Directors Duties Notes

Directors Duties

To whom are director duties owed

Directors duties are owed to the company. (Companies Act s.170(1))

This has consequences for:

1. Redefining the duties

2. The proper claimant rule

3. Ratification of any breach

Percival v. Wright

• Generally a director does not owe any duty to the individual shareholders.

In some exceptional circumstances a director will owe duties to individual shareholders:

Coleman v. Myers

1. Directors can owe fiduciary to individual member if the individual members are habitually relying on the director for advice (and the director knows this).

2. Here the NZ Court of Appeal found that this was the case when family members habitually looked to the director for advice.

Heron v. Lord Grade

• A director of a company which is the target of the takeover bid may have a duty to the individual shareholders of the company.

There are no duties owed to creditors, or if there are then they cannot be enforced by creditors.

Yukong v. Redsbury

1. Creditors do not have standing to sue a director for a breach of duty, so there is not a duty owed to him individually.

2. A liquidator may however sue a director for breach of duty if, after insolvency, the director does not act in the best interests of the creditors.

3. Consequently when a company nears insolvency the interests of the company will swap to be the interests of the creditors for the purpose directors duties.

Winkworth v. Edward Baron

• House of Lords, Lord Temperatur said that a company owes a duty to its creditors. Because the conscience of the company is confided in the directors, and a duty of care is owed by the directors to the company, owed a duty to creditors to ensure that the affairs of the company are properly administered and that the company property is not dismissed or exploited to the benefit of the directors personally at prejudice to the creditors.

Director duties are cumulative in their effect (Companies Act s.219)

Directors may have consideration to the interests of company employees generally (CAs.172(1)(b))

Re Welfab

1. Liquidators tried to see directors for authorising a sale of the company’s business at, what was alleged to be, less than its full value.

2. Held this was fine because the lower offer also took on all of the company’s workforce whereas a higher offer was for premises only and so would have led to all the employees becoming redundant.

Particular duties

CA2006s.171 Duty to act within powers

Directors have a duty to act in accordance with the company’s constitution and to exercise powers only or the purposes for which they were conferred. (CA2006s.171)

Selayar United Rubber

• An application of company assets in breach of the rules on financial assistance was a breach of the duty to act intra vires by the director.

Rolled Steel

• Proceeding to authorise a transaction without a quorate board constituted an act ultra vires and so there was a breach of CA2006s.171.

Article 3 of Model Articles

• Directors are deemed to have power to carry out all business of the company except as restricted by the articles.

Article 3 means there is an inclusive approach to what is within director’s powers. Although it is obviously possible to act outside powers, e.g. Rolled Steel where there was not a fully quorate board and so any decisions made by it could not be intra vires.

The restriction on actions for an improper purpose is slightly more complicated.

Improper purpose rules relating to dealings with outsiders

Regentcrest v. Cohen

1. Good faith and acting for improper purposes are completely separate, good/bad faith and proper/improper purposes can be combined in any way.

2. Good faith is a subjective test but improper / proper purposes is an objective test.

Colin Gruyere v. Laden Wharf

• The directors will have acted for improper purposes if they acted for any purpose other than the interests of the company. This is an objective test, could a reasonable, intelligent and honest man believe that the directors acted for the purpose of promoting the interests of the company.

Bennetts v. Fire Commissioners

• A nominee director must only consider the interests of the company for which he is a director and this must be preferred in any conflict with the interests of the nominating company.

Charterbridge

• A nominee may take account of the interests of the nominator provided his final decisions or actions are made solely to promote the best interests of the company for which he is a director.

Improper purpose rules relating to insiders

Generally an internal power will relate to directors powers to give benefits to, or affect the rights of, shareholders. This could include:

• The power to differentiate between shareholders as the amount of calls to be paid and the time of payment.

• The power to allot and issue new shares.

• The power to make calls

• The power to call meetings

• The power to distribute profits as dividends.

Worthington says that the courts are much more willing to investigate the use of directors powers to affect members rights or interests. But there are different approaches to the matter:

Strict equity approach

A power entrusted to a fiduciary to be used for the benefit of another must only be used for the specific purpose for which it was conferred. Any decision will be a value judgement as to the propriety of a action in a particular context, Worthington says this is inappropriate in company law and is not easy to apply even if courts wanted to.

Hogg v. Cramphorn

1. Directors had an unfettered power to issue shares, which they exercised and issued a large number of shares to a trustee, to hold on trust for employees, so as to frustrate a proposed takeover.

2. The takeover bidder was already a shareholder and he objected to the directors actions.

3. Held that even if the actions bona fide in the interests of the company, it was for improper purposes. Directors may issue shares to raise finance, not frustrate takeovers.

Good faith approach

This approach is based on whether directors have acted honestly and in good...

Buy the full version of these notes or essay plans and more in our Company law Notes.