Sections 171 to 188 of Companies Act 2006 - Coursework Example

SECTIONS 171 TO 188 OF COMPANIES ACT 2006 THE COMPANIES ACT 2006 The major objective behind the provisions of the Companies Act 2006 is to make businesses more transparent in their dealings, especially after the scandals at Enron, WorldCom, Parmalat and Snell1. The scope of duties of Directors of Companies are laid out under Clauses 170 10 188 of the new Act and spell out both the general duties of the Director as well as his fiduciary duties to his Company. General Director Duties: A Director of a company does not have to be a natural person2 but existing Company law had mandated that directors are expected to act in the best interests of the Company.3 While their decisions may be conditioned by their own judgment of what they consider to be best at the time the decision is made,4 however, all such decisions and judgments are expected to be made on the basis of what they believe is best for the Company. Therefore, the general duties of a Director have been set out as a general allowance in making decisions according to their own discretion, however a director’s actions and decisions are expected to be in the best interests of the Company. An examination of the provisions of the Companies Act of 2006 shows that much of the same goals and objectives have been retained in so far as general duties of a Director are concerned. For example, Section 172 deals with the Director’s duty to promote the success of his Company. It states that “a Director of a Company must act in the way he considers, in good faith, would be most likely to promote the success of his Company..”5 Therefore, this is a provision that is already existing in the law and cannot be said to represent a new aspect. The only difference that may be found is in the inclusion of the good faith requirement that is needed from Directors. The Companies Act of 1993 does not impose the duty of good faith or competence but only imputes a duty to the Company, as spelt out by Hoffman LJ: “….if a director chooses to participate in the management of a Company and exercise powers on its behalf, he owes a duty to act bona fide in the interests of the Company.”6 This was also stated by Latham CJ in Mills v Mills, that a director must act “bonafide for the benefit of the company.”7 Justice Plowman in the case of Parke v Daily News Ltd held that the primary duty of the directors of a corporation is to their shareholders, superseding their duty to their employees8. The duties of the director to the company are set out under in the Companies Act, which imposes a duty upon the directors to look out for the interests of the company and its employees as well as its shareholders9. Therefore, what has been stated in the companies Act of 2006 is essentially the same thing that already existed in law. For example, Clause 173 of the Companies Act of 2006 states that a Director “must exercise independent judgment”, however this requirement of Directors that they act independently is already a requirement as per existing law. However, there is one salient difference that must be noted. While earlier provisions in law required Directors to act in the best interests of the Company, the new Act specifically states that Directors must “promote the success of the company”. This could pose a problem later in interpreting the “success of the Company”, especially in the event of take overs or mergers. For example, one aspect that may be considered here is what would happen in the event of a hostile take over, if a Director recommends that the lower of two bids that would benefit the Company on a long term basis but would not however serve the short term interests of the Board. The duty of a Director to exercise due care, skill and diligence: This is spelt out under Clause 174, where a Director is expected to exercise a reasonable amount of care, skill and diligence. In the case of Re Australian Venezolana Pty Ltd10 where it was held that directors were expected to make reasonable efforts to acquaint themselves with Company affairs, but were not expected to be experts beyond their level of knowledge. In the case of complicated situations where technical or expert knowledge is required, directors are expected to seek and procure such expert advice in the interest of the shareholders of the Company, failing which they can be held guilty of a breach of duty of care and skill under the existing law11. But, in the case of Dorchester Finance Co, a higher standard of care was expected from the Directors because they were accountants.12 Similarly in the case of Re D’Jan of London, Hoffman J clarified the duty of care required from Directors by applying an objective test with a subjective element which was that of standard diligence in a person possessing a level of skills and experience that could reasonably be expected from another person in the same position, to which the director’s own special skills and experience could be added.13 The duty of a Director to exercise due skill and diligence has also been laid out under Section 217 of the Insolvency Act of 1986, which is already accepted into common law. Therefore it may be noted that the provisions in the Companies Act of 2006 for the exercise of care, skill and diligence are to be commensurate with the “general knowledge, skill and experience the director has” which is in effect, a provision that already exists in the law and has been established through case precedents such as those mentioned above. Duty to avoid conflicts of interest: A Director of a Company is expected to look out for the interests of the Company before their own interests.14 Under the fiduciary duties that a Director owes to his Company, he may not profit from his position as Director of the Company - should he do so, he must reveal such profits because there cannot be a conflict of interest between a Director’s duty to his Company and his personal interests.15 In the recent case of Bhullar v Bhullar, the Court strictly enforced the existing principle of the fiduciary duties of directors to their Company, in the case of conflicts that arise when there is a clash of fiduciary duties and personal interests, so that allowing such personal interests to predominate would make a Director legally liable.16 Section 317 of the Companies Act of 1985 also places on directors a statutory duty to reveal any interest, profit or financial advantage accruing to them by virtue of their position. This has been reiterated in the New Companies Act of 2006, under Clauses 175 and 176, which states that the Director must not receive benefits from third parties. The duty to disclose a conflict of interest is contained in the provisions of Section 320 the provisions of the Companies Act of 1985, which place the liability upon Directors to reveal all profits resulting from any arrangements entered into without the consent of the members of the Board. The new law under the Companies Act of 