LISA PRATT

COMPANY LAW /DIRECTORS DUTY

Professor Lesley Walcott in her speech-Brief Reflections on Company Law

Reform and Shareholder in the Commonwealth Caribbean 2003- commented on the
decision in Percival v Wright 1902 where she indicated that it continues to
represent the prevailing judicial thought so that the general principle is that
directors of a company are not trustees for individual shareholders. On the other
hand, giving some support to this view is Sir Leonard Knowles (Short Introduction
to Modern Company Law at page 165). In light of this, Division D of the Companies
Act, Cap 308 of Barbados and in Particular section 58 (1) of the Act and s. 58 (1) (a)
purports that directors of a company must exercise the powers of the company
directly or indirectly through the employees and agents at the company and
secondly, direct the management of the business and affairs of the company. With
this in mind, Per Lord Selbourne in Great Eastern Rly Co. V Turner (1872) 8

Ch. App 149 stated plainly, directors are trustees of the companys money and
property and agents in the transactions which they enter into on behalf. Therefore,
they are to do so as a statutory obligation. They are to act honestly and in good
faith in the interest of the company and to exercise the care diligence and skill that
a reasonably prudent person would exercise in comparable circumstances. On the
other hand, if their actions dictate, a contrary intention against the principles of the
no profit rule, no interest rule or engages in bribery; the courts may conclude that
the director (s) has acted outside the scope of their duties. No doubt, directors
stand in a fiduciary duty to that of the company in which they serve. In an article
written by Professor James Edelman (When do fiduciary duties arise? Law
Quarterly Review April 2010) he alluded to the point that in a passage which
has been cited with approval on many occasion Millet LJ in Bristol and West
Building Society v Mothew described four (4) fiduciary duties (1) a fiduciary must
not put himself in position of conflict (2) a fiduciary is not to make a profit from his
position without informed consent, (3) a fiduciary must act in the best interest of
the beneficiary (4) a fiduciary must act in good faith. In lieu of this, the fact pattern
engages the following issues:
Whether Nicardo as a director, exercised his duty with care and skill,
honestly and in good faith by contracting with the third party?
The director Mr. Nicardo is under a common law and statutory duty obligations of
care and skill. However, the statutory duty requires him to exercise the care,
diligence and skill that a reasonably prudent person would exercise in comparable
circumstances (duty of good faith) per s. 95(1) (a). In looking at the fact pattern it
appears to be clear that that he did not act in bad faith. On the other hand, he may
have infringe s.95 (1) (b) of the Barbados Company Act which is analogous

to s. 174 (1) (b) of the Jamaica Act; which purports that, the director must act in
the best interest of the company without taking into account individual
shareholders. Certainly, Mr. Nicardo contracted with a third party in a business
deal on products that was above market value was not in the best interest of the
company. Evidently, he has infringed s. 95 (1) (b) by contracting with a third party in
a bad business deal. The statues for the most part provides for a standard of proof
by which the directors ought to be judged, such test is referred to as an objective
test. Undoubtedly, if the common law duty (pre statutory Standard) is applied in this
instance, a lower threshold of civil standard, would be required from Mr. Nicardo and
he may not be liable as it was in Re Brazilian Rubber Plantation & Estates Ltd
[1911] 1 CH 425. During this era, directors as Nevill J posit in this case
directors are not bound to bring any special qualification to his office. The
directors fate rest on the novice that the articles of association excluded them from
liability and no statutory obligations was necessary at the time. AS Brenda
Hannigan in her text (Company Law pg 195) indicated, Directors are also
subject to a common law duty to exercise an appropriate degree of care and skill.
Hence, a breach of duty can give rise to an action for damages in negligence,
subject to all the rules as to foreseeability and remoteness, though in practice , it is
extremely rare for directors to be sued for negligence. Simply put in applying the
common obligations Nicardo would be required to take reasonable care, that of an
ordinary man. Unbelievably, this is a low civil standard of care. On the other hand, if
the new statutory provisions were applicable then, the director in Re Brazillian
would not have breached s. 95 1(a) because his mistake was honest, but he would
have infringed s. 95 (1) (b). Clearly the latter case is evidence that directors need
not be professionally estute. On the other hand, Re Cardif followed the same

principle as Re Brazilian. The facts summarized, is that a director appointed at age

