Company 15b: Director's duties , staue s170-177
Corporate opportunities
An incident of duty to avoid a conflict of interests is so-called corporate opportunity doctrine. This 'makes it a breach of FD by a DIR to appropriate for his own benefit an economic opportunity which is considered to belong rightly to Co which he serves'
Item Software (UK) Ltd v Fassihi [2005]
Arden LJ, having noted that ' fundamental duty [of a DIR]... is duty to act in what he in good faith considers to be best interests of his Co', concluded that this duty of loyalty is 'time-honoured' rule (citing Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] Where a DIR breaches his duty to Co by making a secret profit, Co law provides a simple solution in form of an action for DM in which DIR is called to account for any profit made. Where a DIR takes steps to make a secret profit in circumstances where Co sustains DM, but where DIR does not succeed in making that secret profit remedy for Co was, prior to CA decision in Item Software, less clear cut. It is now clear that a claim based on a FD of loyalty will provide that remedy.
Duty to promote the success of the company, s.172 2 elements CASES Carlen v Drury (1812) ::non-interventionist policy (the internal management rule): 'This Court is not required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.' Item Software (UK) v Fassihi [2005] ::Arden LJ, having noted that ' fundamental duty [of DIR]... is duty to act in what he in good faith considers to be best interests of his Co', concluded that this duty of loyalty is 'time-honoured' rule , Where DIR breaches his duty to by making secret profit, law provides simple solution in form of an action for DM in which DIR is called to account for any profit made. Where DIR takes steps to make secret profit in circumstances where sustains DM, but where DIR does not succeed in making that secret profit remedy for was, prior to CA decision in Item Software, less clear cut. It is now clear that claim based on FD of loyalty will provide that remedy. Regentcrest v Cohen: determination of good faith is partly subjective in that ct will not substitute its own view about D's conduct in place of board's own judgment :: Q is whether D honestly believed that his act or omission was in interests of Co. issue, therefore, relates to D's state of mind' in determining whether duty has been discharged an objective assessment is also made. TEST for determining whether this duty has been discharged 'must be whether an intelligent and honest man in position of D of Co concerned, could, in whole of existing circumstances, have reasonably believed that Txs were for benefit of Co.' Neptune Ltd v Fitzgerald (No 2) Co's sole DIR resolved at a board meeting in which he and Co secretary were only attendees, that K should be terminated and that £100,892 be paid to him as compensation. ::he was not acting in what he honestly and genuinely considered to be in the best interests of the company but rather was acting exclusively to further his own personal interests. Knight v Frost : K sought to bring derivative action on behalf of all SHs of film production of which he was minority SH, after had made loan to an associated New York for sole purpose of discharging debts to F. F DIR in both Cos. BOFD? ::payments no benefit to that given that purported loans were not made for interest rate no repayment specified, $ ->F personally. In relation to breach of FD, TEST was same as that for BOT and whether or not person purportedly acquiescing understood nature of act in which he was concurring. Although K knew that business in which he was investing was speculative, representations made to K by F did not disclose true financial nature of and NY Co. Consequently, F would be required to account to for $s advanced. However, $s borrowed on behalf of New York to finance film projects must have been within contemplation of parties and would not raise any further L to account. Ball v Eden Project In 1997 relationship between Ball and EPL strained. without prior knowledge of Tees or of EPL, registers TM in own name. ::in registering TM in his own name, Mr Ball was in clear BOD to EPL. His actions in taking steps to risk his own Co's trading future for his own benefit could not be justified and order sought would be granted. West Mercia Safetywear v Dodd citing with approval Kinsela v Russell Kinsela SHs cannot absolve DIRs from BOD to creditors so as to bar liquidator's claim. In solvent proprietary interests of SHs entitle them as general body to be regarded as when Qs of duty of DIRs arise... But where is insolvent interests of creditors intrude. They become prospectively entitled, to displace power of SHs and DIRs to deal with Co's assets. their assets and not SHs' assets that, through medium of Co, are under management of DIRs pending either liquidation, return to solvency, or imposition of some alternative administration... Winkworth v Edward Baron Development ::Templeman explained that Ds owe fiduciary duty to Co and its creditors, present and future, to ensure that its affairs are properly administered and to keep Co's 'PY inviolate and available for repayment of its debts' (cf Lonhro) Yukong Line v Rendsburg Investment :: STANDING; creditors have no standing, individually or collectively, to bring an action in respect of any such duty. Toulson J held that D of an insolvent Co who, in BOD,Xed assets beyond reach of its creditors owed no corresponding fiduciary duty to an individual creditor of Co. appropriate means of redress was for liquidator to bring action for misfeasance (s.212 Insolvency Act 1986). Notwithstanding logistical issue of locus standi raised by Toulson J, Q of Ds' duties to creditors again emerged in two recent decisions of Cos ct. Re Pantone ::In my view, where Co is insolvent, human equivalent of Co for purposes of Ds' fiduciary duties is Co's creditors as whole, i.e. its general creditors. It follows that if Ds act consistently with interests of general creditors but inconsistently with interest of creditor or s of creditors with special Rs in winding up, they do not act in BOD to Co. Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd [2003 a resolution of the board of directors passed without proper consideration being given by certain directors to the interests of creditors would be open to challenge if the company had been insolvent at the date of the resolution. ::Leslie Kosmin QC, sitting as a deputy judge in the High Court, stated that in relation to an insolvent company, the directors, when considering the company's interests, must have regard to the interests of the creditors. The court was required to test the directors' conduct by reference to the Charterbridge Corp Ltd v Lloyd's Bank Ltd [1970] Charterbridge Corp Ltd v Lloyd's Bank Ltd [1970] Ch 62 test ::could an honest and intelligent man, in the position of the directors, in all the circumstances, reasonably have believed that the decision was for the benefit of the company'). In the case of insolvent companies the test is to be applied with the benefit of the creditors substituted for the benefit of the company.
First, a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Secondly, in doing so, the director should have regard (among other matters) to the factors listed in s.172(1). This list is not exhaustive, but highlights areas of particular importance which reflect wider expectations of responsible business behaviour.