2006 also requires that Directors disclose an conflict of interest and any profits arising out of such a conflict of interest. However, the New Act distinguishes two distinct sections where a Director’s interests must be disclosed. On the one hand, are those transactions where the Director could have a conflict of interest but which the company has not yet entered into. On the other hand are those where a Director has gained from or has interests in a transaction or arrangement that ahs already been entered into by the company. In the firs case, the new Act states that a failure by the Director to disclose his interest will only result in a civil consequence, because the transaction may be shelved and the director may be obliged to reveal any profit made up to that point. However, when an arrangement or transaction has been completed and a Director has benefited from it but not disclosed these profits, then it is liable to be a criminal offense. The criminal consequences of a director’s failure to disclose profits was also at issue in the case of Philips v Boardman.17In this case, the Director not only failed to disclose potential profits for himself out of a transaction, he also used the opportunity to garner those profits, therefore he was held liable. However, under the new provisions of the Companies Act, while the duty to disclose and the consequences of a failure to disclose remain substantially the same, nevertheless, it has now been made a criminal offense. This reflects the higher standards that are being expected of Directors in their fiduciary duty to the Corporation. Moreover, one aspect in which the New Companies Act had added some provisions is in the expansion of the category of people who are close to the Director and whose interests will also be assessed when taking into account whether the Director is using his position to illegally transfer benefits to those who are close to him. Therefore, by increasing this circle of people who are close to the Director, there is less scope for nepotism or for Directors to pass off interests or stakes in property into the names of their loved ones, to benefit from their position as Company Director. The duty to seek approval and consent of Members: One part of the duty of disclosure required from Directors is the requirement that all arrangements and agreements made with other parties where there is scope for a Director to benefit on a personal level, should be revealed to the Members. Clauses 180 to 188 list all the transactions of Directors that will now require the approval of members/ shareholders.18 However, while taking into account these provisions, it may be argued that they do not introduce any new elements, because most of these provisions may already be found within existing law and have been upheld through case precedents. For example, this requirement for disclosure by the Directors of a Company on arrangements made on behalf of the Company are already covered under Section 320 of the Companies Act of 1985. This Section covers all such aspects as disclosure by Directors to the Board and well as all other rules of equity that govern the conducted expected of Directors under the rule of law19. In fact, as per Section 320, directors are specifically prohibited form entering into arrangements where there could be a conflict of interest20 and all such arrangements must be ratified in a meeting of the Board. Furthermore, under the provisions of the Act, an arrangement as such, would also cover those contractual agreements that are non binding or even where no formal written contract exists21, as is usually the case. Therefore, this provision has already been spelt out under the existing Companies Act of 1985 and the Companies Act of 2006 does not add much to it. Conclusions: The Clauses 170 to 188 deal mostly with director duties and liabilities to the Company and are specifically intended to ensure that a Director adheres to his fiduciary duties to the Company and maintains accountability. Farrar has spelt out these fiduciary duties and one of the most important aspects of this fiduciary duty arises when there is a conflict posed between the Director’s interests and the interests of the Company, where a Director is expected to subordinate his own interests to that of the Company rather than profit from his position as a Director22. There are some minor changes, such as have been mentioned above. One of them is the extension of the duty of the Director to act for the benefit of his company, which has now been modified to that of acting for the success of his Company. This creates a problem because what may serve the long term interests of the Company may not necessarily serve its short term ones and therefore determining whether a Director is acting for the success of his Company may be difficult in such instances as a takeover. Additionally, the range of people who are close to the Director and fit into his near circle has been expanded so that there is less scope for a Director to misuse resources of the Company in the name of his relatives or close friends. The liability for failure to disclose a transaction in which a director has an interest but which has already been concluded by the Company could not be attached to criminal liability for the Director. This is a significant provision that could help to bring about increased accountability. However, it is not substantially different from existing provisions in case law were such offences often made a Director criminally liable. While existing legislation is founded on the principle that the director’s fiduciary responsibilities are owed to the Company and not to the employees, there are no provisions as such that are reflected within Clauses 171 to 188 that indicate any new element to a Director’s fiduciary duties to the Company or even to his general duties, which substantially, remain the same. The provisions that have been spelt out are substantially the same as what existed before, therefore it would be correct to say that Clauses 171-188 of the Companies Bill are merely a restatement of already existing legal provisions. Bibliography * Davis, Mike. “The Companies Bill: It’s worth the effort.” Compliance, (November 15, 2004) Available online at: http://www.silicon.com/research/specialreports/compliance/0,3800003180,39125844,00.htm * Farrar, J.H, Hannigan, B.M, Farrars Company Law, London Edinburgh and Dublin: Butterworths (1998): pp 378 * Toynbee, Polly. “Labor must not cringe from this puny but necessary amendment” The Guardian, October 27, 2006. Available online at: http://business.guardian.co.uk/story/0,,1932620,00.html Legislation cited: * The Company Law Reform Bill, Clauses 171-188. Available online at: http://www.publications.parliament.uk/pa/ld200506/ldbills/034/2006034.pdf at pages 75-84 * Companies Act of 1985 Cases cited: * Duckwari Plc [1999] Ch 253 * IDC v Cooley (1972) 1 WLR 443 * Murray v Leisure Play plc (2005) EWCA Civ 963 Read More