Company 15: Director's duties

Corporate opportunities

An incident of the duty to avoid a conflict of interests is the so-called corporate opportunity doctrine. This 'makes it a breach of fiduciary duty by a director to appropriate for his own benefit an economic opportunity which is considered to belong rightly to the company which he serves'

Item Software (UK) Ltd v Fassihi [2005] 2

Arden LJ, having noted that 'the fundamental duty [of a director]... is the duty to act in what he in good faith considers to be the best interests of his company', concluded that this duty of loyalty is the 'time-honoured' rule (citing Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] Where a director breaches his duty to the company by making a secret profit, company law provides a simple solution in the form of an action for damages in which the director is called to account for any profit made. Where a director takes steps to make a secret profit in circumstances where the company sustains damage, but where the director does not succeed in making that secret profit the remedy for the company was, prior to the CA decision in Item Software, less clear cut. It is now clear that a claim based on a fiduciary duty of loyalty will provide that remedy.

Duty to promote the success of the company, s.172 2 elements

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.

Final Report of the CLRSG accepted the case for codification for two principal reasons.

First, directors should know what is expected of them and therefore such a statement will further the CLR's objectives of reforming the law so as to achieve clarity and accessibility. Second, the process of formulating such a statement would enable defects in the present law to be corrected 'in important areas where it no longer corresponds to accepted norms of modern business practice'.

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.

Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (No 2) [1995]

company's sole director resolved at a board meeting in which he and the company secretary were the only attendees, that his service contract should be terminated and that £100,892 be paid to him as compensation. It was held that 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.

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 S Mills & Co Ltd [1920]

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'.

Gething v Kilner [1972]

the CL imposes a duty of disclosure where a fi duciary relationship exists. In relation to company directors, who are persons occupying positions of power and confi dence with respect to the company, the law requires that they act solely in the interests of the company. This was held in the case of Percival v Wright (1902) and in Gething v Kilner (1972), that directors have a duty, which clearly includes a duty to be honest and a duty not to mislead.

Parker & Cooper Ltd v Reading [1926]

where a transaction is intra vires the company and honest, the sanction of all the members of the company, however expressed, is sufficient to validate it, especially if it is a transaction entered into for the benefit of the company itself" .

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]

"It has been said on many occasions that an 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.

'self-dealing' falls within s.177(1). This provides that:

'[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.

liability to account arises even where the director acted honestly and where the company could not otherwise have obtained the benefit

(Regal (Hastings) Ltd v Gulliver; IDC v Cooley)

Remedies for breach of duties s 178 CA 2006 preserves the existing civil consequences of breach (or threatened breach) of any of the general duties. Although an attempt was made to codify the remedies available for breach of directors' duties, this proved to be a very difficult exercise and eventually it became 'too difficult to pursue'. It provides:

1. the consequences of breach (or threatened breach) of ss 171 to 174 are the same as would apply if the corresponding CL rule or equitable principle applied 2. the duties in those ss (with the exception of s 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors.

Dranez Anstalt v Hayek [2002]

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. encompasses the significant body of case law spanning over a century or so which the provision codifies. See Re Lands Allotment Co [1894] 1 Ch 616 and JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162, confirming that a 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:

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.

courts have been able to distinguish Percival v Wright on its facts and have held that fiduciary duties, carrying a duty of disclosure, can be owed to shareholders. For example, when recommending whether a takeover offer should be accepted it has been held that directors owe a duty to the shareholders which includes a duty to be honest and not to mislead (

Allen v Hyatt (1914) 30 TLR 444; Gething v Kilner [1972] 1 WLR 337; Heron International Ltd v Lord Grade [1983] BCLC 244; Coleman v Myers [1977] 2 NZLR 225; Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258; Peskin v Anderson

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.

Further, it has been held that it may be in the company's interest for directors to forestall a resolution accepting a takeover offer by issuing shares. Teck Corporation Ltd v Millar [1972]

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.

Specific statutory duties

CA 2006 carries over from the CA 1985 certain statutory duties originally designed to deal with an increasing number of cases involving fraudulent asset stripping by directors Substantial property transactions Loans and guarantees

Bairstow v Queens Moat Houses plc [2000] Dividend can be declared provided: the company has sufficient distributable reserves as defined generally in Section 830 of the Companies Act 2006 determination of the existence of sufficient distributable reserves must be undertaken with reference to relevant accounts as set out in Sections 836 to 839 of the Companies Act 2006 Unlawful dividends in light of Section 847 of the Companies Act 1986 are repayable by shareholders who are in receipt of the same.