6, who never attended a board meeting in 27 yrs, was not held liable by the court
when sued by creditors because the company went bankrupt. The court held that if
he had gone to meetings and showed in competencies, he would have been liable
(his actions are what mattered). Evidently, the courts were more willing to take a
subjective standpoint, i.e. by looking at the decisions from the directors point of
view when deciding the standard of care required by directors. Notwithstanding,
Nicardo may face liability because the courts are much obliged to follow the
principles advanced by Romer J in Re City Equitable Fire Ins. [1925] Ch. 407.
These rules are an interpretation of s. 95 (1) (b)-principles of Directors duties.
(1) The manner in which the work of the company is delegated the courts will not
look at the internal running of the company. (2) He applied the objective test-which
directors must act honestly and with such care and skill and diligence as would
amount to reasonable care. (3) The latter tests are subjective views directors need
not exhibit in his performance of duties greater skill than may be expected from
person of his knowledge and experience. (4) Director not bound to give continuous
attention to affairs of the company, just periodical management. (5) In respect of all
duties, having regard to the needs of the business and articles of association, duties
may be properly delegated to other officers in the absence of suspicion of fraud or
other illegal activity. One may conclude that Romer J has intertwined both the
subjective and subjective standard. In applying these tests against Nicardos
actions, liability may be impossible because he did act honestly, he was only naive
in his dealings, and according to the law his actions may be also be attributed to
acquiring reasonable care . Not only but also, that Nicardos business dealings may
rest on the premise of him incurring mere negligence. This would not suffice for

breach to be articulated Re Pavides v Jensen [1956] Ch 565). Insurmountably,

Nicardo would only be accountable to the company , not his employers or creditors
Kuwait Asia Bank v National Mutual Life Nominees Ltd [1990] 3 All E.R.
404 . Out rightly, if Nicardos actions cannot be contributed to fraud, he could not
be held liable (Shultz v Reynolds and Newport).

In considering all discussed, it

cannot be equated definitively that Nicardo has violated his duty of skill and care.
Due to the minimal effect of common law application to directors fault, the
Company Law Review accepted in general, the Law Commissions proposal with full
codification of directors main duties replacing equitable and common law rules
(Brenda Hannigan-Company Law pg 215).
Whether the board act in good faith by rejecting the proposed agreement
with Perry ?
The general statement of the duty of directors is when exercising their directorial
powers they must act bona fide in what they consider-not what the court considers
in the interest of the company (Allen v Hyatt 1914 30 TLR 444) . The law gives
directors freedom to exercise the powers assigned to them but they do so as
fiduciaries. The board of directors was under a duty to act honestly and in good faith
with the view to the best interest of the company according to s. 95 (1) of Barbados
Act, which mirrors Jamaica Company Law Act 2004 s. 174 (1) (a). This speaks to the
fact that they rejected an offer to contract, which may have benefited the company.
However, the question now to be determined is what is in the best interest of the
company? Furthermore, to determine if the board rejecting the offer did act in the
best interest of the company would be judged according to what s. 95 (2) of
Barbados provides. This purports that a director must have regard to the interest
of the employees in general and it is mandatory for them to have regard of the

interest of shareholders of a company. If off course the directors were in the

jurisdiction of Jamaica, the requirements would differ. Section 174 (4) (Jamaica)
would require a director to have a discretionary regard for a company shareholders,
employees and the community. Whereas in the Bahamas, s. 81 (2) states that a
duty is owed to the company alone and is enforceable.To the contrary the United
Kingdom Company Act 2006 the directors owe an obligation to the company alone
and may have regard to the environment. Further to this, the board of directors had
an overriding interest if circumstances altered materially not to implement any
agreement between the bidder and the company (Dawson International v Coats
Paton plc [1989] BCLC 233, 244). This overriding nature of duty is a subjective
test, the directors must decide what is in the best interest of the company and not
what the court consider (Re Smith & Fawcett Ltd [1942] Ch 304) . If the
directors, felt that rejecting the offer would be in the best interest of the company,
the courts may infer that the directors was not under any duty to its shareholders or
creditors (Multinational Gas and Petrochemical Co. v Multinational Gas and
Petrochemical Services Ltd).
Did Sharons failure to disclosed interest breached any statutory duty?
Directors are like trustees, unless expressly allowed they must not make a profit
from their position. It is (no profit rule) an equitable rule that you are not to profit
from your position. These general principles are found in Regal (Hastings) Ltd v
Guillver [1967] 2 AC. The fact that Sharon was a director of a company and was
privy to certain information, as it pertains to contracting benefits with another
company; she was under a duty at the time to disclose her interest. Directors are
also precluded from taking for themselves the maturing opportunity pursued by the
company even after resigning. The question is, if an executive resigns from a

corporation at what point does the implicit contract in respect of the

obligations between the company and the executive terminated? At what
point will Sharon be free to capitalize on information she as ascertained
whilst being an employee at the company? The contract will extend way
beyond termination or resignation of employment. Particularly if their resignation
was prompt by some motive to take advantage of such opportunity. The case on
point is found in an Anglo Canadian case Regal (Hastings) ltd v Guillver [1942]
1 All ER 378. The former directors in this case had to give account for their profits
earned from purchasing a large cinema. The ratio in this case may also apply in this
circumstance in that the directors obtained shares by reasons and reason only of
the fact that they

were directors of Regal.

