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Directors’ Duties I Notes

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Directors' Duties (I)
Contents
General Reading.......................................................................................................................................... 110
Gower pp461-514: Chapter 16 - Directors Duties...................................................................110
Introduction........................................................................................................................................ 110
To Whom and by Whom are the Duties Owed?....................................................................110
Directors' Duties of Skill, Care and Diligence.........................................................................114
Introduction to Ds' Various Duties of Good Faith and Loyalty.......................................115
Duty to Act within Powers............................................................................................................. 116
Duty to Exercise Independent Judgement..............................................................................118
Duty to Promote the Success of the Company....................................................................... 119
Key Cases to Note....................................................................................................................................... 123
Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71...........................................................123
Liquidator of West Mercia Safteywear v Dodd [1988] BCLC 250......................................126
Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244....................................................126
Howard Smith Ltd v Ampol Ltd [1974] 1 All ER 1126............................................................127
Re Smith and Fawcett [1942] Ch 304............................................................................................ 127
Regentcrest plc v Cohen [2001] 2 BCLC 80................................................................................. 128
Charterbridge Corporation v Lloyds Bank [1970] Ch 62.......................................................128
GHLM Trading Ltf v Maroo [2012] EWHC 61............................................................................. 129
Fulham Football Club Ltd v Cabra Estates plc [1994] 1 BCLC 363 (CA)..........................129
Articles............................................................................................................................................................ 130
H. Hansmann and R. Kraakman: The Anatomy of Corporate Law 2nd Ed (OUP, 2009) -
Chapter 2: Agency Problems............................................................................................................. 130
P. Davies, Directors' Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency (2006) 7 EBOLR 301, pp327-29............................................132
D Ahern, Directors' Duties, Dry Ink and the Accessibility Agenda (2012) 128 LQR 114
....................................................................................................................................................................... 132
Parkinson, Disclosure and Corporate Social and Environmental Performance:
Competitiveness and Enterprise in a Broader Social Frame [2003] Journal of
Corporate Law Studies 3..................................................................................................................... 133
A Keay, Moving Towards Stakeholderism? Constituency Statutes, ESV and More: Much ado about little? (20122) 22 EBLR 1.............................................................................................. 133
Supervision Questions.............................................................................................................................. 133 General Reading
Gower pp461-514: Chapter 16 - Directors Duties
Introduction
Usually, CoAoA give boards unusually wide discretionary powers for reasons of efficiency. However, this creates a risk of misuse, particularly in the interests of senior management rather than the company. This is an age-old problem that continues despite
CA 2006.
A few approaches:

Constitution and power of the board, and shareholder power to remove Ds
Extent to which shareholders can intervene in company management, or subject management performance to critical review

Perhaps the best method is simply well-directed criticism of the board and the use of the threat of removal - a sort of soft power, rather than allowing shareholders too much power to interfere with good management
Restrictions from company law itself - fiduciary powers, which were previously entirely common law - Law Comm and CLR pushed for statutory restatement,
which took place in Ch 2 Part 10 CA 2006

Aim was to promote understanding of basic principles by directors themselves

However, note that Part 10 is a general overview of directors' duties not a detailed, comprehensive list

Law Society and leading solicitors' firms thought codification was dangerous as it would freeze the law in time but this is not true as the CA
2006 expressly preserves the common law principles and says common law and equitable precedents should be used as interpretative guides.
o However, sometimes, the Act is more than codifying - it also reforms - eg
SS140(3),(4) - standard of care expected of directors; authorisation by independent directors of conflicts of duty - in such cases, the courts should not refer to the old common law precedents (Hansard)
o It was hoped a similar scheme on remedies for breaches of directors'
duties would be enacted in statute but the Government eventually abandoned this part of the proposal. However, Nolan's work for the CLR
paper has been published. As a result, S178 of the Act simply says remedies will be the same as they were at common law.

