Directors' Duties 1 Notes

DIRECTORS’ DUTIES 1

Content of Duties

1. Section 171: duty to act within powers and for a proper purpose

2. Section 172: duty to promote the success of the company

3. Section 173: duty to exercise independent judgment

4. Section 174: duty to exercise reasonable care and skill

5. Section 175: duty to avoid conflicts of interest

6. Section 176: duty not to accept benefits from third parties

7. Section 177, 182: duty to declare interests in transactions

8. Section 188-226: duties in respect of transactions requiring approval of members

   Section 179: the duties are cumulative

   Thus director can be liable for breach of more than one duty at same time

Avoidance of Liability

Ways in which directors can avoid being in breach of duty include:

1. Board authorisation

• Section 175(5)+(6)

2. Consent, approval or authorisation of members

• Section 180

3. Authorisation in articles

• Section 180(4)

4. Ratification

• Section 239

5. Relief from the court

• Section 1157

Remedies

Section 178(1): consequence for any breach of duty is same as would apply if corresponding common law rule or equitable rule applied

To Whom Are Duties Owed?

Section 170(1): Directors owe their statutory duties to the company

Hence only the ‘company’ can

enforce directors’ duties,

or ratify a breach of duty.

Directors may in certain circumstances owe duties to:

1. Shareholders

   only the directors’ statutory duties are owed to company

   thus directors can still come under fiduciary duties to shareholders outside of statute

   directors may come to owe fiduciary duty to shareholders where:

   directors are acting as agents of shareholders

• e.g. for the sale of shares

  there is special factual relationship between directors and shareholders

• even where there is no agency relationship

• e.g. in case of a small family company directors may owe fiduciary duty of disclosure if:

1. they are much more knowledgeable than members

2. members rely on them for advice

   • Coleman v Myers [1977] (New Zealand Case)

2. Creditors

   when company is nearing insolvency, interests of company becomes synonymous with interests of creditors

   director may owe duty to company take into account interests of creditors where company is nearing insolvency

   But cannot owe duty to creditors directly

   Yukong Line [1998]

   thus only the liquidator (as holder of company’s right of action) may sue director for not having regard to interests of creditors

   and not creditors themselves

   Yukong Line [1998]

3. Employees

   Section 172: directors have duty to have regard to interests of employees

   However employees themselves are incapable of enforcing this duty

   i.e. only the company/liquidators can do this

   in addition, must only ‘have regard’ to employees’ interests

   thus in practice, provision hardly ever enforced

By Whom are Duties Owed?

Directors’ duties are owed by:

1. Directors

2. De facto directors

   Directors’ duties may be owed by:

3. Shadow directors

   Concept of shadow directors and de facto directors are usually distinct

   However they have common feature that person in question is alleged to have exercised real influence over company

   Re Kaytech [1999]

   Unclear whether directors’ duties apply to shadow directors

1. One case held they did not

• Ultraframe [2005]

2. Another case seems to support view that they do

• i.e. analogy drawn between de facto and shadow directors suggest that same duties apply to both

• Re Kaytech [1999]

SECTION 171

Section 171: director must exercise powers:

1. In accordance with the constitution

2. For the purpose for which they were conferred

   Thus director breaches his duty in section 171 wherever he acts:

1. outside his powers

   action which is ultra vires the director’s powers

   action which has not been duly authorised by a quorate board

2. or for improper purposes

Former is obvious. Only latter need be analysed in greater detail.

Improper Purposes

External Powers

I.e. use of powers in relation to third parties

Test of improper purposes is objective.

not subjective

Regentcrest plc v Cohen [2001]

Thus test is not one of good faith

i.e. is possible for director to be acting in good faith, but for improper purposes

Regentcrest [2001]

“Nominee/Special Interest Directors”

Sometimes directors are appointed deliberately in order to represent the interests of a particular shareholder, or special interest group.

Nominee/special interest director still has overriding duty to serve interests of board in question

Cannot simply act as representative

Bennetts v Board of Fire Commissioners of News South Wales [1967] (Australian Case)

Can only take into account interests of nominator insofar as this is consistent with his overriding duty

2. Internal Powers

   I.e. use of powers in manner which affect rights of shareholders

   Courts seem much more prepared to interfere where internal powers are involved.

   Whether use of power is proper depends on purpose for which power was conferred

   this ascertained from construction of company’s articles.

   Hogg v Cramphorn [1967]

Relevant Test

Opposing Tests

1. Objective Test

   Supported by some English authorities

   Hogg v Cramphorn [1967]

   Therefore whether directors acting in good faith irrelevant

2. Subjective Test

   More popular in Commonwealth

   Thus is no improper purpose where directors are acting in good faith.

3. Intermediate Test (best view)

   Power is exercised properly where “substantial purpose” for which power was exercised is proper.

   ‘Substantial purpose’: i.e. the dominant or primary purpose

   Howard Smith v Ampol Petroleum [1974] (PC)

   Extrasure Travel Insurance v Scattergood [2003]

   Thus where substantial purpose of exercising power is proper, is irrelevant that an incidental purpose is improper.

   Howard Smith [1974]

   Good faith of directors simply a factor taken into account when determining “substantial purpose” for which power was exercised

   Howard Smith [1974]

   Strength of Shareholders

   where exercise of power affects power of relative shareholders in company, courts also look at whether exercise of power is fair as between different classes of shareholders

   i.e. in addition to...

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