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Directors' Duties 1 Notes

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DIRECTORS' DUTIES 1 Content of Duties 1) 2) 3) 4) 5) 6) 7) 8)

Section 171: duty to act within powers and for a proper purpose Section 172: duty to promote the success of the company Section 173: duty to exercise independent judgment Section 174: duty to exercise reasonable care and skill Section 175: duty to avoid conflicts of interest Section 176: duty not to accept benefits from third parties Section 177, 182: duty to declare interests in transactions Section 188-226: duties in respect of transactions requiring approval of members

1. Section 179: the duties are cumulative

1. 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

1. 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?

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

2. Hence only the 'company' can

1. enforce directors' duties,

2. or ratify a breach of duty.

2. Directors may in certain circumstances owe duties to: i) Shareholders

1. only the directors' statutory duties are owed to company

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

2. directors may come to owe fiduciary duty to shareholders where:

1. directors are acting as agents of shareholders
- e.g. for the sale of shares

2. 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: i) they are much more knowledgeable than members ii) members rely on them for advice
? Coleman v Myers [1977] (New Zealand Case) ii) Creditors

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

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

1. But cannot owe duty to creditors directly

2. Yukong Line [1998]

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

1. and not creditors themselves

2. Yukong Line [1998]
iii) Employees

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

1. However employees themselves are incapable of enforcing this duty

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

2. in addition, must only 'have regard' to employees' interests

3. thus in practice, provision hardly ever enforced

By Whom are Duties Owed?

3. Directors' duties are owed by: Directors De facto directors

4. Directors' duties may be owed by: iii) Shadow directors i) ii)


5. Concept of shadow directors and de facto directors are usually distinct

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

2. Re Kaytech [1999]

6. Unclear whether directors' duties apply to shadow directors One case held they did not
- Ultraframe [2005]

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