Companies Act 2006 - Essay Example

Topic: Company Law Style: APA Preferred language style: English (U.K Answer: Before attempt to discuss this question it need to say that Companies Act 2006 does not contain a specific definition of the term "director". However, there is a general provision in section 250 of CA 2006, which states that the expression "director" includes "any person occupying the position of director, by whatever name called", which includes a person who is treated by the board as such despite not having been validly appointed. The law also recognises the concept of shadow director, which is defined by section 251. In the shareholder-centred view a company directors are required to act in the interests of the Shareholders exclusively shareholder primacy supports the idea that a company shareholders are entitled to its profits which continues the view of the capitalist held the classical economists. Normally, the directors of a company are not required to own any of its shares. Economists have analysed the problems, which may arise when the people managing a business do not own all of it. Managers in this position are believed to manage the business less efficiently than if they did own it.1 In broad terms the duties can be distilled into three propositions: Firstly, directors are under a duty to act bona fide in the interests of the company. Secondly, to exercise their powers under company's constitution for the proper purpose. Finally, to avoid conflict of interests and to profit from their position. For the first time, however, all the duties owed by directors to their company have been set out in statute, in Part 10 (ss.170-177) of the CA 2006. Section 171 of Companies Act 2006 states that duty to act within powers. 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. The constitution of the company is one or more documents setting out the rules by which the company is to be operated. While the constitution is subject to the Act, it sets out what powers directors have and how they are to exercise them. Directors must abide by these rules. If this power is given for one purpose, they cannot exercise it for a different proper purpose, even if they think that to do so would be in the best interests of the company.2 In Re Smith & Fawcett Ltd Lord Greene MR went to add that Directors must not exercise their powers for any "collateral purpose". This is called the proper purpose doctrine. The facts of Extrasure Travel Insurances Ltd v Cohen3, afford a clear illustration of a power being exercised for an improper purpose. More generally, however, the issue of whether Directors have used a power for a proper purpose arises in relation to their authority to issue shares. If shares are allotted in exchange for cash where the company is in need of additional capital the duty will not be broken. But where Directors issue shares in order to dilute the voting rights of an existing majority shareholder because he or she is blocking a resolution supporting, for example a takeover bid, then the duty will be breached. The Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd4 subjected the content of the duty to through scrutiny. The Directors allotted shares to a company, which had made a takeover bid. The effect of the shares was to reduce the majority holding of two other shareholders who had made a rival bid from 55 to 36 percent. The two shareholders sought declaration that the share allotment was invalid as being an improper exercise of power. The court held that it must be unconstitutional for Directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority, which did not previously exist. Section 172 of Companies Act 2006 introduces significant change in common law. This Act states that duty to promote the success of the company. Section 172(1) 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. Previously it was described that the director had to act bona fide in the best interests of the company. By this Act, the obligation of good faith remains and it is the interests of the company, defined as the benefit of its members as a whole, which must be advanced.5 The director must now have regard to the definite matters set out in section 172(1)(a)-(f). While competent directors have previously had regard to these specific matters, that process is now part of the directors' statutory obligation. It is important to note that Section 172(3) makes it clear that the statutory duties set subject to certain obligations of directors to act in the interests of creditors when the circumstances arise. The pivotal duty of a director is to act and in good faith in the best interest of the company. Directors are therefore precluded from exercising their powers to further their own interests or interests of the third party. The classic formulation was made by Lord Greene MR in Re Smith & Fawcett Ltd6, who said that 'directors must exercise their discretion bona fide in which they consider - not what a court may consider - is in the interests if the company' From this statement, the court will not substitute its own view about which course of action the directors should have taken in place of the boards own judgment - to this extent the duty is subjective.7 Over-arching nature of duty is illustrated by the decision of the Supreme Court of Canada in Sun Trust co. v Begin8. The court stated that self-dealing on the part of directors and giving preference to one shareholder group over and above the shareholders as a whole are types of motivation which could lead a court to conclude that the directors had not acted in good faith for the benefit of the company. The duty of good faith operates to prevent directors fettering their discretion by; for example, contracting with a third party as to how a particular discretion conferred by the article will be exercised. However, where the board is able to establish that it was in the best interests of the company to enter into such an agreement, the duty would not be broken. Provided director's act in good faith and in the interest of the company