Criterion Properties plc v Stratford UK Properties LLC [2003] It held that it is an improper use of a directors' power to frustrate a takeover bid through issuing a poison pill. former managing director (Aubrey Glasner) of Stratford UK (a subsidiary of Oaktree Capital Management LLC, a Delaware institutional money manager) had entered the company into a poison pill contract. If the managing director or the chairman (Rolf Nordstrum) left office, or if there was a takeover, the company would owe a crippling payment to a Criterion Properties through a put option. Criterion and Oaktree were in a joint venture. When the board of Stratford learnt of the pill, it dismissed Glasner.
argued that the refusal to consider such reasons must not be taken too far and that the board must have authority to interfere with these constitutional rights where the threat is big enough. A company cannot, he suggests, be incapable of acting where it is at risk of 'impotence and beggary'. Court of Appeal Brooke LJ and Carnwath LJ held that the judge's conclusion that the directors' had improperly exercised their powers was correct and should not have gone on to consider the actual knowledge of the director. House of Lords The decision of the House of Lords was that the test of unconscionability and knowing receipt were irrelevant, as no property had been received by Oaktree. The only issue was whether the directors had actual or ostensible authority to sign an agreement that was probably in BOFD, and as this had not been determined in summary judgment, the case was remitted for trial. Nicholls held that if directors cause their company A to enter into an agreement with B for an improper purpose, A's ability to set aside the agreement depends on familiar principles of agency and company law. If, applying those principles, the agreement is valid and not set aside, questions of knowing receipt would not arise. However, Nicholls then stated: "If, however, the agreement is set aside, B will be accountable for any benefit he may have received from A under the agreement. A will have a proprietary claim if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for UE, subject always to a defence of change of position. B's personal accountability will not be dependent on proof of fault or unconscionable conduct on his part. B's accountability, in this regard, will be strict." With this, Lord Nicholls advocated a strict liability personal claim, subject to a defence of change of position, based on unjust enrichment principles in which unconscionability or fault had no part to play. It would, in effect, become the equitable counterpart to the common law restitutionary action for money had and received, as seen in cases such as Lipkin Gorman v Karpnale [1991]. Lord Nicholls rejected the approach in BCI v Akindele, holding that the case should also have been decided on the question of authority rather than unconscionability. obiter, but radical departure from the present position. If accepted, a claimant would not have to prove unconscionability on the part of the defendant, but only that the defendant received a benefit as a result of a transaction that can be set aside, such as if it was entered into in breach of fiduciary duty. It would be significantly easier for a claimant to mount this type of claim rather than knowing receipt. Proving unconscionability is not an easy burden to discharge because the test is subjective and, as the majority of cases in this area show, the claimant is unlikely to know the circumstances surrounding the transaction
Balston Ltd v Headline Filters Ltd [1990]
an intention to set up in competition after his directorship has ceased is not to be regarded as COI wi having regard to the rules of public policy as to restraint of trade, nor is the taking of preliminary steps to investigate or forward that intention so long as there is no actual competitive tendering or trading, while D
Re D'Jan of London Ltd [1993]
applying s.214(4) of the Insolvency Act 1986, held the director N and prima facie liable to the company for losses caused as a result of its insurers repudiating a fire policy for non-disclosure. The director had signed the inaccurate proposal form without first reading it.
Charterbridge Corp Ltd v Lloyd's Bank Ltd [1970] Ch 62 test
could an honest and intelligent man, in the position of the directors, in all the circumstances, reasonably have believed that the decision was for the benefit of the company'). In the case of insolvent companies the test is to be applied with the benefit of the creditors substituted for the benefit of the company.
Piercy v Mills
court set aside a share issue on the basis that this was done 'simply and solely for the purpose of retaining control in the hands of the existing directors'.
Re Landhurst Leasing plc [1999]
went on to consider '... the question of the extent to which an individual director may T his or her colleagues. He found that 'even where there are no reasons to think the reliance is misplaced, a director may still be in breach of duty if he leaves to others matters for which the board as a whole must take responsibility.'
'self-dealing' falls within s.177(1).
'[i]f a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.' In similar terms s.182 applies to cases where a director has an interest in a transaction after it 'has been entered into by the company.' The provisions do not apply to substantial property transactions, loans, quasi-loans and credit transactions which require the approval of the company's members (ss.190 - 20
Competing directorships: conflicts of interest and duty and conflicts of duties Section 175(7)
'any reference in this s to a conflict of interest includes a conflict of interest and duty and a conflict of duties.' This at last injects a long awaited measure of cohesion in to the law and settles a long running dispute surrounding what was seen to be an anomalous decision of Chitty J in London and Mashonaland Co Ltd v New Mashonaland Exploration Co Ltd [1891]
Duty to exercise independent judgment, s.173 s 173 provides the following.
(1) A director of a company must exercise independent judgment. (2) This duty is not infringed by his acting— (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company's constitution. restates the principle developed in the case law that directors must exercise their powers independently and not subordinate their powers to the control of others by, for example, contracting with a 3P as to how a particular discretion conferred by the articles will be exercised. This is a facet of the duty to promote the success of the company laid down in s 172. Directors are not permitted to delegate their powers unless the company's constitution provides otherwise.
Duty to exercise reasonable care, skill and diligence, s.174 s 174 gives statutory effect to the modern judicial stance taken towards the determination of the standard of care expected of directors. It provides the following.
(1) A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.
Gwembe Valley Development Co Ltd v Koshy [2000]board has to be given precise information about the transaction in question
(1) K did breach the rule of EQ that a company director could not make a secret profit from his F position. The provision in the articles of association of GVDC, which permitted K to K with Co, was subject to a formal declaration of interest to be made by the director at a board meeting (Movitex v Bulfield [1988] applied). The self-dealing rule was not excluded if the director's interest was not disclosed. The 'no profit rule' was not impliedly abrogated in relation to GVDC in the particular circumstances of the case. (2) K had not made sufficient disclosure to the board of GVDC under the articles of association or general law. Informal disclosure made piecemeal or proof of the knowledge of individual board members did not comply with the formal requirements of the articles for disclosure at a board meeting.
Anstalt v Hayek [2002] cf balston, ummuna, coleman taylor v oakes
A director may utilise confidential information or 'know-how' acquired while working for the company after he departs but not 'trade secrets'
Duty to avoid conflicts of interest, s.175 s 175 replaces the equitable obligation to avoid conflicts of interest whereby directors are liable to account for any profit made personally in circumstances where their interests may conflict with their duty owed to the company. The substance of this duty is strict. This is reflected in the language of s.175(1), in that it is framed in terms of the possibility of conflict rather than actual conflicts of interest.
A director of a company must avoid a situation in which he has or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. Re Lands Allotment Co [1894] JJ Harrison (Properties) Ltd v Harrison [2002] director holds the proceeds made from a breach of fiduciary duty as a CTee.