CA determined that there was a requirement for any dividend to be made only in accordance with a company's financial statements and drawn up in the proper format and laid before the company at a general meeting. Critically the Court confirmed that the same cannot be regarded as merely a procedural technicality and the mandatory nature of Section 270 of the Companies Act 1985 (now Section 836 of the Companies Act 2006) must be fatal to any argument based on the Duomatic principle. also determined that it is not defence to say that dividends could have been declared perfectly lawfully if accounting adjustments had been made to the accounts. It is necessary to look and to look only at the relevant accounts. Even more important Bairstow established that it mattered not whether the company is still solvent if the dividend was unlawful / ultra vires because it infringed the rules.

JJ Harrison (Properties) Ltd v Harrison [2002] a director usurped a corporate opportunity by acquiring for his own benefit development land owned by the company. At the time of valuation he failed to disclose that planning permission was forthcoming which, once granted, would greatly inflate its value. The company, having unsuccessfully applied for planning permission a couple of years earlier, was unaware that local authority policy in this respect had changed. The director purchased the land from the company in 1985 for £8,400. Having obtained planning permission through, to add insult to injury, use of the company's resources, he then resold part of it for £110,300 in 1988 and the rest in 1992 for £122,500. The director resigned and the company sought to hold him liable as a CTee

Chadwick LJ, citing Millett LJ in Paragon Finance plc v DB Thackerar & Co (1999), said: It follows... from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of T that, a director who is, himself, the recipient of the property holds it upon a T for the company. He, also, is described as a CTee.

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, until Mr Foster said she was going to be made redundant. Unsurprisingly, this made Mr Bryant unhappy. He resigned. 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, fully funded by Alliance, set up a new company. However this was all done a few days before the resignation had actually taken effect. In the light of the preceding events, the company sued Mr Bryant, alleging that he had breached his fiduciary duty during the period between resigning, and his resignation taking contractual effect. FBS Ltd (i.e. Mr Foster) sued Mr Bryant for breach of his fiduciary duty of loyalty, and the diversion of corporate opportunities to himself.

Court of Appeal found there was no breach of fiduciary duty in this case. Here, defendant directors had resigned so that they could take the benefits for themselves of a project that they had been negotiating on behalf of the company. Laskin J had held that the defendants were "faithless fiduciaries", their duties survived resignation, their resignation had been influenced by wanting to get the opportunity, and that they were in breach of trust. However, he stressed that he was "not to be taken as laying down any rule of liability to be read as if it were a statute", but rather the standards of loyalty, good faith and the no-conflict rule should be looked at with reference to all the circumstances. "Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness [sic] and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge." Here, defendant directors had resigned so that they could take the benefits for themselves of a project that they had been negotiating on behalf of the company. Laskin J had held that the defendants were "faithless fiduciaries", their duties survived resignation, their resignation had been influenced by wanting to get the opportunity, and that they were in breach of trust. However, he stressed that he was "not to be taken as laying down any rule of liability to be read as if it were a statute", but rather the standards of loyalty, good faith and the no-conflict rule should be looked at with reference to all the circumstances. "Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness [sic] and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge."

injunction or declaration (see Cranleigh Precision Engineering Ltd v Bryant [1965]

D was the managing director of a company, which made and sold swimming pools. The D found that the pools were made under a Swiss patent. Cranleigh used this information to set up a rival company. The C sought an injunction for breach of confidentiality. Cranleigh argued that since the informatno was in te form of a patent it was public knowledge. It was held that since Cranleigh had obtained the information while the managing director it was confidential and an injunction was granted.

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.

Read 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. The decision clearly illustrates that where the company is one of a number in a group structure the directors must act bona fide in the interests of that company. This is, after all, a straightforward application of the decision in Salomon (see Chapter 3 of this guide) - that each company is a separate legal entity. There may be situations, however, where acting in the interests of the group furthers the interests of the particular company. For example, if a subsidiary company is owed money by its parent company which is in financial difficulty the failure on the part of the directors to take action to recover its debts may be in the interests of the subsidiary if, on balance, it would be adversely affected by the liquidation of the parent company (see Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360).