To Whom and by Whom are the Duties Owed?
To whom are the general duties owed and who can sue for their breach?
The company
Duties primarily owed to the company - S170(1). This means the duty is not owed to individual shareholders or employees, and only those who act for or on behalf of the company can enforce these duties. Who can act on behalf of the company was an area of controversy until clarification and reform in CA 2006. Although there may be an ex turpi causa issue where the actions of directors are attributed to the company as against third parties, this does not mean companies cannot sue directors for wrongdoing while in office or else this would undermine D duties.
However, the actions of the director may be attributed to the company depending on the
'nature and factual context of the claim in question' per Lord Neuberger, Bilta (UK) Ltd
(In Liquidation) v Nazir [2015]. One workable rule may be to say that no individual can rely on his own act counting as a corporate act so as to give them either a claim or defence against the company.
Individual shareholders
Statutory duties are only owed to the company but the Act does not purport to answer the question whether fiduciary or other duties are owed to others. At common law, there is a reluctance to recognise such duties. That would undermine the collective nature of the shareholders' association in a company and the rule that the duties are owed to and are enforceable by the company. If this were the case, then the rules on derivative action could be easily circumvented.
However, there may be special factual situation where directors do owe fiduciary duties to individual shareholders, but this does not apply simply by virtue of their office. Peskin v Anderson [2001] per Mummery LJ - fiduciary duties may be owed where there is a
'special factual relationship between the directors and the shareholders'.
What are examples of such a relationship?

Where shareholders have authorised Ds to sell their shares in the context of a takeover: Breiss v Woolley [1954] - agency relationship
However, there is no general duty owed to shareholders individually: Percival v
Wright [1902]