Duty to act within powers, s.171 s 171 provides that: CASES: Extrasure Travel Insurances Ltd v Scattergood Hogg v Cramphorn Piercy v S Mills ::court set aside a share issue on the basis that this was done 'simply and solely for the purpose of retaining control in the hands of the existing directors'. Howard Smith v Ampol Petroleum :allotment of shares to reduce %, rejected Criterion Properties plc v Stratford UK Properties : improper use of a directors' power to frustrate a takeover bid through issuing a poison pill. Brooke LJ and Carnwath LJ held that the judge's conclusion that the directors' had improperly exercised their powers was correct and should not have gone on to consider the actual knowledge of the director. Harlowe's Nominees v Woodside (Lake Entrance) Oil:power to issue shares may be exercised for reasons other than the raising of capital provided 'those reasons relate to a purpose benefiting the company as a whole Smith Ltd v Ampol Petroleum Pty Ltd Street J held that the purpose behind the decision to allot shares to Howard Smith was to reduce Ampol's shareholding, also cf Teck Corporation Ltd v Millar [1972] may be in the company's interest for directors to forestall a resolution accepting a takeover offer by issuing shares.
A director of a company must— (a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred. s restates the duty requiring a director to exercise his powers in accordance with the terms upon which they were granted (ie to comply with the company's constitution), and do so for a proper purpose
Duty to promote the success of the company, s.172 s 172 reasserts the notion of the primacy of shareholders while recognising that well-managed companies operate on the basis of 'enlightened shareholder value'
According to this approach, directors, while ultimately required to promote shareholder interests, must take account of the factors affecting the company's relationships and performance.
Foster J's judgment in Dorchester Finance v Stebbing [1989] BCLC 498. Were the non-executive directors (NEDs) held liable for signing blank cheques and leaving them with Stebbings, the executive director? Was a lower standard of care required of two of the Ds because they were NEDs? Was the fact that they were qualified accountants material?
All three of the directors (the executive and the two NEDs) were held liable to make good the company's losses and, while the judge noted the accountancy experience of the NEDs, their professional qualifications were not material to his finding. The court found the NEDs N in allowing Stebbings 'to do as he pleased'. You should note Foster J's finding that the NEDs not only failed to exhibit the necessary skill and care in the performance of their duties as directors, but that they failed to perform any duty at all.
articles of association may increase the burden of the duties by, for example, requiring directors to obtain shareholder authorisation for their remuneration packages. However, the articles may not dilute the duties except to the extent expressly provided for in the relevant provisions. In this regard, s.173 (duty to exercise independent judgment (see 15.2.3 below)) provides that a director will not be in breach if he has acted in accordance with the constitution.
As we will see, s.175 (duty to avoid conflicts of interest (see 15.2.5 below)) provides that a director will not be in breach where, subject to the constitution, the matter has been authorised by independent directors.
JJ Harrison (Properties) Ltd v Harrison [2002] a DIR of a property Co who had acquired property from Co without disclosing development potential of property was in BOD and L to account for $ he made from acquisition when he sold land in 2 parts but was not a CTee for it.
CA dismissed the director's appeal and allowed the company's cross-appeal. A director who obtained a company's property for himself by misuse of the powers with which he had been entrusted as a director was a CTee deputy J had found that on conveyance of land to D a failure by D to comply with statutory disclosure requirements of a DIR and he acted in breach of his F duties as a DIR in failing to ensure that land was sold at its full value. His existing duties as a DIR required him to ensure that land was not conveyed at all until Co had received and considered advice as to its value in light of change in planning potential. In those circumstances it was impossible to reach a conclusion that D did not hold development land as a CTee and deputy J was wrong not to have so found.
DIR FDs competing duties
Crow: F duties are concerned with concepts of honesty and loyalty, not with competence. - law draws a clear distinction between F duties and other duties that may be owed by a person in a F position.
need to demonstrate that stakeholder interests informed his or her deliberations. In this regard, it is noteworthy that requirement for a business review introduced by s.417 CA 2006 (not applying to small Cos and is qualified wrt medium-sized Cos) specifies that its purpose 'is to inform members of Co and help them assess how DIRs have performed their duty under s 172...'. restates Lord Greene in Re Smith
DIRs must exercise their discretion bona fide in what they consider - not what a Ct may consider - is in interests of Co...
Dorchester Finance Co Ltd v Stebbing [1989] Dorchester Finance, which had gone insolvent, made a claim against Mr Stebbing and 2 NED accountants signed blank checks, later countersigned by Mr Stebbing.
DIRs of a Co were bound to act in good faith and in interests of Co (s.172 CA). display such skill and care as should be reasonably expected from people with their knowledge and experience (s.174). blank cheques N, and L for losses under s.214 IA 1986. Furthermore, no distinction should be drawn in principle between an executive and a non-executive DIR. Foster J held further that it would not be appropriate for Ct to exercise its discretion to relieve 3 DIRs on basis that they acted " . honestly and reasonably" . (see s.1157(1) ).
Nicholas v Soundcraft Electronics Ltd [1993] A parent company's failure to pay the debts it owes to a subsidiary is not unfair in a situation where the parent is in dire financial straits. E, a parent company held 75 per cent of the shares in its subsidiary, and handled all its exports, sales and finances. A petitioner who owned 12.5 per cent of the shares brought an action alleging that E had acted in a manner unfairly prejudicial to the subsidiary, in not paying sums of money due.
E's action was not unfair in that it was taken at a time when the company was in an extreme financial situation, and in an effort to avoid liquidation, which would not have been in the interest of E or the subsidiary.
Peso Silver Mines v Cropper [1966] competing duties cf Hasgings Peso was offered the opportunity to buy a number of mining claims. bona fide declined the offer because: financial state of the company doubt over the value of the claims. Later, the company's geologist formed a syndicate with the D and two other Peso directors to purchase and work the claims. action for CT
Held that the decision of the directors to reject the opportunity had been made in good faith and for sound commercial reasons in the interests of the company
Re Lands Allotment Co [1894] Ct contrasted conduct of 2 DIRs in determining their responsibility for an ultra vires investment made by Co. Neither was present at meeting at which investment had been approved. Attendance at a later meeting at which minutes of that meeting were confirmed was held to be insufficient to make either DIR L. stms made showed he had taken an active part in decision sufficient to hold him responsible for it.
However the other director "had nothing to do with the transaction at all" which was "past praying for" on his return. The court recognised the trustee-like nature of a director's duties as very relevant for actions by beneficiaries against express trustees for breach of trust and for the recovery of trust property, whether those periods are applied directly or by analogy. In consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust. Directors are not regarded as trustees merely by virtue of their office; but they are treated as trustees "of money which comes to their hands or which is actually under their control"
Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd [2003 a resolution of the board of directors passed without proper consideration being given by certain directors to the interests of creditors would be open to challenge if the company had been insolvent at the date of the resolution.