Lonhro Ltd v Shell Petroleum Co Ltd [1980]

GENERAL RULE LAID DOWN BY LORD TENTERDEN Lord Tenterden CJ in Doe d Bishop of Rochester v Bridges (1831) 1 B&Ad 847, 859 laid down the general rule that 'where an Act creates an obligation, and enforces the performance in a specified manner ... that performance cannot be enforced in any other manner'. LORD DIPLOCK'S EXCEPTIONS However, Lord Diplock in Lonrho Ltd v Shell Petroleum Co recognised two exceptions to this general rule. First, where the obligation or prohibition was imposed for the benefit or protection of a particular class of individuals, and secondly, where the statute creates a public right and an individual member of the public suffers 'particular damage'.

restoration of the company's property Re Forest of Dean Coal Co (1879) Upon the formation of a company promotion money had been improperly paid, of which B. was cognizant though not a party thereto. B. subsequently became a director, but took no steps to recover the money for the company. The company was now being wound up. On a summons by the liquidator to make B. liable under the above circumstances:—

Held, that B. was not liable for wilful default or for misfeasance under sect. 165 of the Companies Act, 1862 . CONCLUSIONS: no liability in this case because the choice director made was discretionary, also debt was not certain, would have required litigation. But where without fraud and without dishonesty they have omitted to get in a debt due to the company by not suing within time, or because the man was solvent at one moment and became insolvent at another, I am of opinion that it by no means follows as a matter of course, as it might in the case of ordinary Tees of T funds or of a T debt, that they are to be made liable. Traders have a discretion as to whether they shall sue their customers, a discretion which is not vested in the Tees of a debt under a settlement. In fact the customers of a trading partnership are very often allowed time, because the partners may think that, if they do not allow them time, they will drive the customers into bankruptcy and so suffer a greater loss than by giving them time; indeed they not only very often give them time, but they lend them money or sell them goods in the hope that better times may come and enable them to pay their debts. no such liability attaches to directors of joint stock companies. They must, as ordinary managing partners of a trading concern, be allowed a discretion, and not be too much interfered with by the Court, or have inquiries made by the Court as to whether the debtor could have paid at a particular moment a larger or a smaller amount if he had been sued. there was no obligation upon him to tell his brother directors the knowledge he had, so there was no obligation upon him to initiate by resolution or otherwise any attempt to sue the promoters; because it must be remembered, as I said before, that it is not an admitted debt; if the transaction had occurred some time before, there would have been probably a protracted and very hostile litigation about it, and it by no means follows that at the end of the litigation any money would have been forthcoming any more than there is now; and any discreet or cautious director might very well have said, "It is not wise to take proceedings in this matter; we shall probably not get anything by it, and if we do, it will do the company a great deal of mischief, and we had far better let bygones be bygones."

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 was a film director and producer who exercised the de facto powers of the board of directors of the company and also the New York corporation. The issue arose as to the propriety of such payments and as to the company's acquiescence in the first D's apparent breach of fiduciary duty owed to the company.

Held, that the payments made by the company to the New York corporation were of no benefit to that company given that the purported loans were not made at any specified, commercial rate of interest nor was the currency for repayment specified. Rather the money was passed directly to F personally. In relation to breach of fiduciary duty, the test was the same as that for BOT and whether or not the person purportedly acquiescing understood the nature of the act in which he was concurring. Although K knew that the business in which he was investing was speculative, the representations made to K by F did not disclose the true financial nature of the company and the New York corporation. Consequently, F would be required to account to the company for the moneys advanced. However, moneys borrowed on behalf of the New York corporation to finance film projects must have been within the contemplation of the parties and would not raise any further liability to account.

Re D'Jan of London Ltd VIMP director in question incorrectly completed a proposal form for property insurance. The insurers subsequently repudiated liability on the policy when the company claimed for fire damage. The director had signed the proposal without reading it

Hoffmann LJ thought that it was the kind of mistake that could be made by any busy man. In granting the director partial relief from liability, the court noted that he held 99 of the company's shares (his wife held the other). Therefore the economic reality was that the interests the director had put at risk were those of himself and his wife. The judge observed that it 'may seem odd that a person found to have been guilty of N, which involves failing to take reasonable care, can ever satisfy the court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so. It follows that conduct may be reasonable for the purposes of s.1157, despite amounting to lack of reasonable care at CL

account of profits made by the director Regal(Hastings) Ltd v Gulliver) rule against directors and officers from taking corporate opportunities in violation of their duty of loyalty. The Court held that a director is in breach of his duties if he takes advantage of an opportunity that the corporation would otherwise be interested in but was unable to take advantage. However the breach could have been resolved by ratification by the shareholders, which those involved neglected to do. Regal owned a cinema in Hastings. They took out leases on two more, through a new subsidiary, to make the whole lot an attractive sale package. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the buyers brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. They had not gained fully informed consent from the shareholders.

