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.
- 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)
- 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...

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Directors’ Duties I Notes

Updated Directors’ Duties I Notes

Company Law

Contents

General Reading

Gower pp461-514: Chapter 16 – Directors Duties

Introduction

To Whom and by Whom are the Duties Owed?

Directors’ Duties I

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