Introduction: The statutory duties The duties of directors were codified in statutory form for the first time

in 2006. The statutory code is based on the common law and equitable principles. The statue replaces any the case law that appear to contradict the statuory provisions. The provisions are to be interpreted in accordance wih the earlier casse law because they were intended to primarily codify that case law Section 170(1) if CA 2006 makes it clear that the general duties are owed by a director to the company. Thus only the company or member acting on behalf of the company can enforce them. The first duty of directors is that they must act within the terms of their powers as set out in the companys article of association and any memorandum of association ( that is its constitution) Section 172 requires a director to act in a way he or she considers to be in good faith, would most likely to promote the success of the company for the benefit of its members as a whole and having regard 6 things. 1) 2) 3) 4) 5) 6) The likely consequences of any decision in the long term The interest of the companys employees The need to foster the companys business businesses relationships The impact of the companys operations on the community and environment The desirability of the company maintaining a reputation for high standards The need to act fairly as between members of the company

The decision as to what is success or what will promote success is the directors good faith judgement. The six factors must find their way into every decision a director makes on behalf of the company. S.174 requires a director to exercise reasonable care, skill and diligence. S.175 imposes a duty on a director to avoid situations in which they can have direct or indirect conflict of interest. s.176 a director must not accept benefits from third parties s.177 requires a director to declare any interest he or she may have in a proposed transaction. s.171 requires a director to disclose any interest they may have in relation to a proposed transaction. S.180 provides a transaction cannot be set aside by virtue of common law or equitable principle if the above statues have been complied with.

Fudiciary duties The key obligations for manage the company are placed in the hands of the directors. The directors owe fudiciary duties to the company and a number of common law duties. The duty to avoid conflicts of interest The conflict of interest is a conflict between directors fiduciary duties and her personal interests.

Regal (Hastings) Ltd v Gulliver- The defendants were the directors of Regal, a company which
operated a cinema. Regal created HAC, intending it to be a subsidiary, to acquire two cinemas nearby due tof lack of money, the directors and solicitors personally paid for 60% of the shares in HAC. HAC acquired the cinemas, and then both were sold off together to the Plaintiff [Gulliver] for a profit. The Plaintiffs, as the new management of Regal, took proceedings against the exdirectors and solicitor, seeking an account of profits made on the sale of their personal shares in HAC Held: A fiduciary cannot have personal interests conflicting with the interests of those he is bound to protect. If he has any property acquired as a fiduciary, he must account it to his principle. The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made their profits by reason of the fact that they were directors of Regal and in the course of the execution of that office.

IDC v Cooley The defendant was an architect. He was employed as MDirector by IDC who provide consultancy to gas boards. The East Gas Board were offering a lucrative contract to building 4 dopts and IDC were keen to obtiain the business. The Eastern Gas Board made it clear it would not engage with a firm of consultants. The defendant realised he had a good chance of obtaining thecontract himself. He represented to IDC he was ill and later resigned. Shortly, after he took the steps to getting the contracts for himself. IDC sued the defendant for account of profits he would make. Held: D acted in breach of duty and must account. The fact IDC might not
have obtained the contract itself was irrelevant.

The same question was considered in Boardman v Phipps and Re Bhullar Bros the court held mere possession of information resulting from their position. The directors were under a fiduciary duty to communicate it to the company. Competing business directorship A director is not accountable for the profits of a competing business which he may be running (Bell v Lever Bros) unless the articles or his service contract expresses he will be accountable if he used the companys property in that business. The duty to act within powers The statutory principle A director cannot go beyond terms of the companys constitution or beyond the terms of their powers within the constitution. This is set out in s171 CA2006 The case law principle Re Smith & Fawcett- 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. It was held that the directors were required to act bona fide in what they consider to be in the interest of the company and not what the court may consider.

Sometimes there is a tension between the duty of good faith(now in s.172 CA2006) and for a purpose that is arugble contrary to the objective that power was supposed to have.

Hogg v Cramphorn Mr Baxter approached the board of directors of Cramphorn Ltd. to make a
takeover offer for the company. The directors (including Colonel Cramphorn believed that the takeover would be bad for the company. So they issued which meant they could outvote Baxter's bid for majority control. A shareholder, Mr Hogg, sued, alleging the issue of the shares was ultra vires. Cramphorn argued that the directors' actions were all in good faith. Held: The new shares issued by the directors are invalid. The directors violated their duties as directors by issuing shares for the purpose of preventing the takeover. The power to issue shares creates a fiduciary duty and must only be exercised in order to raise capital and not for any other purposes such as to prevent a takeover. The act could not be justified on the basis that the directors honestly believed that it would be in the best interest of the company. The improper issuance of shares can only be made valid if the decision is ratifiedby the shareholders at a general meeting, with no votes allowed to the newly issued shares. S.171(b) requires directors actively to act in accordance with the companys constitution and to operate their powers properly; unlike in Smith & Fawcett which requires the directors simply refrain from committing a breach of their duties.

