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Duties of Directors

Who is a director?

A director is a person who is responsible for the


overall direction of the company's affairs.
In company law, director means any person
occupying the position of director, by whatever
name called.

Types of Director
De facto directors

A de facto director is anyone who is held out by


a company as a director, performs the functions
of a director and who is treated by the board as
a director although they have never been
validly appointed

Types of Director
Shadow directors
A person might seek to avoid the legal

responsibilities of being a director by avoiding


appointment as such but using his power, say
as a major shareholder, to manipulate the
acknowledged board of directors.
In other words they seek the power and
influence that come with the position of
director, but without the legal obligations it
entails.

Types of Director
Alternate directors
A director may, if the articles permit, appoint

an alternate director to attend and vote for


them at board meetings which they are
unable to attend.

Types
ofdirectors
Director
Executive
An executive director is a director who performs
a specific role in a company under a service
contract which requires a regular, possibly daily,
involvement in management.
Non-executive directors
A non-executive director does not have a
function to perform in a company's
management but is involved in its governance

Types of Director
The Chief Executive Officer (Managing

Director)
A Chief Executive Officer (also commonly known
as a Managing Director ) is one of the directors
of the company appointed to carry out overall
day-to-day management function

Number of Director
Every company must have at least one

director and for a public company the


minimum is two.
The board of directors
Companies are run by the directors
collectively, in a board of directors.
The board of directors is the elected
representative of the shareholders acting
collectively in the management of a
company's affairs.

Duties of Directors
The Companies Act 2006 sets out the seven general statutory
duties of a director.
Who are the duties owed to?
Section 170 makes it clear that directors owe their duties to
the company, not the members.
This means that the only company itself can take action
against a director who breaches them.
Who are the duties owed by?
Every person who is classed as a director under the Act
owes the company a number of duties.
Certain aspects of the duties regarding conflicts of interest
and accepting benefits from third parties also apply to past
directors

Percival v Wright
Mr Percival owned shares per value of 10 in a company whose shares
neither had a market price nor were they quoted on the stock exchange
and were only transferable with the director's approval. Mr Percival through
his solicitors inquired from the company if any body was willing to
purchase their shares 12.55 a priced based on independent valuation. Mr
Wright who was the chairman of a company, with two other directors,
agreed to buy shares from Mr Percival at 12.10 each. Mr Percival then
found out the directors had been negotiating with another person for the
sale of the whole company at far more than 12.10 a share. The directors
had not told Percival. Percival claimed breach of fiduciary duty.
itwasheldthatthedutiesofthedirectorwereowedtothecompany.
TheapplicationofthiscommonlawprincipleisillustratedinPeskinv
Anderson4(2001)wheretheclaimantsfailedtoestablishthatthedirectorsowedduties
totheshareholdersofthecompany

Percival v Wright[1902] 2 Ch 401 is a

UK company lawcase concerning


directors' duties, holding that directors only
owe duties of loyalty to the company, and not
to individual shareholders. This is now codified
in the United Kingdom's
Companies Act of 2006section 170.

InCity Equitable Fire Insurance Co Ltd6


some directors who were negligent escaped
liability due to an exclusion clause in the
companys articles. It was held that the
director had no obligation to give continuous
attention to the affairs of the company.
While inRe DJan7a director was negligent
in not reading a fire insurance form which
resulted in the company going into
liquidation.

Duties of directors
To act within the power (s171)
This requires a director to comply with the

companys constitution and decisions made


under the constitution and to exercise the
powers only for the reasons for which they
were given.
They have a fiduciary duty to the company
to exercise their powers bona fide in
what they honestly consider to be the
interests of the company

In exercising the powers given to them

by the articles the directors have a


fiduciary duty not only to act bona fide
but also only to use their powers for a
proper purpose.
The powers are restricted to the purposes for
which they were given. If the directors
infringe this rule by exercising their powers for
a collateral purpose the transaction will be
invalid unless the company in general
meeting authorises it, or subsequently
ratifies it.

Section 17 of the Act provides that a

companys constitution includes not only the


companys articles of association but the
resolutions and agreements specified in s.29,
which includes special resolutions passed by
the company
and any resolutions or agreements that have
been agreed to, or which otherwise bind
classes of shareholders.