Lord Russell of Killowen stated:

the rule of equity insist that those who by fiduciary position make a profit being
liable to account for that profitthe profiteer, however honest and well intentioned
cannot escape the risk of being called upon to account. Certainly, Sharons action
may be inferred as usurping a corporate opportunity with a third party whom she
proposed a corporate deal on behalf of the company. Hence, she formed her own
company instead and obtained secret profits (Cook V Deeks 1916 1 AC 554). In
addition, Regal Hasting was extended by Canadian Aero Service Ltd v O
Malley, where both the vice and president of the company resigned and formed a
contract with the same persons they should have been contracting for on behalf of
the company. The Supreme Court of Canada held that their fiduciary duty had
survived even after their resignation and that the duty was enforceable against the
company and the directors. Judge Laskin in the latter case gave relevant factors in
determining

standards of loyalty, good faith and avoidance: position held, the

ripeness of corporate opportunity, knowledge obtained, circumstances in which it

was obtained, whether knowledge was special or private and the circumstance
under which the relationship ended-retired or resign. If it is concluded that Sharon
has obtained a corporate advantage, the courts may decide to consider awarding
for damages for breach of duty rather than an account of profits. The same principle
was followed in the English case of Industrial Development Consultants Ltd v
Cooley. Evenly important, is that to determine if a director has obtained a
corporate advantage, could be based on his motive and timing of the fiduciary
leaving the company. The fact that Sharon left immediately after the company
declined the offer with the other party and she contracted with the same third party.
It may not fall within the purview of Island Export v Umunna [1986], where it
was held that no maturing business opportunity existed when Umunna left the
company.
However, what must also be considered is that if the board rejects the offer by the
contracting party, then there is no breach of fiduciary duty on Sharons behalf as
long as she disclosed her interest to the board and they agreed (Queensland
Mines Ltd v Hudson 1978 52 ALJR 399). This distinguishes the position in Cook
v Deeks, there was no secret profit and he got the blessing of the board. The
question to be answered is, when is it considered that a director is
interested? There were two definitions advance to suggest when a director is
interested: (1) if they are a party to a material Contract (2) if it is not a director in
person but the director has interest. Therefore, it is clear that Sharon has not
received the consent from the board, nor did she attempt to acquire one. This may
be clear enough to say that she has breached her fiduciary duty. However, the
courts may decided to take a more liberal approach by applying what was held in
Peso Silver Mines

v Cooper 9 [1966] Privy Council.

It was held that the

directors did not violate the no-conflict rule because there was a bona fide vote of
the board of directors. Thus a director is free to make an investment on his own
account after the company has considered a proposition and bona fide decided
against it. This was all that was required, consent was not necessary.
Whether Lana and Guy breached their fiduciary duty by engaging in an Act
of Bribery?
Notwithstanding, the general rule is that a conflict of interest will arise if a board
member took an advantage of an opportunity that was first offered to the
company(Movitex Ltd v Bulfield 1988 BCLC 104 and Aberdeen Rly Co v
Blaikie Bros 1854 1 Macq 461). Conclusively, even if Lana and Guy had some
interest in doing business with Oats and Bran company personally, they should have
satisfied what the statutory obligations require; S. 89-92 of Barbados Company
Law Act, which mirrors Jamaica Company Act s. 193 which mandates every
director or an officer of company who is interested in contracting with another
company must in writing disclose to the company their interest or request to have it
entered into the companies minutes per s. 89 (3) Barbados Company Act. The
application would be subject to the boards approval according to S. 8 of the
Jamaican Act. This section provides that if the person fails to disclose in
accordance to this section, his interest in a material contract made by the company,
the company can upon application to the courts set aside such contract on those
terms. As it relates to bribery, the taking of the Mercedes Benz as a means of Oats
and Brans securing the deal; the directors are under a duty not to collect bribe.
Therefore, where a director receives a secret profit in the form of a bribe or
commission with respect to a particular transaction, that director will hold that bribe
as a constructive trustee for the company (AG For Kong v Reid 1994 1 AC 324).

The bribe spoken of in this context is not for any corrupt motive but merely that a
third party dealing with a company through one of its officials has given something
in cash or in this regard luxury cars without the knowledge and consent of that
company Mahesan v Malaysian Housing Society 1978 2 WLR 4444 and AG
For Kong v Reid 1994 1 AC 324.
Advice
The company is advised that although the director has not act in bad faith, he was
honest in his dealing. But he was naive as to the business deal he sorts. Hence, the
court may not consider repudiating the contract or allowing for any compensation
from the third party. Sharon for the most part was dishonest in her dealings and she
should be sued according to the non-conflict rule. As it relates to Lana and Guy, the
company can ask for either remedy, rescission of contract, an action for money and
damages. On the other hand, immediately allow for instant dismissal and forfeit the
vehicles offered to them, and take it as the property of the company.