Leslie Kosmin QC, sitting as a deputy judge in the High Court, stated that in relation to an insolvent company, the directors, when considering the company's interests, must have regard to the interests of the creditors. The court was required to test the directors' conduct by reference to the Charterbridge Corp Ltd v Lloyd's Bank Ltd [1970]
CMS Dolphin Ltd v Simonet [2001] remedy
In many cases an account of profits would be a more advantageous remedy than equitable compensation since the actual profits obtained by a director might be higher than the damages for the loss of opportunity suffered by the company, particularly where the company had little or no prospect of obtaining the benefit of the opportunity. Where, as here, the business was not restricted exclusively to the performance of contracts which were obtained from CMSD, the fiduciary should be accountable for the profits properly attributable to the breach of fiduciary duty, taking into account the expenses connected with those profits and a reasonable allowance for overheads (but not necessarily salary for the wrongdoer), together with a sum to take account of other benefits derived from those contracts, e.g. other contracts might not have been won, or profits made on them, without (for example) the opportunity or cash-flow benefit which flowed from the contracts unlawfully obtained. There must, however, be some reasonable connection between the breach of duty and the profits for which the fiduciary was accountable.
Notwithstanding the logistical issue of locus standi raised by Toulson J, the question of directors' duties to creditors again emerged in two recent decisions of the Companies Court. In Re Pantone 485 Ltd [2002]
In my view, where the company is insolvent, the human equivalent of the company for the purposes of the directors' fiduciary duties is the company's creditors as a whole, i.e. its general creditors. It follows that if the directors act consistently with the interests of the general creditors but inconsistently with the interest of a creditor or s of creditors with special rights in a winding up, they do not act in breach of duty to the company.
Self-dealing directors: ss.175(3) and 177 CA 2006 underlying rationale of the self-dealing rule, which prohibits a director from being interested in a transaction to which the company was a party, was explained by the HL in Aberdeen v Blaikie Bros (1854) company had contracted with John Blaikie for the supply of iron chairs. At the time of the contract John Blaikie was both a director of Aberdeen Railway and a partner of Blaikie Bros.
Lord Cranworth LC, having stated that 'no-one, having [fiduciary] duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect', went on to stress that: his duty to the company imposed on him the obligation of obtaining these iron chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed.
ss 177 and 182 reflect the common practice that companies' articles of association generally permitted directors to have interests in conflict transactions provided they were declared to the board. The reason why the CL tolerated such relaxation of the rule was explained by Upjohn LJ in Boulting v Association of Cinematograph Television and Allied Technicians [1963] VIMP
It is frequently very much better in the interests of the company... should be advised by someone of Tx, although he may be interested on the other side. DIRs... may sometimes be placed in such a position that though their interest and duty conflict, they can properly and honestly give their services to both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands what are his rights in the matter, there is no reason why he should not relax the rule, and it may commercially be very much to his advantage to do so.
SCWS v Meyer [1959]
Lord Denning said that such directors walk a very fine line
Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v Griffiths [1998]
Lord Woolf stated that: The collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising or controlling them.
that s.175(4)(a) recognises that unexpected situations can arise where a conflict exists, but that conflict alone does not necessarily constitute a breach by directors.
Once you know that you are now in a situation of conflict, you will have to do something about it, but you are not in breach simply because it happened when, as is set out in subs (4)(a), it could not, 'reasonably be regarded as likely to give rise to' the conflict.
Lord Wilberforce's opinion delivered in Howard Smith Ltd v Ampol Petroleum Ltd [1974]. What steps should the court go through when determining whether or not an exercise of power by directors was for an improper purpose? TEST
POWER i. nature and scope (here a power to issue shares) ii. limits iii. substantial purpose for which exercised iv. having given credit to the bona fide opinion of the directors and accepting their judgment as to matters of management,substantial purpose =legitimate purpose (ii) v. If proper, not set aside due to incidental purpose
Industrial Development Consultants Ltd v Cooley [1972] D, who was managing director of Industrial Development Consultants Ltd (IDC), a design and construction company, failed to obtain K to undertake work for the Eastern Gas Board, approached Cooley, to deal with him personally and would not, contract with IDC. C did not disclose to the company. resigned his office so that he could take up the contract after deceiving the company into thinking he was suffering from ill health
Roskill J held that he was accountable to the company for all of the profits he received under the contract. Information which came to Cooley while he was managing director and which was of concern to the plaintiffs and relevant for the plaintiffs to know, was information which it was his duty to pass on to the plaintiffs. It was irrelevant to the issue of liability that Cooley had been approached in his personal capacity and that the Gas Board would not have contracted with IDC. Roskill J concluded that: if the D is not required to account he will have made a large profit as a result of having deliberately put himself into a position in which his duty to the plaintiffs who were employing him and his personal interests conflicted.
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 the CA, citing with approval the decision of the New South Wales CA in Kinsela v Russell Kinsela Pty Ltd (1986)
SHs cannot absolve DIRs from a BOD to creditors so as to bar liquidator's claim. In Dillon LJ's view following passage from Street CJ's judgment in Kinsela was of particular note. In a solvent Co proprietary interests of SHs entitle them as a general body to be regarded as Co when questions of duty of DIRs arise... But where a Co is insolvent interests of creditors intrude. They become prospectively entitled, to displace power of SHs and DIRs to deal with Co's assets. their assets and not SHs' assets that, through medium of Co, are under management of DIRs pending either liquidation, return to solvency, or imposition of some alternative administration...
s 172(3) also makes express reference to 'any enactment'. should be noted that s 214 of the Insolvency Act 1986 provides that a liquidator of a company in insolvent liquidation can apply to the court to have a person who is or has been a director of the company declared personally liable to make such contribution to the company's assets as the court thinks proper for the benefit of the unsecured creditors.
The liquidator must prove that the director in question allowed the company to continue to trade, at some time before the commencement of its winding up, when he knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation
effect of s.174 is that a director's actions will be measured against the conduct expected of a reasonably diligent person.
This is therefore an objective test. However, subjective considerations will also apply according to the level of any special skills the particular director may possess.
Harlowe's Nominees v Woodside Oil Co (1968 DIRs, in allotting new S to themselves for purpose of ensuring Co's stability,proper purpose?