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". They therefore had to account for their profits to the company. The governing principle was succinctly stated by Lord Russell of Killowen, "The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances been made."

Re Lands Allotment Co [1894] A limited company is not a trustee of its funds, but their beneficial owner. However, the fiduciary character of the duties of its directors mean that they 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. The court contrasted the conduct of two directors (one of whom, Mr Brock, was also chairman) in determining their responsibility for an ultra vires investment made by the company. Neither was present at the meeting at which the investment had been approved. Attendance at a later meeting at which the minutes of that meeting were confirmed was held to be insufficient to make either director liable. On the other hand statements made by Mr Brock showing he had taken an active part in the decision to make the investment were sufficient to hold him responsible for it.

However the other director had been "away on the sea" and "had nothing to do with the transaction at all" which was "past praying for" on his return. In a case of a company director being treated as a trustee within the limitation provisions of ss1(3) and 8(1) of the Trustee Act 1888 in respect of a claim that unauthorised investments had caused loss to the company. The court recognised the trustee-like nature of a director's duties as very relevant to the statutory limitation periods 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" (per Lindley LJ); or "they are only trustees qua the particular property which is put into their hands or under their control" (per Kay LJ).

s 170(2) CA 2006 codifies the CL position that resignation is no defence to an action for breach of the no-conflict rule (s.175, see 15.2.5 below) or to an action where a director has accepted a benefit from a 3P (s.176, see 15.2.6 below).

IDC v Cooley [1972] 1 WLR 443; Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371; CMS Dolphin Ltd v Simonet [2001]

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.

damages or compensation where the company has suffered loss Re Lands Allotment Co [1894] A limited company is not a Tee of its funds, but their beneficial owner. However, the fiduciary character of the duties of its directors mean that they are treated as if they were Tees 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 T. The court contrasted the conduct of two directors (one of whom, Mr Brock, was also chairman) in determining their responsibility for an ultra vires investment made by the company. Neither was present at the meeting at which the investment had been approved. Attendance at a later meeting at which the minutes of that meeting were confirmed was held to be insufficient to make either director liable. On the other hand statements made by Mr Brock showing he had taken an active part in the decision to make the investment were sufficient to hold him responsible for it. However the other director had been "away on the sea" and "had nothing to do with the transaction at all" which was "past praying for" on his return.

In consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were Tees 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 T. Directors are not regarded as Tees merely by virtue of their office; but they are treated as Tees "of money which comes to their hands or which is actually under their control" (per Lindley LJ); or "they are only Tees qua the particular property which is put into their hands or under their control"

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.

Re Duckwari plc (No 2) [1999] Offerventure Ltd was a private company owned by Mr Cooper and his wife. Among its assets was a development property which Mr Cooper offered to sell at cost price in 1989 to Duckwari Plc - a company of which he was also a director. The property was transferred subject to an 'overage' agreement, under which Offerventure would be entitled to 50% of any profit arising from the land's future development. It was clear on the facts that Mr Cooper had conflicting duties to Offerventure and Duckwari. Nevertheless, the transaction was completed without the consent of Duckwari's shareholders in general meeting, and so in breach of s320 of the Companies Act 1985 (the 1985 Act). Duckwari subsequently defaulted on the loan that had funded the transaction, and the company sought restitution against Offerventure and Mr Cooper. The property element of this dispute then had a further part to play, as the property market collapsed soon after the transaction, leading to the property falling in value by £405,000.

In proceedings under s322(3)(b) of the 1985 Act, Offerventure and Mr Cooper were jointly held liable to indemnify Duckwari for the loss of value in the property resulting from the transaction.

company's constitution can reverse the statutory change and can insist on certain steps being taken requiring the consent of the members in certain circumstances.