InHogg v Cromphorn11(1967)

Facts: Mr Baxter approached the board of directors of


Cramphorn Ltd. to make a takeover offer for the company.
The directors believed that the takeover would be bad for
the company. So they issued 5707 shares with ten votes
each to the trustees of the employees welfare scheme
(Cramphorn, an employee and the auditor). This meant they
could outvote Baxter's bid for majority control. A
shareholder, Mr Hogg, sued, alleging the issue of the shares
wasultra vires. Cramphorn argued that the directors' actions
were all in good faith. It was feared that Mr Baxter would
sack many of the workers.
itwasheldthatthepowertoissueshareswasafiduciarypowerthat
hadbeenexercisedforanimproperpurpose
anditwasirrelevantthatthemanagingdirectoractedbonafidein
whathefeltwasinthebestinterestsofthecompany.Thebreach
was,however,ratifiedbyreferringthemattertothegeneralmeeting
forapprovalbythemembers.

Howard Smith Ltd v Ampol Petroleum Ltd 1974

facts: Shareholders who held 55% of the issued shares


intended to reject a takeover bid for the company. The
directors honestly believed that it was in the company's
interest that the bid should succeed. The directors allotted
new shares to a prospective bidder so that the shareholders
opposed to the bid would then have less than 50% of the
enlarged capital and the bid would succeed.
Decision: The allotment was invalid. 'It must be
unconstitutional for directors to use their fiduciary powers
over the shares in the company purely for the purpose of
destroying an existing majority or creating a new majority
which did not previously exist'

Bishopsgate Investment Management Ltd v Maxwell

Facts: defendant who controlled Maxwell Group plc and bought the
Daily Mirrorin 1984, fell off his yacht in theCanary Islandson 5
November 1991. It transpired he had used the company pension
funds to fund his own lifestyle.Ian Maxwellwas Roberts son and a
director of Bishopsgate Investment Management Ltd, which was
meant to be safeguarding the company pension plans. He had
signed share transfers from Bishopsgate to Maxwell Group plc for
noconsideration. The shares had been held on trust for a number of
pension schemes. The liquidators of Bishopsgate sued Ian Maxwell
to compensate for the value of the shares, on the basis that it was
an improper use of the company's property.
Held:that Ian Maxwell was liable for the value of the shares, not
even on the basis of any negligence, but merely by misapplying the
assets.[1]

Bamford v Bamford 1969

facts: The directors of Bamford Ltd allotted 500,000


unissued shares to a third party to thwart a takeover bid.
A month after the allotment a general meeting was
called and an ordinary resolution was passed ratifying
the allotment. The holders of the newly-issued shares did
not vote. The claimants (minority shareholders) alleged
that the allotment was not made for a proper purpose.
Decision: The ratification was valid and the allotment
was good. There had been a breach of fiduciary duty but
the act had been validated by an ordinary resolution
passed in general meeting.

Duties of Directors
Duty to promote the success of the company (s 172)

In performing this duty, a director must have regard to all


relevant matters, but the following are specifically identified
in legislation:
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 standard business conduct; and the need to act fairly
as between members of the company.

Re Smith & Fawcett Ltd [1942],

Facts: Act 10 of the company constitution said


directors could refuse to register share transfers.
Mr Fawcett, one of the two directors and
shareholders died. Mr Smith co-opted another
director and refused to register a transfer of
shares to the late Mr Fawcetts executors. Half the
shares were bought, and the other half offered to
the executors.
Held: that in absence of mala fides, this was
proper

Duties of Directors
To exercise independent judgment, (173)

that is, not to subordinate the directors power


to the will of others. This does not prevent
directors from relying on advice, so long as they
exercise their own judgement on whether or not
to follow it.

Duty to exercise
independent judgment
Broadly this means that directors cannot
allow others to influence their decisions
or to make decisions for them.
A director will not breach this duty if they:
act in accordance with an agreement
entered into by the newly set up
company which restricts the exercise of
the directors discretion
act in a way authorised by the
companies constitution
rely on the advice or work of others in
making their decisions

Fulham Football Club v Cabra Estates plc [1994])

In this case the directors of a company had entered into


an undertaking to support and refrain from opposing
planning applications by another party for the development
of certain land in return for the receipt by the company of
large sums of money. The directors subsequently wanted to
give evidence to a planning inquiry opposing the
development and sought a declaration that they were not
bound by the undertakings and were entitled to give such
evidence to the inquiry as they considered to be in the
interests of the company.
The court of Appeal disagreed. It held that they had not
improperly fettered their discretion.

