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Directors Duties Notes

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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:

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

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The power to allot and issue new shares.

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The power to make calls

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The power to call meetings

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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 faith. This is not favoured by UK courts though. The UK approach is more in line with point 3(below).

Opinions of the directors A factor in determining the substantial purpose for which the power was used can be the opinions of the directors, but this is only one factor in the larger determination of the substantial purpose. Howard Smith v. Ampol

1. Directors had issued shares which served to raise capital and also to depose the majority shareholders and facilitate the takeover. There genuine need for finance.

2. Held that where an action is in the directors self interest then their plea stating that it was bona fide in the best interests of the company will be ignored. On the facts the director had not acted in self interest. Held even so, their opinions would be taken into account but only as one factor. That they believed it to be in the best interests of the company was only one factor and it did not get around the fact that the main purpose of the action was not to raise capital but actually to frustrate the majority shareholding of Ampol. The court did not realise their contrary statements. The action was thus a breach of s.171.

Fairness to different shareholders When the exercise of a power affects the relative strength and position of different classes of share then the courts will generally consider whether or not the power was properly exercised in the light of fairness between different classes or sections of classes. Millls v. Mills

1. The question which arises is sometimes not a question about the interests of the company at all, but what is fair between different classes of shareholder. Here a different test must be applied.

2. In such a situation undue weight should not be given to the fact that the director may himself be a shareholder, just because he was affected by this does not make the action invalid.

3. On the facts, where a director was part of a board resolution which paid a distribution to the type of share which he held and not a different class of share which the claimant held, the distribution would have gone to ordinary shares (the class held by

the defendant) if it had been paid as a dividend. The effect of the resolution was merely to change the form of the distribution not the recipients.

4. Held this was fine, it did not encroach on the rights of either share class and was action taken good faith and in the best interests of the company. Consistent with proper purposes, not altering the rights just an action to give in a different form. But here, in the rules relating to insiders, it seems that actually these duties are owed to shareholders in some cases. Hogg v. Cramphorn

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The consideration was strictly whether the action was for the best interests of the company and whether it was for a proper purpose, this is consistent with the duty being owed to the company.

but Mills v. Mills

1. Sometimes the question relates not to what is in line with the interests of the company but instead look at what is fair between different classes of shareholders.

2. This suggests duties are owed, by directors, to the shareholders individually. Duties are owed by directors to the company. (CA2006s.170) The situation is now that directors do not owe fiduciary duties to individual shareholders, only to the company. If a shareholder feels they have been unfairly treated personally then the shareholder will need to seek a different course of action (possibly an unfair prejudice action under CA2006s.994).

Remedies for a breach of s.171 All equitable remedies are available for breach of statutory duties; it is the same as if an equitable fiduciary duty has been breached. So for a breach of s.171 it is as if a trustee has acted outside his powers.

Internal individuality of directors actions Clark v. Cutland

1. A director had misappropriated trust assets and had also taken unauthorised remuneration.

2. Held that unauthorised or stolen payments were breaches of duty. The directors owed duties to adhere to the rules of the constitution and only to use their powers for the proper purposes. The director in breach lacked any authority to make the payments and so the payments were completely void, not merely voidable.

Consequences of misapplication - director's personal liability

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