In that event, that provision would have to be given effect to. That is the consequence of the change of approach - and therefore a change of approach to the appropriate consequence of there not being members' approval in particular cases because it would no longer be required

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]

It is frequently very much better in the interests of the company... that they should be advised by someone on some transaction, although he may be interested on the other side of the fence. Directors... 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.

Substantial property transactions principal features of the regime are the following

It permits a company to enter into a contract which is conditional on member approval. This implements a recommendation of the Law Commissions (s.190). The company is not to be liable under the contract if member approval is not forthcoming (s.190(3)). It provides for the aggregation of non-cash assets forming part of an arrangement or series of arrangements for the purpose of determining whether the financial thresholds have been exceeded so that member approval is required (s.190(5)). It excludes payments under directors' service contracts and payments for loss of office from the requirements of these clauses (s.190(6)). This implements a recommendation of the Law Commissions. It provides an exception for companies in administration or those being wound up (s.193).

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 Rly Co 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.

SCWS v Meyer [1959]

Lord Denning said that such directors walk a very fine line

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, [1967] 2 AC 134n What is the basis of the liability of the directors in this case? Who brought the claim? The directors were liable notwithstanding that: the company was financially incapable of purchasing the necessary shares they had used their own money they had acted honestly.

Lord Russell pointed out, the liability to account for any profit does not depend upon fraud or absence of bona fides, 'the liability arises from the mere fact of a profit having, in the stated circumstances, been made'. The fact that the purchasers of the company in effect got a reduction on the purchase price they had agreed was irrelevant to the issue of liability. The decision illustrates that the liability of directors in this respect is founded upon their Tee-like status - thus, like Tees, directors will hold any secret profit (i.e. a profit not disclosed to and ratified by the shareholders) on CT. new board caused the company to bring the claim against its former directors. As we saw in Chapter 11, the proper C rule requires the company to bring proceedings for redress when a wrong has been committed against it.

A-G for Hong Kong v Reid [1994]

Lord Templeman explained that Boardman 'demonstrates the strictness with which EQ regards the conduct of a fiduciary and the extent to which EQ is willing to impose a CT on property obtained by a fiduciary by virtue of his office.

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. As explained by Lord Goldsmith, (see Official Report

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.

liability of accessories

Presumably the rules developed for establishing the liability of accessories (for example, in the case of receipt of property pursuant to a breach of fiduciary duty, or dishonest assistance of such a breach) will be applied notwithstanding that the breach may be of a duty which is now statutorily defined and imposed.

classic decision on this aspect of the fiduciary obligation is Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, [1967] 2 AC 134n. Regal owned a cinema and its directors wished to acquire two additional local cinemas and sell the whole undertaking as a going concern. They formed a subsidiary company in order to take a lease of the other two cinemas but the landlord was not prepared to grant the subsidiary a lease on these two cinemas unless the subsidiary's paid-up capital was £5,000. The company was unable to inject more than £2,000 in cash for 2,000 shares and so the original arrangement was changed. It was decided that Regal would subscribe for 2,000 shares and the outstanding 3,000 shares would be taken up by the directors and their associates. Later, the whole business was sold by way of takeover and the directors made a profit.

Ps of Regal installed a new board of directors and the company successfully brought an action against its former directors claiming that they should account for the profit they had made on the sale of their shares in the subsidiary. Russell of Killowen stated that the opportunity and special knowledge to obtain the shares had come to the directors qua fiduciaries 'and having obtained these shares by reason of the fact that they were directors of Regal, and in the course of the execution of that office, are accountable for the profits which they have made out of them.' Lord Russell went on to add that: rule of EQ which insists on those, who by use of a fiduciary position make a profit, being liable 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 the plaintiff... liability arises from the mere fact of a profit having, in the stated circumstances, been made.

(The Savoy Hotel Ltd, and the Berkeley Hotel Co Ltd, Report of an Investigation under s.165 (6) of the Companies Act 1948

Report concluded that it was not enough for directors to act in the short-term interests of the company alone (see Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, on the meaning of 'the company as a whole'), but that regard must be taken of the long-term interests of the company. In other words, the duty is not confined to the existing body of shareholders, but extends to future shareholders. Some assistance in addressing this issue is also given in s.172 CA 2006 subss (3) and (4) of s.170, taken together, direct the courts to have regard to the pre-existing case law when interpreting the statutory statement.