Duties of Directors
Duty to exercise reasonable skill, care and

diligence (s 174)
This requires a director to be diligent, careful
and well informed about the company's affairs.
If a director has particular knowledge, skill or
experience relevant to his function (for
instance, is a qualified accountant and acting as
a finance director), expectations regarding what
is reasonable will be judged accordingly
(regulation 25). -

(Re City Equitable Fire Insurance Co Ltd

[1925],
Facts:some directors who were negligent
escaped liability due to an exclusion clause in
the companys articles.
It was held that the director had no obligation to
give continuous attention to the affairs of the
company.

Re DJan of London Ltd [1994],

adirectorwasnegligentinnotreadingfireinsurance
formwhichresultedinthecompanygoinginto
liquidation.HoffmannLJheldthatthestandardofcare
expectedofadirectorwascontainedinthewrongful
tradingprovisionsins214(4)IA1986.
Thisrecognisestheideaofareasonabledirectorand
appliesthehigherofeitheranobjectiveorsubjective
standard.

Duties of Directors
Duty to avoid conflicts of interest
Section 175 CA 2006 - directors, as fiduciaries, must respect

the trust and confidence placed in them and should do nothing


to undermine or abuse their position as fiduciaries.
The practical effect of the rule is that any conflict of interest
must be authorised by the members of the company, unless
some alternative procedure is properly provided.
In the case of a private company, a conflict can be authorised
by the other directors of the board unless the companys
constitution provides to the contrary. The position is the same
for public companies, except that the constitution must
expressly permit authorisation by the board.

Duty to avoid conflicts of


interest
Directors have a duty to avoid conflicts of

interest after they register a company.


Where one may arise they will need to
disclose this to non-conflicted directors and
allow them to make the decision regarding the
relevant transaction.

(Boardman v Phipps [1967],

Upjohn in Boardman v Phipps(1966 )26 to


whether a reasonable man looking at the
relevant facts and circumstances would think
that there is a real sensible possibility of
conflict with the interests of those whom the
fiduciary is bound to protect.

Bhullar v Bhullar [2003])


where two directors of a family company were

held to be in breach of the no-conflict rule when


they acquired property adjacent to the company
without telling the company that the property was
available for purchase. Their personal interest in
acquiring the land was in conflict with their duty
to promote the companys interest which required
them to pass on the existence of the opportunity
to the company which could then have assessed
whether to acquire it.

Duties of Directors
Duty not to accept benefits from third parties Under

s.176,
a director must not accept a benefit from a third party,
which is conferred by reason of
(a) his being a director or
(b) his doing (or not doing) anything as director.
This duty is an aspect of the previous general duty to
avoid conflicts of interest, but it has been stated
separately in order to ensure that the obtaining of a
benefit from a third party by a director can only be
authorised by members of the company rather than by
the board.

In Towers v Premier waste management Ltd


(2011)32 the court of Appeal held that a
company director had breached his fiduciary
duty when he accepted a free loan of
equipment from a customer without
disclosing the transaction or seeking
approval for it.

Duties of Directors
Duty to declare to the companys other directors any
interest a director has in a proposed transaction or
arrangement with the company Under s.177 CA 2006
a director must declare to the other directors any
situation in which they are in any way, directly or
indirectly, interested in a proposed transaction or
arrangement with the company.
Again this further emphasises the duty to avoid a
conflict of interests by ensuring that directors are
transparent about personal interests, which could,
even remotely, be seen as affecting their judgement.

In Neptune (Vehicle washing equipment)Ltd v

Fitzgerald (1996) 33Lightman J held that to


comply with s177 F ,the former director of
the company should have declared his
interest and recorded in the minutes the
resolutions terminating his employment
contract and the payment of 100,000
compensation when a new management
sought a declaration that F should have
declared his interest in the contract.

QUESTION
The directors of a company owe a strict and non-negotiable
fiduciary duty to the company. Directors must act in the best
interests of the company and must never allow their personal
interests to conflict with their duties. However, this has not always
been the case and breach of directors duties are rampant in
modern business environment (The Examiner, 2014).
You are required to:
(1). critically examine the laws and legal principles relating to
directors duties in the Companies Act 2006 (approximately 1,500
words) AND
(2). provide one (1) mini case study on how directors duty has
been breached in a publicly listed company in Malaysia or other
countries (approximately 500 words)