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LPC Law Notes Business Law and Practice Notes

Directors' Duties Notes

Updated Directors' Duties Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

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DIRECTORS’ DUTIES

  1. NATURE of the breach and who’s committed it.

  2. What further INFORMATION might be needed to decide whether there has been a breach.

  3. What could be done to AVOID a breach.

  • S.170(1) Companies Act 2006 – The general duties specified in sections 171 to 177 are owed by a director of a company to the company.

  • In general, directors owe their company a fiduciary duty.

  • Aberdeen Rly Co v Blaikie Bros (1854): directors are agents of the company whose duty is to act as to best promote the interests of the company. Such agents have duties to discharge of a fiduciary nature towards their principal.
Section Duty Example
171

Duty to act within powers

Act in accordance with the company’s constitution and only exercise powers for which they are conferred (also see MA 3).

 Punt v Symons (1903): If the issuing of shares is to raise capital and not to help block an undesirable takeover, a director cannot issue new shares to people just so they will oppose the block. He is not using his powers for the purpose for which the powers were conferred – keeping themselves in office is not regarded as a ‘proper purpose’.
172

Duty to promote the success of the company

Act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

  • Must have regard (amongst other matters) to:

    • the likely consequences of any decision in the long term

    • the interests of the company's employees

    • the need to foster the company's business relationships with suppliers, customers and others

    • the impact of the company’s operations on the community and the environment

    • the desirability of the company maintaining a reputation for high standards of business conduct

    • the need to act fairly as between the members of the company

  • Regentcrest plc v Cohen (1988) – subjective test: did the directors think they were acting in good faith for the benefit of the members?

  • Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) – objective test: is the director an honest and intelligent person acting in the position of director?

  • difficult to breach – concept of business judgment, so the courts don’t like to intervene

  • unless the company’s survival is at risk, mere incompetence will not constitute a breach in fiduciary duty if the director honestly believed he was acting in the best interest of the company

  • Directors taking on an overdraft/more debt when there is substantial money owed on a current overdraft.

  • Not doing due diligence when entering into an agreement.
173

Duty to exercise independent judgment

Directors must make their own decisions but does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into.

  • can contract out under s.173(b)

  • Fullham FC v Cabra Estates (1994): if the director’s actions end up being in the best interest of the company, then the duty will not be broken.

  • When a director’s judgement is influenced by their appointment as a director for another company.
174

Duty to exercise reasonable care, skill and diligence

  • S.174(2)(a) – general objective test: judge each director against ‘the general knowledge, skill and experience that may reasonably be expected’ of an individual carrying out their director role

  • S.174(2)(b) – small subjective test: “as well as the knowledge and experience that the director actually has” (entitled to expect more from a more experienced director)

  • Also see s.214(4) Insolvency Act 1986: A reasonably diligent person [has] both– (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director [actually] has.

  • Re: D'Jan of London Ltd (1994): director was found negligent and liable for the company’s losses after signing an inaccurate proposal without reading it.

  • Re Barings plc (No 5) (2000): directors have a continuing duty to exercise care, skill, and diligence even when they have delegated things – this does not absolve them

  • Cohen v Selby (2001): sit back & do nothing = breach of reasonable care, skill and diligence
175

Duty to avoid conflicts of interest

The director must exploit property, info or opportunity for the benefit of the company and not themselves; it is irrelevant whether...

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