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 for the company a lucrative contract to undertake work for the Eastern Gas Board. The Gas Board subsequently approached Cooley indicating that they wished to deal with him personally and would not, in any case, contract with IDC. Cooley did not disclose the offer to the company. However, he promptly 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.

recognition of the existence of directors' duties to creditors has received the endorsement of the HL. In Winkworth v Edward Baron Development Co Ltd [1986]

Templeman explained that directors owe 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

Heron International Ltd v Lord Grade [1983] In the course of a contested take-over bid, the directors of the target company who owned a majority of the company's voting shares were alleged, in breach of their duties both to the company and to its shareholders, to have accepted proposals which would reduce the value of the company's assets and hence of its shares and induce the shareholders to accept the lower of two rival offers.

The Court of Appeal granted the shareholders injunctive relief. It observed out that the decision of the directors, if implemented, would cause loss in two directions. First, the company would suffer loss to the extent that the value of its assets would be depreciated. That loss would be borne exclusively by the company. It was not a loss in respect of which the shareholders could recover, even if the market value of their shares fell in consequence. The other loss would be to the pockets of the shareholders because they were deprived of the opportunity of accepting the higher offer. That loss would be suffered exclusively by the shareholders. It was not a loss to the coffers of the company, which would remain totally unaffected. That could readily be demonstrated. If, as a result of the decision of the board which was impugned, the take-over went through and the entire shareholding in the company became vested in one bidder at a lower price than was available from the other, the recovery of damages by the company would not` compensate the former shareholders for their loss. Only a direct action by those shareholders in their own right, and not in right of the company, could provide the necessary compensation.

rescission of a contract where the director failed to disclose an interest Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] A held shares of company B on T for someone else. It was held that the contract was invalid because of the conflict of duties as director and Tee. The company has several possible remedies where the directors have allowed their duty and interest to conflict

The contract is voidable at instance of the company The company can call upon the director to account for gains he has made Company can ratify the transaction (general meeting) Directors are required to declare his interest at a board meeting (s 317 CA 1985) Remember s 322 CA 1985 (ultra vires). Transaction between company and one or more of its directors is voidable at the instance of the company

Re Simmon Box (Diamonds) Ltd [2000]

The court had the discretion under the CPR to strike out the appeal on the ground that it was unsatisfactory and an abuse of the process for it to continue. In the circumstances the court concluded that the appeal should not proceed as, inter alia, the appeal was completely stale. The disqualification order against which the appeal was sought to be brought was no longer in force and it did not prevent the appellant from doing anything.

Cases within more than one of the general duties

The way in which the duties are framed results in an overlap between them. Section 179 serves to emphasise that the effect of the duties is cumulative: Except as otherwise provided, more than one of the general duties may apply in any given case. It is therefore necessary for directors to comply with every duty that may be triggered in any given situation. For example, the duty to promote the success of the company (s.172) will not authorise the director to breach his duty to act within his powers (s.171), even if he considers that it would be most likely to promote the success of the company.

Section 239(6)(a) goes on to provide that nothing in the section affects the validity of a decision taken by the unanimous consent of the members of the company.

This appears to mean that the restrictions on who may vote on a resolution, contained in s.239(3)-(4), will not apply when every member, including the director qua shareholder, agrees to condone the breach of duty. This places on a statutory footing the CL principle that a breach of duty is ratifiable by obtaining the informal approval of every member who has a right to vote on such a resolution. See Re Duomatic Ltd [1969] 2 Ch 365; Parker & Cooper Ltd v Reading [1926] Ch 975; EIC Services Ltd v Phipps [2003] 1 WLR 2360; Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003]

Relief from liability Section 1157 CA 2006, replacing s.727 CA 1985, confers on the court the discretion to relieve, in whole or in part, an officer of the company from liability for: N default breach of duty breach of T.

This can occur in cases where it appears to the court that: the officer has acted honestly and reasonably having regard to all the circumstances of the case, he ought fairly to be excused on such terms as the court thinks fit. Re Welfab Engineers Ltd [1990] Re D'Jan of London Ltd Re Duckwari plc (No 2) Re Brian D Pierson (Contractors) Ltd [1999] BCC 26; Re Simmon Box (Diamonds) Ltd [2000] BCC 275; Bairstow v Queens Moat Houses plc [2000]

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.