Yes - proper purpose. Share issue give W greater freedom to plan future joint ventures LAW: Issue of shares during takeover (effect of defeating takeover) What constitutes a breach of the doctrine of proper purpose appears to be the underlying intention that gives rise to the power executed by the director. cf Smith Ltd v Ampol Petroleum Pty Ltd Street J held that the purpose behind the decision to allot shares to Howard Smith was to reduce Ampol's shareholding, also cf Teck Corporation Ltd v Millar [1972]
recognition of the existence of directors' duties to creditors has received the endorsement of the HL Winkworth v Edward Baron Development Co Ltd [1986] cf yukong esv
a fiduciary duty to the company and its creditors, present and future, to ensure that its affairs are properly administered and to keep the company's 'property inviolate and available for the repayment of its debts' (see also, Lonhro Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 HL, at 634 per Lord Diplock
The question of what will promote the success of the company is one for the director's good faith judgment
aligns the duty with the position long taken by the courts that, as a general rule, their role is not to interfere in the internal management of companies. The orthodoxy here is that the management of companies is best left to the judgment of their directors, subject to the good faith requirement.† In discharging this duty and, more particularly, in taking account of the factors listed in subs (1), directors are bound to exercise reasonable care, skill, and diligence (s.174,
power to issue shares may be exercised for reasons other than the raising of capital provided 'those reasons relate to a purpose benefiting the company as a whole;
as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends' (Harlowe's Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968
principal distinction between the two statutory provisions s177 and 182 proposed and existing
breach of s.177 carries civil consequences (s.178), breach of s.182 results in criminal sanctions (s.183). More particularly, s.178 states that the consequences of breach (or threatened breach) of ss.171-177 are the same as would apply if the corresponding CL rule or equitable principle applied. This is subject to the proviso introduced by s.180(1) that, subject to any provision to the contrary in the company's constitution, if s.177 is complied with, the transaction is not liable to be set aside by virtue of any CL rule or equitable principle requiring the consent of members.
Bhullar v Bhullar principle that DIRs must avoid COI Each side owned 50% of ordinary S. DIRs were Bhullars and sons. Co had a grocery store. It also owned an investment property called Springbank leased to a bowling alley families began to fall out. Mohan and Tim told board they wished for Co to buy no further investment properties. Negotiations began to split up Co, but they were unsuccessful. In 1999, Inderjit noticed carpark on sale. set up a Co called Silvercrest and bought, but did not tell. found out and brought an unfair prejudice claim (s 994 CA 2006) on breached their FD of loyalty to Co.
clear breach of the rule that directors must avoid COI. " . 41. Like D in Industrial Development Consultants Ltd v Cooley,[3] appellants in instant case had, at material time, 1capacity and 1capacity only in which they were carrying on business, namely as DIRs of Co. In that capacity, they were in a F relationship with Co. At material time, Co was still trading, albeit that negotiations for a division of its assets and business were on foot. reasonable men looking at facts would think a real sensible possibility of conflict" . .
Paragraph (b) of s.171 codifies the proper purposes doctrine formulated by Lord Greene MR in Re Smith
directors must not exercise their powers for any 'collateral purpose'.
public company and director duties
directors will only be able to authorise such conflicts if its constitution expressly permits (s.175(5)(b)). Further, s.175(6) provides that board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors. The votes of the conflicted directors in favour of the decision will be ignored and the conflicted directors are not counted in the quorum
Regal (Hastings)cf Cook v Deeks
distinction between Regal (Hastings) where ratification was a possibility and Cook v Deeks in which the Privy Council ruled out the question of ratification as a means of avoiding liability is not easy to discern. The answer probably lies in the fact that in the decision for Cook v Deeks the directors were fraudulent. In Regal (Hastings) the HL accepted that the directors acted in good faith.
Bristol and West Building Society v Mothew [1998] similar to Bray v Ford
distinguishing obligation of a fiduciary is the obligation of loyalty. good faith; must not make a profit out of his T; COI
Insolvency and creditors - section 172(3)
duty to promote the success of the company has effect subject to any rule of law requiring directors to act in the interests of creditors. In this respect English and Australian courts have reasoned that where a company is insolvent directors must have regard to the interests of the creditors.
On post-resignation breaches (s.175(4)) Foster Bryant Surveying Ltd v Bryant [2007] Mr Foster and Mr Bryant were directors of the plaintiff, a surveying company, and pretty much all their work came from a company called Alliance. Mrs Bryant also worked for the company,Mrs Bryant redundnat, H resigns. Alliance still wanted both of them to keep working. It said that Mr Bryant should still give his services. Mr Foster argued that Mr Bryant's services should be contracted out through their company still, not a separate one. But he lost the argument. Mr Bryant, set up a new company. done a few days before the resignation had actually taken effect. sued for BOFD breached his fiduciary duty during the period between resigning, and his resignation taking contractual effect. FBS Ltd (i.e. Mr Foster) and the diversion of corporate opportunities to himself.
e CA held that resigna tion by Bryant had had no ulterior motive and that approach had been made by Alliance to Bryant and not other way around and this was significant and that all of dealings had been completely open and transparent. CA held that there had been no breach of DIR's duty standards of loyalty, good faith and no-conflict rule should be looked at with reference to all circumstances. " . Among them are factor of position or office held, nature of corporate opportunity, its ripeness, its specificness and DIR's or managerial officer's relation to it, amount of knowledge possessed, circumstances in which it was obtained and whether it was special or, indeed even private, factor of time in continuation of FD where alleged breach occurs after termination of relationship with Co, and circumstances under which relationship was terminated, that is whether by retirement or resignation or discharge." . However, he stressed that he was " . not to be taken as laying down any rule of L to be read as if it were a statute" . , but rather standards of loyalty, good faith and no-conflict rule should be looked at with reference to all circumstances. " . FACTORS: Among them are factor of position or office held, nature of corporate opportunity, its ripeness, its specificness [sic] and DIR's or managerial officer's relation to it, amount of knowledge possessed, circumstances in which it was obtained and whether it was special or, indeed even private, factor of time in continuation of FD where alleged breach occurs after termination of relationship with Co, and circumstances under which relationship was terminated, that is whether by retirement or resignation or discharge." .
MacPherson v European Strategic Bureau Ltd [1999]
each of the shareholders and the directors knew the precise nature of other's interest so that there was, in effect, unanimous approval of the agreement. The court therefore held that: [n]o amount of formal disclosure by each other to the other would have increased the other's relevant knowledge.
difficulty comes when one tries to pin down the scope of the implied contractual obligation of good faith and fidelity. moonlighting probably is not a breach Hivac Ltd v Park Royal Scientific Instruments Ltd [1946]
employee owes a duty of fidelity to his employer. As a general proposition that is indisputable. The practical difficulty in any given case is to find exactly how far that rather vague duty of fidelity extends. Prima facie it seems to me on considering the authorities and the arguments that it must be a question on the facts of each particular case.