and are not willfully blind to the company's interests they will not be liable for breach of fiduciary duty if they make a mistake and act unreasonably, but may be liable for breach of their duty of care (Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd (above), per Leslie Kosmin QC, sitting as a deputy judge in the High Court). Section 174 of Companies Act 2006 states that duty to exercise reasonable care, skill and Diligence. Section 174(1) provides a director of a company must exercise reasonable care, skill and diligence. Section 175 of Companies Act 2006 states that duty to avoid conflicts of interest. The Act generates a new, positive duty to avoid unauthorised conflicts of interest. The Act also allows conflicts of interest to be authorised by directors instead of by shareholders. The most important think is that where directors may face a conflict of interest until 1 October 2008,9 it will continue to be possible for them to place themselves in a position. Directors must not place themselves in a position whereby their personal interests conflict with their duties to the company. Breach of this renders the Director liable to account for any profit he obtains in circumstances where his interests may conflict with his duty to the company. In Re Lands Allotment10; and JJ Harrison (Properties) Ltd v Harrision11, confirming that a Director holds the proceeds made from a breach of fiduciary duty as constructive trustee. A 'conflict transaction' entered into by a Director is void able at the company. The classic decision on this aspect of the fiduciary obligation is regal (Hastings) Ltd v Gulliver12, the whole business was sold by way of takeover and the Directors made a profit. The purchasers of regal installed a new Board of directors and the company successfully brought an action against its former Directors claiming that they should account for the profit they had made on the sale of their shares in the subsidiary. An example of the duty to avoid a conflict of interests is the so called corporate opportunity doctrine which makes it a breach of fiduciary duty by a director to appropriate for his own benefit an economic opportunity which is considered to belong rightly to the company which he serves (Prentice, 1974). In Cook v Deeks13 three of the four directors diverted to their own personal benefit certain railway construction contracts, which were offered to the company. Notwithstanding that their conduct was ratified by the company the directors were held accountable. Lord buckmaster said the company whose interest it was their first duty to protect (Bhullar v Bhullar, Re Bhullar Bros Ltd14). In Industrial development consultants Ltd Cooley15, the defendant, who was managing director of industrial development consultants Ltd (IDC), a design and construction company, failed to obtain for the company a lucrative contract to undertake work for the eastern gas board. Cooley did not disclose his personal interest in this transaction. Roskill J held that he was accountable to the company for all of the profits he received under the contract. Information which came to Cooley while he was managing director and which was of concern to the plaintiffs and relevant for the plaintiffs to know, was information which it was his duty to pass on to the plaintiffs. Although Regal (Hastings) continues to represent the orthodox approach in UK company law (Gwembe Valley Development Co Ltd v Koshy16) recent decisions have made it clear that the general fiduciary obligations of a Director do not prevent him from making the decision Island export finance Ltd v Umunna17; Balston Ltd Headline filters Ltd18; Framlington Group plc v Anderson19 and Coleman Taymar Ltd v Oakes20. Section 176 of Companies Act 200621 introduces The "No Bribe" Rule that means duty not to accept benefits from third parties. For the first time, the Act sets out a statutory rule against directors accepting benefits from third parties. However, directors have always been required to account for benefits received by them so this rule makes little difference to the law. For example, the procurement director is taken by a prospective supplier on an all expenses paid holiday. This would be a breach of duty. However, gift could not reasonably be thought breach of the section. They should ensure that under the constitution of the company, they do not receive any benefits not provided for, or allowed. The only exceptions will be benefits that are so minor such as gift. It is fundamental that directors have to be completely transparent with their shareholders as well as with their boards as to the benefits that are received. Corporate hospitality should be scrutinized critically in the light of s. 176. Section 177 of CA 200622 states that the duty to declare interest in proposed transaction or arrangement 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. This Section will replace the equitable rule that directors may not have an interest in a transaction with the company unless the interest has been authorised by the members. The director need not be a party to the transaction for the duty to apply. Before the company enters into the transaction or arrangement, the declaration must be made. However, until 1 October 2008 the equitable rule will continue to apply. Bibliography: J. Lowry & A. Dignam, Company Law, 4th edition, (2007) Oxford University Press, page 315-362 L. Sealy, Sarah Worthington, Cases and Materials in Company Law, (2007) 8th edition, Oxford University Press, Chapter-6 Gower, L.C.B. and P.L. Davies Gower and Davies' Principles of Modern Company Law. (2007), 8th edition, (London: Sweet & Maxwell), page-256-300, [ISBN 0421949007]. Dr D. Arsalidou - Shareholder primacy in cl.173 of the Company Law Bill 2006. Company Lawyer, 28 (3) (2007) 67-69 ISSN 0144-1027, page-222-234 Mayson, French & Ryan, Company Law. 24th edition, August 2007, ISBN-13: 978-0-19-921081-7, Chap-16, Oxford University Press, page-400-415 S. Alan QC, M. Martin QC, (2007), Blackstone's Guide to the Companies Act 2006, page-333-334 Read More