Howard Smith Ltd v Ampol Petroleum 2 Shareholders (Ampol Ltd and its associate company Bulkships Ltd held 55% of the shares in RW Miller Ltd. Ampol Ltd and Howard Smith made rival takeover offers for RW Miller. Miller preferred the offer from Howard Smith over Ampol. Millers directors issues shares to Howard which had the effect of dilyting Ampols shareholding to 36%. A,pol sough a declaration that the share allotment was invalid as being an improper exercise of power. Held: The issue was intra vires but it was excercised for an improper use IT was stated when the use of a particular power is challenged. Determining whether or not it was used fo improper purpose is a dual process. 1) Consider the power to establish on a fair view nature and limits. 2) the purpose for which the power was used. The court will give credit to the bona fide opinion and respect the directors judgement. However in relation to the second test it is entitled to take an objective approach. Duties of skill and care An important question which has arisen on the case law is whether the director must be measured subjectively against his own level of competence or whether the director must be measured against an objective concept of what constitutes reasonable care, skill and diligence for any director. a director also owes a duty of care to the company at common law not to act negligently ( now in s.174). The standard is that of a reasonable man in looking after his own affairs. RE City Equitable Fire Insurance- Mr Bevan committed widespread fraud from the company. The legal issue was whether or not the fellow directors should have been liable to allowing bevan do what he did. Among the acts the directors signed blank cheques. Held: The directors did breach their duty of care. But they were not liable. The judge said For a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him appears to us to be laying too heavy a burden on honest businessmen

Dorchester Finance- 2 Non executive directors were held to be negligent in not attending board meetings of a subsidiary company. The directors also had signed blank cheques for a director who rarely attended board meetings. The director embezzled money from the company. Foster J Held All 3 directors were liable and the directors in the case were accountants and people with financial experience. They had to display such skill and care as should be reasonably expected from people with their knowledge and experience. The subjective level of skill First, Romer J held that, on the basis of earlier authority, *a+ director need not exhibit in the Performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience Now the test is similar as being the same as the test for establishing wrongful trading under s.214(4) of the Insolvency Act 1986. The qualified/experienced director is judged by the higher standard he ought to have but other directors are required to reach a level of competence to an objective standard. s 214 can only be applied specifically when the company is in insolvent liquidation but the standard required by the section has been cited particularly in Norman v Theodore Goddard [1992] and Re DJan of London [1994] 1 BLCL 561 as being an accurate statement of a directors duty at common law which could be applied more widely than in wrongful trading; Re DJan of London- A director, who failed to read but signed an insurance proposal, which contained inaccurate information and which was rejected by the insurance company, potentially liable in negligence. Directors Duties The traditional view in British Company law is that directors owe their duties to the providers of capital that is the shareholders. This duty is owed to the shareholders as a whole body and not individual shareholders. To company Percival v Wright(1902) certain shareholders approached directors asking them to purchase their shares at a time when secret takeover negotiations were going on. The directors failed to mention this to the shareholders. In litigation it was held :the directors were not in breach of duty to the share holders individually. To creditors West Mercia- CA held that a director of a company must have regard to the interest of its

creditors.

Effects of breach of duty

A director cannot be made liable for the acts of co-directors if he has not taken part in such acts and he had no knowledge of them and the circumstances were not such as ought to have aroused his suspicion Relief by the court The court has power to grant relief to a director who has acted honestly and reasonably and who ought, in all the circumstances, to be excused. Re Duomatic the test of whether a director acted reasonably was whether: he was acting in the way in which a man of affairs dealing with his own affairs with reasonable care and circumspection could reasonably be expected to act in such a case. This case was regarding the payment of directors that hadnt been approved by members because a meeting to discuss it never took place. It was held that he hadnt been dishonest in taking a salary. However his attempt to dismiss a 3rd director which he quarrelled with was illegal. Taking legal advice is part of acting reasonably A director is not strictly a trustee but in respect of the companys property he may come under the same liabilities as a trustee. In Re Lands Allotment Co2 Lindley LJ said: Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees These are the relevant tests and move into the exposition of critiquing how directors dealt by their regulation by s.6 of the company disqualification act a little more is needed to attach unfitness as an idea to their behaviour it is even higher standard competence as expected by the companies disqualification act 1986. We get serial abuse of the corporate form through low prosecution of the standards of behaviour we expect,

http://lawcommission.justice.gov.uk/docs/cp153_Company_Directors_Consulation.pdf Section 12.4 http://books.google.co.uk/books?id=BDdIdRc5DcC&pg=PA37&lpg=PA37&dq=using+secondary+sources+in+law+essay&source=bl&ots=4dlb3R AZ6a&sig=tWSHsY1j0Dm5rfeD1WvGpDHtnA&hl=en&sa=X&ei=hBanUvzeHsuBhAe15oGYCQ&ved=0CEoQ6AEwAw#v=onepage&q=using%2 0secondary%20sources%20in%20law%20essay&f=false http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2230.1992.tb01871.x/pdf