Section 180(3) states that compliance with the general duties does not remove the need for the approval of members to the transactions falling within Chapter 4 CA 2006. Further, s.180(2) provides that the general duties apply even though the transaction falls within Chapter 4, except that there is no need to comply with ss.175 or 176 where the approval of members is obtained. Section 180(4) preserves the CL position on prior authorisation of conduct that would otherwise be a breach of the general duties.

Thus, companies may, through their articles, go further than the statutory duties by placing more onerous requirements on their directors (e.g. by requiring shareholder authorisation of the remuneration of the directors). It also makes it clear that the company's articles may not dilute the general duties except to the extent that this is explicitly permitted. The effect of this provision seems to be that interested members can vote on a resolution to approve a prospective breach of the statutory duties, but cannot do so to ratify a breach after the event (s.239).

Ratification by members of a director's breach of duty

Under the CL a director could avoid liability for breach of duty by disclosing the breach to, and obtaining the consent of, by ordinary resolution, the company in general meeting (see Regal Ltd v Gulliver [1967] 2 AC 134; and Gwembe Valley Development Co Ltd v Koshy [2004] Companies Act 2006 maintains this rule, albeit subject to one major change. Section 239(1)

Harlowe's Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968 W do joint venture with Comp1 - consolidate business rel by issuing shares to Comp 1. H (substantial Sh in W) argue share issue not proper (W didn't need more capital)! ISSUE: were share issue - proper purpose?

Yes - proper purpose. Share issue give W greater freedom to plan future joint ventures with Comp1 LAW: Issue of shares during takeover (effect of defeating takeover) may not be "improper" Power to issue shares - primarily to raise capital when required, BUT many occasions where Dirs can use it fairly/properly for OTHER REASONS Just need to relate to purpose of benefiting comp as whole (as opposed to eg. keeping control of comp).

Coleman Taymar Ltd v Oakes [2001

a company is entitled to elect whether to claim damages (equitable compensation) or an account of profits against a director who, in breach of duty, makes a secret profit.

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]

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,

Balston Ltd v Headline Filters Ltd [1990]

an intention by a director... to set up in competition with the company after his directorship has ceased is not to be regarded as a conflict in interest within the context of the principle, 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 he remains a directo

Substantial property transactions Sections 190-196, which replace ss.320-322 CA 1985, require substantial property transactions involving the acquisition or disposal of substantial 'non-cash assets' by directors or connected persons (including shadow directors (s.223(1)(b)) to be approved in advance by the company's members. A 'substantial property transaction' is defined

as arising where the market value of the asset exceeds the lower of £100,000 or 10 per cent of the company's net asset value, if more than £5,000 (s.191).

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

EIC Services Ltd v Phipps [2003] Section 35A has been viewed as essentially an outsider's protection as where a creditor relies on the section to validate a contract entered into by the directors without authority. However in EIC Services v Phipps [2003] 3 All ER 804 it was held to be available to shareholders in regard to a disputed issue of bonus shares. shareholder in the company challenged a bonus issue of shares that it had made by capitalising the sum standing to the credit of its share premium account because if his claim had succeeded he would have owned a substantially greater proportion of the company. The challenge was based upon the company's articles which provided that the bonus shares should be applied in proportion to the amounts paid up on the shares and following an ordinary resolution of the members.

bonus issue was enforceable. The relevant shareholders were entitled to rely on S35A of the CA 1985 which provides that in favour of a person dealing with the company in good faith the power of the board of directors to bind the company or authorise others to do so shall be deemed free of any limitation under the company's constitution eg its articles. Regarding the fact that certain of the recipients of the bonus shares were directors the judge referred to the further provisions of S35A which state that a person shall not be regarded as acting in bad faith because he or she knows that the act is beyond the powers of the directors. The judge felt that they did not know that the issue of the bonus shares was beyond their powers though as directors they should have done. In any case the judge felt that they had acted in good faith.

principal distinction between the two statutory provisions s177 and 182

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.

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. It certainly explains how the requirements in s.417(5) and (6) are directed towards giving members 'an understanding' of such trends and factors. These 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).