Section 172 and section 417 CA 2006: the business review business review, forming part of the directors' annual report, is a narrative report of the company's business activities designed to flesh out the figures contained in the accounts. The intent behind the provision seems to be more of a declaration rather than an obligation on directors.
explains how the requirements in s.417(5) and (6) are directed towards giving members 'an understanding' of such trends and factors. requirements refer, among other things, to certain matters being included in the review such as the main trends and factors likely to affect the future development, performance and position of the company's business (including information about environmental matters, the company's employees, social and community issues and the company's relationship with its suppliers).
Coleman Taymar Ltd v Oakes [2001], balston, ummuna Cs brought an action against the DIRS for BOC and/or FD, alleging that the first D had misused confidential information received while a director of the first C to enter into wrongful competition with that company, either personally or through the agency of the second D, and claimed an account of profits. D sought relief under s 727(1) of the Companies Act 1985 on the basis that he had acted honestly and reasonably TEST
first D owed the first C both contractual and FDs to do his best to promote its business and to act in complete good faith. did not prohibit that person while still a director or employee forming the intention to set up in competition or taking preliminary steps provided no actual competitive activity while D test obj and subj D may not have acted dishonestly but he had acted unreasonably under all circumstances so no relief
Gwembe Valley Development Co Ltd v Koshy [2003]
found to have acted dishonestly in not disclosing his interest in a transaction and was nonetheless held not liable to pay equitable compensation on the basis that his breach had not been proven to have caused loss to his company
Lord Herschell in Bray v Ford [1896]
fundamental objective of the duty to avoid conflicts of interest is aimed at curbing any temptation directors may succumb to when faced with the opportunity of preferring their own interests over and above those of the company's.
Neptune Ltd v Fitzgerald (No 2) [1995] Co's sole DIR resolved at a board meeting in which he and Co secretary were only attendees, that his service K should be terminated and that £100,892 be paid to him as compensation.
he was not acting in what he honestly and genuinely considered to be in the best interests of the company but rather was acting exclusively to further his own personal interests.
In the course of his judgment, Sedley LJ cast serious doubt on the correctness of the contract law case, Bell v. Lever Bros Plus Group Ltd v Pyke [2002] Plus Group Ltd did not like one of its partners, Mr Pyke. Mr Pyke refused to resign. The others tried to squeeze him out, by excluding him from management and severing his salary. Mr Pyke set up his own new company, and he got a lucrative contract with one of its major customers. In Plus then sued him for breach of fiduciary duty. They argued that he had procured a corporate opportunity for himself, when he owed it to the company.
held in favour of Mr Pyke. Sedley acknowledged that Mr Pyke had poached a customer, but said his... "...duty to the claimants had been reduced to vanishing point by the acts' of his fellow director and shareholder... For all the influence he had, he might as well have resigned." Brooke LJ quoted Upjohn's dissenting judgment in Boardman v. Phipps that the circumstances of... "...each case must be carefully examined to see whether a fiduciary relationship exists in relation to the matter of which complaint is made"
CMS Dolphin Ltd v Simonet [2001] Simonet resigned from his position as managing director of CMS (an advertising company) and he set up a new company. CMS's staff followed and so did the major clients. CMS sued Mr Simonet for the profits he made, alleging that he had breached his duty of loyalty to the company. Mr Simonet contended that he owed no duty because he had left the company.
held that Mr Simonet resigned without giving proper notice, and so he was in breach of contract. He had made no proper disclosure and had misused confidential information. The maturing business opportunities were the company's property, 'where he knowingly had a conflict of interest, and exploited it by resigning from the company'. Resignation was not a fiduciary power in itself, and no obligations continued after the end of the relationship.
Teck Corporation Ltd v Millar [1972] may be in the company's interest for directors to forestall a resolution accepting a takeover offer by issuing shares. British Columbia Supreme Court
held that an allotment of shares designed to defeat a takeover was proper even though it was made against the wishes of the existing shareholder and deprived him of control. Berger J stressed that, provided the directors act in good faith, they are entitled to consider the reputation, experience and policies of anyone seeking to take over the company and to use their power to protect the company if they decide, on reasonable grounds, that a takeover will cause substantial damage to the company.
question has arisen as to whether disclosure has to be made at a formal meeting of the board. In Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22 and Runciman v Walter Runciman plc [1992] Cf macpherson : Everyone Knew Already Gewerbe: Info Must be precise
held that informal disclosure to all members of the board would suffice
London and Mashonaland Co Ltd v New Mashonaland Exploration Co Ltd [1891]
held that no breach of duty arose where a director held office with two or more competing companies. modern courts have adopted a stricter stance in viewing competing directors as giving rise to an irreconcilable conflict of interest and duty. SCWS v Meyer [1959] Plus Group Ltd v Pyke [2002] Bell v Lever Bros Ltd [1932] : precluded any liability for holding a directorship which competed with the company but doubted in Pyke if still correct Hivac Ltd v Park Royal Scientific Instruments Ltd [1946]
Bell v Lever Bros [1932] CF PYKE WHICH CASTS DOUBT ON THIS CASE has long been thought to have held that neither an employee nor a director was under no duty to disclose his own wrongdoing:
servant owes a duty not to steal, but, having stolen, is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned
Privy Council in Howard Smith v Ampol Petroleum subjected the content of the duty to thorough scrutiny. The directors allotted shares to a company which had made a takeover bid. The effect of the share issue was to reduce the majority holding of two other shareholders, who had made a rival bid, from 55 to 36 per cent. The two shareholders sought a declaration that the share allotment was invalid as being an improper exercise of power. The directors argued, however, that the allotment was made primarily in order to obtain much needed capital for the company.
held that the directors had improperly exercised their powers: 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. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers.
Fulham Football Club Ltd v Cabra Estates plc [1994] four directors of Fulham football club agreed with Cabra, the club's landlords, that they would support Cabra's planning application for the future development of the club's ground rather than the plan put forward by the local authority. In return for this undertaking, Cabra paid the football club a substantial fee. directors subsequently decided to renege on this P and wanted to give evidence to a planning enquiry opposing the development. They argued that their agreement with Cabra was an unlawful fetter on their powers to act in the best interests of the company. The CA rejected this argument.
held that: agreement with landlords was part of a K that conferred significant benefits on Co DIRs, in giving their undertaking to Cabra, had not improperly fettered future exercise of their discretion. In fact, it was not a case of DIRs fettering their discretion because they had exercised it at time they gave their undertaking. Ct drew a distinction between: DIRs fettering their discretion, which is a clear BOD DIRs exercising their discretion in a manner which restricts their future conduct; this is not a BOD.