Should the rule on special factual relationship be extended beyond the situation of agency? Coleman v Meyers [1977] NZCA found a fiduciary duty to arise even without agency in the context of a small family company where there was a gross disparity of knowledge between Ds and shareholders and where the shareholders of the company had traditionally relied on Ds for information and advice - held that Ds were subject to a duty of full disclosure of relevant facts about the company to the shareholders.
Approved by EWCA in Peskin v Anderson [2001]. However, in that case, the Ds were not obliged to disclose their plans for the company even though the shareholders' decision to sell their shares would have been affected where (i) the directors were not parties or otherwise involved in the sale of the shares, and (ii) it was arguably in the company's interests to keep the plans secret for the meantime.
This indicates that the exception to this rule is a narrow one, primarily of interest to small, family-held companies. In Re A Company, Hoffmann J held that, in the context of a takeover, Ds did not have any duty to advise shareholders on how to sell their shares.
However, if they did, they had to do so in a way which had a 'view' to allowing them to sell for the best price if they wanted, and not for an improper purpose like favouring one bid over another. This clearly falls short of a fiduciary obligation.
Other stakeholders No such general duty owed to employees or creditors per Yukong Line Ltd v Rendsburg
Investments Corporate (No 2) [1998] or to other groups per Bath v Standard land Co Ltd
[1911]. However, rather than direct duties, the general duties of Ds owed to the company may require Ds to take into account the interests of the stakeholder groups.
CLR wanted to make these explicit and this is reflected in CA 2006.
By whom are the general duties owed?
De facto and shadow directors
The general statutory duties are clearly owed by those properly appointed as Ds
However, the courts have extended common law and statutory duties to de facto Ds.
S250 CA - these duties apply to 'any person occupying the position of director, by whatever name called'. Core test: has the person 'assumed the status and functions of a company director'? Re Kaytech International Plc [1999]. De facto directors will be subject to the same duties as de jure directors.
However, this factual question is often difficult to answer. Within corporate groups, one particular problem is the question of whether or not by acting as a de jure director of one company, can someone become a de facto director of another company?
Commissioner HMRC v Holland [2010] divided UKSC 3-2. Issue: was an individual who was the only active director of the sole corporate director of the principle companies also a de facto director of the principle companies? It was held he was not (by bare majority), and therefore did not owe fiduciary or other directors' duties to them. This is because to hold otherwise would upset separate corporate legal personality. Where a corporate structure has been set up to facilitate a corporate directorship, then the individual behind that corporation should be shielded.
The minority, Lords Walker and Clarke, would have taken a more purposive approach -
where an individual in fact is acting as a director ie taking all the important decisions affecting the relevant company, he is a de facto director and should be held accountable as such. Lord Walker found the view of the majority one of 'arid formalism' which would encourage abuse of the corporate structure and corporate directorship.
Shadow directors - a category created by legislation: a person not formally appointed director but in accordance with whose directions or instructions the directors of a company are accustomed to act - S251(1) CA. Some of the specific statutory duties also expressly apply to shadow directors - Chs 3 and 4 of Pt 10, and some of the general duties - Ch 2 S170(5), 'to the extent that they are capable of so applying'.
This confirms judicial progression towards this position. Ultraframe (UK) Ltd v Fielding
[2005] per Lewison J: Ds' fiduciary duties did not automatically apply to shadow directos as a shadow D, unlike a de jure or de facto D, had not undertaken to act on behalf of the company and so had not put himself in a fiduciary relationship with the company. However, the logic of this has been doubted by Newey J in Vivendi SA v
Richards [2013] - a shadow director's chosen involvement in the affairs of a company ought to attract at least some fiduciary duties.
Initially, it was thought the categories of shadow and de facto directors were mutually exclusive. Millett J per Re Hydrodam (Corby) Ltd [1994] thought that a de facto director is one who 'claims and purports to act as a director' while a shadow director does not claim or purport to be a director but 'lurks in the shadows'. However, this was doubted in McKillen v Mixland (Cyprus) Investments Ltd [2012]. However, as Walker LJ said in Re
Kaytech, the duties owed by both should be similar as both exerted 'real influence' over the affairs of the company.
Note two statutory exceptions to the shadow directors rule - professional advisors or government regulators giving advice are not shadow directors per S251(2); S2511(3)
says a parent company should not be regarded as a shadow director of its subsidiary simply because the directors of the subsidiary are accustomed to acting on the instructions of the parent. Similarly, it is unlikely that the parent company will be considered a de facto director. Hence, the parent company can implement a common group policy, but it is unclear if the Ds of the subsidiary can validly carry out group policy rather than simply pursuing the best interests of the subsidiary.
Senior managers
D duties do not apply to senior managers who are not Ds but wrt Ds, the courts not will distinguish between acts done qua D and qua senior manager eg where D is an ExD so D
duties apply regardless: Item Software (UK) Ltd v Fassihi [2005]. Although the board may set general strategy and delegate day-to-day management, this approach is needed to reflect the reality of smaller companies where the directors may oversee everything personally and their actions cannot be separated out.
Can general statutory duties or common law fiduciary duties apply to senior managers who are not formally appointed directors? Canadian Aero Services Ltd v O'Malley (1973)
(CanSC) said that D common law fiduciary duties apply to those 'officials of the company who are authorised to act on its behalf and in particular to those acting in a senior management capacity'. However, this has not been affirmed by an English court, and an employment relationship is not necessarily a fiduciary one - University of Nottingham v
Fischel. However, a senior manager may be deemed a de facto D, or may be an agent of the company and therefore subject to fiduciary duties, or be in any case subject to the implied duty of mutual trust and confidence in employment contracts notwithstanding
Bell v Lever Bros.
Exclusion of senior managers from statutory general duties because the UK continues to rely on Corporate Governance Code soft law that board should contain a substantial number of ExDs. However, if English boards were to become more like American boards where the CEO is the sole member of the board who is also a D then more controls on senior management would be needed, which is the case in the Australian Corporations
Act 2001.
Note the other side of the equation - the duty of care. The statutory duty of care only applies to Ds but this is not so different from the common law duty of care required by employees anyway eg Lister v Romford [1957].
Former directors
At common law, D duties start from date of appointment but do not necessarily end at date of retirement: Lindgren v L & P Estates Ltd [1968]. This non-cessation of duties is confirmed by S170(2) - D will still be subject to duties relating to taking benefit from corporate opportunities which he became aware of while D, and taking benefits from third parties for any act or omission while still a D but those duties will apply 'subject to any necessary adaptations' eg to include situations where the D no longer has up-to-date information - Thermoscan Ltd v Norman [2011]. Issue - D who has given notice of resignation who has yet to resign.
Directors of insolvent companies
When a company enters an insolvency procedure, the powers of Ds are substantially curtailed and direction of the business passes into the hands of the insolvency practitioner appointed. This is likely to reduce the practical expectations of Ds during such a period but their legal duties remain in principle - Ds cannot be held liable for failing to exercise powers that they no longer have - Ultraframe (UK) Ltd v Fielding
[2005].
Directors' Duties of Skill, Care and Diligence
Historical Development
Two types of duties: duties of loyalty and duties of care. These correspond to the main risks taken by shareholders in delegating management functions to the board.
Historically, the standard of care expected of Ds was a low one as it was a subjective test at common law. Re City Equitable Fire Insurance Co [1925]: these cases appear to have framed D duties with NExDs in mind rather than ExDs, with the expectation that NExDs played a minimal role in company management. Romer J per City Equitable: 'a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience'. This was also influenced by a model of corporate decision-making that gave more powers to shareholders - if shareholders chose incompetent Ds, then that was their fault.
However, shareholders no longer have such control and such a low standard is inappropriate for ExDs, who are often paid large sums of money in exchange for their business expertise. Further, since the 1990s, the CGC has pushed for NExDs to play a more active role in monitoring the performance of ExDs. As such, there were some slow common law movements towards a higher standard which were further reformed and codified in the CA 2006.
Statutory Standard
S463 CA 2006: the standard of care expected of all directors is subject to an objective floor but may be increased subjectively where that D has special expertise or skills.
Several conclusions:

This means the standard may vary according to the size of the company and type of director.
An objective standard of directorship avoids the question of who counts as a professional director - simply need an assessment of what is reasonably required of a person having the knowledge, skill and experience which a person in the position of a particular director ought to have.
Directors have substantial powers of delegation: Norman v Theodore Goddard
(1995) 

Directors still have to supervise and oversee the delegated functions: Re Barings
Plc (No 5) [2000]. Directors must set up adequate internal control mechanisms:
Report of the Turnbull Committee, which influenced the CGC.
The principles of sub-board managers apply also to the division of functions among the directors themselves, so ExDs will carry a greater load of management responsibilities than NExDs, and different ExDs will have different levels of responsibility for their sub-boards eg Finance Director and Finance Sub-board.
However, all Ds 'have a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as Ds' and must not allow any board to be solely dominated by one D - Re Barings Plc (No 5). In large companies, it would not always be possible to catch what is going on immediately so the quality of the internal control mechanisms would be relevant in determining liability.
What happens when, rather than being negligent and inactive, the Ds make a decision that goes badly and causes loss to the company? In the US, the 'business management' rule protects Ds from liability for making a business decision on the basis of risk analysis. Law Com did not think such a rule was needed in the UK.
Better to leave the assessment of what the Ds did to the courts.

Overall, this standard of care can be said to be the same as negligence but the move from a subjective approach to an objective one means the courts have become more active in defining what is expected of Ds, which has a risk of the use of hindsight and excessive intervention. However, courts are aided by the Corporate Governance Code. In Court of
Appeal of New South Wales, Austin J cited the UK Corporate Governance Code in defining the duties of the chair of the board - ASIC v Rich [2003].
Remedies
Standard remedy is compensation for harm caused. S178(2) says assessment of remedies is on common law, not equitable basis. However, the modern approach is to assimilate the remedies - Bristol and West Riding BS v Mothew [1998].
Introduction to Ds' Various Duties of Good Faith and Loyalty
Historical Background
Duties of good faith and loyalty were developed by the courts from analogy with the duties of Ts. Pre-JSC Act 1844, most joint stock companies were unincorporated and functioned as partnerships grafted onto trusts. However, today, Ds are more like agents of the company, or one of its organs when acting together as the board. As such, Ds act as the company rather than as agents of the company when acting in concert within their powers. Nevertheless, like Ts, the Ds must often act jointly and are severally liable to the beneficiary/company.
While these have largely been replaced by the statutory duties, they are still useful for interpretation - S170(4), and are relevant for remedies - S178.
Categories of Duties

Duties relating to how Ds exercise their powers

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