where there would be conflict of interest. This applies to situations that would in particular lead to exploitation of property, opportunity or information. Jamal did not consider if the company can take advantage of the opportunity that was presented by Big Brand Ltd. Instead, he took the advantage by sheer indication that the company’s reputation was not to the preference of Epping Ltd. In turn, he has used the company position to advance his interests. That poses unfair completion for existing client noting that he has an influential position due to his long-time transaction with Epping Ltd. Subsection (4) requires a director to have a duty not to infringe. In O'Donnell v Shanahan [2009] case, Mr. Shanahan took an opportunity to buy part of the building which the other directors claimed that they would have possibly taken. She thus acted to her interests and unfairly8. The situation should not reasonably be seen as likely giving rise to conflict of interest. The matters have to be authorized by directors. However, Jamal did not disclose the matter to the directors but resigns taking the contract. S. 171 charges directors to exercise their power for a proper use. Jamal action defeated a potential bid which was an improper purpose. He then deprived the company of an opportunity to raise capital. S 177 requires a director to declare his/her interests in a proposed transaction and arrangement. Where directors are directly in indirectly interested or involved with proposed transaction with the company, they must declare the extent and nature of their interests to other directors. Lu has in many ways abided to directors statutory duties. He has declared his interests with International Supplier GmbH. He has declared his favor for GmbH against the other suppliers to avoid safeguard the company’s bargaining powers with suppliers. Declaration of interests allows in decision making as the other directors are able to act with discretion and make decision being aware of any implications the director’s interests may have on such a contract and relationships. On the other hand, the directors must be aware of implications such a concluded contractual engagement with the international supplier might bring. Lu might use it to limit the company access to other alternatives that might be cheaper. Forged relationship allows the company to agree on long-term contractors that ensure that the interests of the company are secured and avoid undue actions of the suppliers that might affect the costs of operations. Aberdeen Railway Co v Blaikie Brothers (1854) was major case where Aberdeen Railway confirmed the conflict of interest since the contract engaged with the company had included its managing director in the board of directors9. Similarly, GmbH may fail to deliver in future and defend its failure on the same argument. Lu discretion, use of skills and experience opted for the company to place its money in reinvesting the profit and ensure product development on existing resources. That would have controlled the dispersal of capital and control the level of exposure. The predicted disaster due to declining market and purchase was well appointed. His advice, decisions and failure to vote complied with the requirements of s 172 where the director has to exercise the duty to promote the company’s success. However, the other directors defeated the concept by the majority vote reducing applicability of his foresights. Eventually, there lacked control and sufficient care in other directors decisions and actions leading to risky transaction that failed the company shortly. S 173 requires a director to exercise an independent judgment and one that is not infringed by acting in accordance with agreement duly entered by the company and authorized by the constitution. Lu demonstrated independent judgment when asserted his position not to carry out acquisition due to foreseeable losses in near future. He voted against acquisition despite the majority viewpoint that the transaction would promote more capital and share in the market. The other directors have not taken an independent judgment and unanimously agreed without taking into account any foreseeable risks. Ultimately, the level of a director should avoid any undue influence and no wonder they are required to use due diligence, skills and experience to avoid anything that might risk the company’s capital and investment opportunities. Bibliography Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 Companies Act 2006 Dorchester Finance Co. v. Stebbing [1989] BCLC 498 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 In re Walt Disney Co. Derivative Litigation 907 A.2d 693 (Del. Ch. 2005) Keay, A. (2007). Section 172 (1) of the Companies Act 2006: An interpretation and assessment. Company Lawyer, 28(4), 106-110. O'Donnell v Shanahan [2009] EWCA Civ 751. UK Parliament (2006). Companies Act 2006. Cabinet Office. http://www. Legislation. gov. uk/ukpga/2006/46/contents, accessed, 4, 2013. Read More