Extrasure Travel Insurances Ltd v Scattergood [2002] All ER (D) 307 (Jul), Ch D. Where a company is a member of a group, in whose interests should the directors act? Extrasure the directors had transferred company funds to another company in the group to enable it to pay a creditor who had been pressing for payment. It was held that the directors had acted without any honest belief that the transfer was in the interests of the transferor company
illustrates that where Co is 1of a number in a group structure DIRs must act bona fide in interests of that Co. Salomon=>separate entity. however, where acting in interests of group furthers interests of particular Co. For example, if a subsidiary Co is owed $ by its parent Co which is in financial difficulty failure on part of DIRs to take action to recover its debts may be in interests of subsidiary if, on balance, it would be adversely affected by liquidation of parent Co (see Nicholas v Soundcraft Electronics Ltd [1993] .
Ball v Eden Project Ltd [2002] In 1997 the relationship between Mr Ball and EPL became strained. In October 1997, without prior knowledge of the trustees or of EPL, registers TM in own name.
in registering the trademark in his own name, Mr Ball was in clear breach of his fiduciary duty to EPL. His actions in taking steps to risk his own company's trading future for his own benefit could not be justified and the order sought would be granted.
Framlington Group v Anderson [1995]
in the absence of special circumstances, like a prohibition in a service contract, a director commits no breach of duty merely because, while a director, he takes... "...steps so that, on ceasing to be a director... he can immediately set up business in competition with that company or join a competitor of it. Nor is he obliged to disclose to that company that he is taking those steps."
For the purpose of paragraph (a), the company's constitution is defined in s.17 CA 2006
including the company's articles of association, decisions taken in accordance with the articles and other decisions taken by the members, or a class of them, if they can be regarded as decisions of the company. The importance of directors appreciating the purposes of the company as detailed in the constitution is critical if they are to fulfil the duty laid down by s.172 to promote the success of the company
Recent decisions have made it clear that the general fiduciary obligations of a director do not prevent him from: Island Export Finance Ltd v Umunna [1986] Balston Ltd v Headline Filters Ltd [1990] Framlington Group plc v Anderson [1995] Coleman Taymar Ltd v Oakes [2001]
making the decision, while still a director, to set up in a competing business after his directorship has ceased taking preliminary steps to investigate or forward that intention provided he did not engage in any actual competitive activity while his directorship continued.
Extrasure Travel Insurances Ltd v Scattergood [2002] power to deal with corporate assets) being exercised for an improper purpose Tensions between duties DIRs Xed $ to the parent Co for debts acting in good faith BUT on the other hand it was argued that directors were using their power for an improper purpose, the directors were guilty of abuse of power even though they were working in company's interest DIRs DMd 1subsidiary in an attempt to rescue another. exploited their limited access to assets of paying corporation to secure a benefit for subsidiary they chose to prefer.
indirectly beneficially interested in all of Cos, this was simply a conflict of interest and duty. Ct, however, took a different approach. Crow DIR owes to his Co a FD to exercise his powers ( i) in what he (not Ct) honestly believes to be Co's best interests, and (ii) for proper purposes for which those powers have been conferred on him . . . examine facts to determine whether DIRs believed X was in best interest of Co or was for a proper purpose. Lord Wilberforce stressed that Ct must examine substantial purpose for which a power is exercised and must reach a conclusion as to whether that purpose was proper or not
Hogg v Cramphorn [1967]
issue of whether directors have used a power for a proper purpose arises in relation to their authority to issue shares. If shares are allotted in exchange for cash where the company is in need of additional capital the duty will not be broken. But where directors issue shares in order to dilute the voting rights of an existing majority shareholder because he or she is blocking a resolution supporting, for example, a takeover bid, then the duty will be breached
objective assessment can also be seen in cases brought under the Company Directors Disqualification Act 1986 (see Chapter 14, above), particularly in relation to where directors delegate their powers. Inactivity on the part of directors is no longer acceptable.
little weight is given to any contention to the effect that the director was unaware of a state of affairs because he had Ted others to manage the company (see Re Landhurst Leasing plc [1999]
Avoiding liability for conflicts of duty: authorisation by the directors - s.175(5)
major concern expressed by the Company Law Review was that the case law on conflicts of duty holds the potential to 'fetter entrepreneurial and business start-up activity by existing directors' and that 'the statutory statement of duties should only prevent the exploitation of business opportunities where there is a clear case for doing so' 2005 White Paper echoes this concern by stating that it is important that the duties do not impose impractical and onerous requirements which stifle entrepreneurial activity (at para 3.26). s 175(5)(a) therefore implements the CLRSG's recommendation that conflicts may be authorised by independent directors unless, in the case of a private company, its constitution otherwise provides.
Australian case Thornby v Goldberg (1964)
many kinds of transaction in which the proper time for the exercise of the directors' discretion is the time of the negotiation of a contract and not the time at which the contract is to be performed... If at the former time they are bona fide of opinion that it is in the interests of the company that the transaction should be entered into and carried into effect I see no reason in law why they should not bind themselves.
Furs Ltd v Tomkies (1936):decision governed by the inflexible rule that, except under articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in EQ to the company.
no answer that profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, =>L
Carlen v Drury (1812)
non-interventionist policy (the internal management rule) was explained by Lord Eldon LC in Carlen v Drury (1812) 1 Ves
s176 word 'benefit', for the purpose of this section
not defined in the Act although during the Parliamentary debates on the Bill it was made clear that it includes benefits of any description, including non-financial benefits. While s.175(5) provides for board authorisation in respect of conflicts of interest, this is not the case with this particular duty. However, the company may authorise the acceptance of benefits by virtue of s.180(4). s 176(2) defines a '3P' as a person other than the company or its holding company or its subsidiaries and thus s.176(3) provides that benefits provided by the company fall outside the prohibition.
a director cannot take a passive role in the management of the company. This is also the case in small private owner-managed companies (termed quasi-partners) where a spouse or son assumes the role of director without ever expecting to play a pro-active part in the affairs of the company. In Re Brian D Pierson (Contractors) Ltd [2001] 1 BCLC 275 the court refused to countenance such symbolic roles:
office of director has certain minimum responsibilities and functions, which are not simply discharged by leaving all management functions, and consideration of the company's affairs to another director without question, even in the case of a family company... One cannot be a 'sleeping' director; the function of 'directing' on its own requires some consideration of the company's affairs to be exercised.
Effect of ummuna
ordinary fiduciary duty owed by a director to his company is capable of surviving the director's resignation in certain circumstances. These circumstances being: Where there exists 'a maturing business opportunity' enjoyed by the company; and Where this opportunity is being actively pursued by the company; and Where the director's resignation was prompted/influenced by his wish to acquire for himself the opportunity/where it is the directors position with the company rather than a fresh initiative that led him to the opportunity.
Knight v Frost [1999] K sought to bring a derivative action on behalf of all the shareholders of a film production company of which he was a minority shareholder, after the company had made a loan to an associated New York corporation for the sole purpose of discharging debts to F. F DIR in both Cos. BOFD?
payments no benefit to that Co given that purported loans were not made for interest rate no repayment specified, $ ->F personally. BOFD, TEST was same as that for BOT and whether or not person purportedly acquiescing understood nature of act in which he was concurring. Although K knew that business in which he was investing was speculative, representations made to K by F did not disclose true financial nature of Co and NY Co. Consequently, F would be required to account to Co for $s advanced. However, $s borrowed on behalf of New York Co to finance film projects must have been within contemplation of parties and would not raise any further L to account.
As has been noted, the statutory objective of the business review is laid down in s.417(2). It provides that:
purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under s 172.
in determining whether the duty has been discharged an objective assessment is also made. In Charterbridge Corporation Ltd v Lloyd's Bank Ltd [1970]
test for determining whether this duty has been discharged 'must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.'
Island Export Finance Ltd v Umunna [1986]
resulted in a director not being in breach of duty for approaching customers of his former company. The company had not been actively seeking repeat business from those customers. Hutchison J, recognised that the law as set out in the Canadian case of Canadian Aero Service v O'Malley (1973) was an accurate description of the present aw in England. In particular, Hutchison J relied on the following excerpt of Laskin J's Judgment in above case: "...a...director is precluded from obtaining for himself, either secretly or without the approval of the company...any property or business advantage either belonging to the company or for which it has been negotiating...In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where his resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or [and] where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired "No restraint of trade. Directors, no less, than employees, acquire a general fund of knowledge and expertise in the course of their work, and it is plainly in the public interest that they should be free to exploit it in a new position"
statutory statement of directors' duties does not follow the CL position. Self-dealing is removed from the realms of directors' fiduciary duties and replaced with a statutory obligation to disclose an interest.
s 175(3) makes it clear that the duty to avoid conflicts of interest contained in s.175(1) 'does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.' Rather, 'self-dealing' falls within s.177(1).
Duty not to accept benefits from third parties, s.176 an element of the wider no-conflict duty laid down in s.175 and it too will not be infringed if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a COI. It should be noted that it applies only to benefits conferred because the director is a director of the company or because of something that the director does or does not do as director.
s 176(1) provides that a director must not accept a benefit from a 3P conferred by reason of: a. his being a director, or b. his doing (or not doing) anything as director.
Tito v Waddell (No 2) [1977]
self-dealing rule is (to put it very shortly) that if a Tee sells the T property to himself, the sale is voidable by any B , however fair the transaction.... [E]quity is astute to prevent a Tee from abusing his position or profiting from his T: the shepherd must not become a wolf.
It is therefore made clear that the review is an integral part of the duty of loyalty. In informing the members about the directors' performance of this duty, s.417(4) states that the review must give a balanced and comprehensive analysis
subs (6) requires the use of key performance indicators (KPIs) relating to financial matters and to environmental and employee matters. Although the particular KPIs used are left to the discretion of the directors, they must be effective in measuring the development, performance or position of the business.
classic decision on this aspect of the fiduciary obligation is Regal (Hastings) Ltd v Gulliver [1942] owned cinema and its DIRs wished to acquire 2 additional and sell. formed a subsidiary Co in order to take a lease of other 2 cinemas but landlord was not prepared to grant subsidiary a lease on these 2 cinemas unless subsidiary's paid-up capital . Co was unable to inject more than £2,000 in so original arrangement was changed. Regal would subscribe for 2,000 S and outstanding 3,000 S would be taken up by DIRs and their associates. Later, whole business was sold by way of takeover and DIRs made a profit.
successfully brought an action against its former DIRs claiming that they should account for profit they had made on sale of their S in subsidiary. Russell :opportunity and special knowledge to obtain S had come to DIRs qua F 'and having obtained these S by reason of fact that they were DIRs of Regal, and in course of execution of that office, are accountable for $ which they have made out of them. Russell went on to add that: rule of EQ which insists on those, who by use of a F position make a profit, being L to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether profit would or should otherwise have gone to C... L arises from mere fact of a profit having, in stated circumstances, been made.
A corporate opportunity is viewed as an asset of the company which may not therefore be misappropriated by the directors. In Cook v Deeks , directors diverted to their own personal benefit certain railway construction contracts which were offered to the co conduct was ratified by the company, the directors were held accountable.
the directors, 'while enitltled with the conduct of the affairs of the company [had] deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect.'
Part 10 of the 2006 Act restates seven duties for directors. These are:
the duty to act within powers (s.171) the duty to promote the success of the company (s.172) the duty to exercise independent judgment (s.173) the duty to exercise reasonable care, skill and diligence (s.174) the duty to avoid conflicts of interest (s.175) the duty not to accept benefits from 3Ps (s.176) the duty to declare interest in proposed transaction or arrangement (s.177) The duty to declare interest in an existing transaction or arrangement is laid down by s.182.
Regentcrest plc v Cohen [2001] determination of good faith is partly subjective in that the court will not substitute its own view about a director's conduct in place of the board's own judgment
the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue, therefore, relates to the director's state of mind' (see also, Extrasure Travel Insurances Ltd v Scattergood
Standing to sue The question of standing to sue to enforce this duty (locus standi) arose in Yukong Line v Rendsburg Investment Corpn of Liberia (No 2) [1998] cf F v H for SH
which it was pointed out that creditors have no standing, individually or collectively, to bring an action in respect of any such duty. Toulson J held that a director of an insolvent company who, in breach of duty to the company, transferred assets beyond the reach of its creditors owed no corresponding fiduciary duty to an individual creditor of the company. The appropriate means of redress was for the liquidator to bring an action for misfeasance (s.212 Insolvency Act 1986).