In the case of fiduciary duties the consequences of breach may include:

damages or compensation where the company has suffered loss (see Re Lands Allotment Co [1894] 1 Ch 616, CA; Joint Stock Discount Co v Brown (1869) restoration of the company's property (see Re Forest of Dean Coal Co (1879) 10 Ch D 450; JJ Harrison (Properties) Ltd v Harrison [2002] an account of profits made by the director (see Regal(Hastings) Ltd v Gulliver) injunction or declaration (see Cranleigh Precision Engineering Ltd v Bryant [1965] rescission of a contract where the director failed to disclose an interest (see Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914]

Furs Ltd v Tomkies (1936)

decision of this appeal is governed by the inflexible rule that, except under the authority of a provision in the 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. It is no answer to the application of the rule that the 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, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable.

damages or compensation where the company has suffered loss Joint Stock Discount Co v Brown (1869) Two years after the incorporation of the company the directors assisted in the construction of another company out of an existing banking business, on the terms of an agreement whereby they were to apply for 10,000 £50 shares in the new company, but with an understanding that of these 10,000 shares they should not be bound to take more than two-sevenths of what might not be allotted to the public. In pursuance of this arrangement the directors took, amongst some of themselves, and in the names of their secretary and assistant manager, on behalf of the company, 3000 shares in the new company, for which was drawn by three cheques and paid out of the company's funds the sum of £30,000. They also took, in the names of their secretary and assistant manager, 500 paid-up shares in the new company as the consideration for an agreement not to sell any of the new company's shares *382 under a £2 per share premium before the 1st of July, 1866; or, if they saw no objection, for a further period of six months

directors had no power to take or accept the 3000 shares, or the 500 shares; and that the payment of the £30,000 was a breach of T, which the directors were jointly and severally liable to make good to the company.

director will, therefore, need to demonstrate that the stakeholder interests listed informed his or her deliberations. In this regard, it is noteworthy that the requirement for a business review introduced by s.417 CA 2006 (though not applying to small companies and is qualified with respect to medium-sized companies) specifies that its purpose 'is to inform members of the company and help them assess how the directors have performed their duty under s 172...'. s 172(1) restates Lord Greene MR's formulation of the duty in Re Smith & Fawcett Ltd:

directors must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company...

Paragraph (b) of s.171 codifies the proper purposes doctrine formulated by Lord Greene MR in Re Smith & Fawcett Ltd [1942]

directors must not exercise their powers for any 'collateral purpose'.

Extrasure Travel Insurances Ltd v Scattergood [2002] power to deal with corporate assets) being exercised for an improper purpose

directors transferred £200000 to the parent company to help it to pay debts; On one hand, it was argued that directors were acting in good faith and 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 illustrates the confusion that currently troubles the assessment of the fiduciary liability of directors. 52 The case involved a monetary transfer between corporations in a corporate group. The paying corporation sought equitable compensation from two of its directors on the ground that the payment was in breach of their fiduciary obligations. On the facts, arguably, this was a straightforward instance of a conflict of competing duties on the part of persons who were formal or de facto directors of all of the involved corporations. 53 The directors damaged one subsidiary in an attempt to rescue another. They exploited their limited access to the assets of the paying corporation to secure a benefit for the subsidiary they chose to prefer. Alternatively, in the case of Mr Scattergood, who was indirectly beneficially interested in all of the corporations, this was simply a conflict of interest and duty. The court, however, took a different approach. 54 Justice Crow asserted that: " . It is trite law that a director owes to his company a fiduciary duty to exercise his powers (i) in what he (not the court) honestly believes to be the company's best interests, and (ii) for the proper purposes for which those powers have been conferred on him (emphasis added)" . .55 He then went on to examine the facts to determine whether the directors believed the transfer was in the best interest of the corporation or was for a proper purpose. Lord Wilberforce stressed that the court must examine the substantial purpose for which a power is exercised and must reach a conclusion as to whether that purpose was proper or not (

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

To whom are the duties owed? The orthodox answer to this question is now contained in s.170 CA 2006.

directors' duties are owed to the company and not to shareholders individually Consequently, a breach of duty is a wrong done to the company and the proper C in proceedings in respect of the breach is the company itself

restoration of the company's property JJ Harrison (Properties) Ltd v Harrison [2002] The Court of Appeal has heard an appeal against a decision of a deputy judge that a director of a property company who had acquired property from the company in 1986 for £8,400 without disclosing the development potential of the property was in breach of duty and liable to account for the profits he made from the acquisition when he sold the land in two parts for £110,300 in 1988 and £122,500 in 1992, but was not a constructive trustee for it.

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 enTed as a director was a CTee. no limitation period for a B under a T to recover from the Tee T property or the proceeds of T property in the POS of the Tee or previously received by the Tee and converted to his use - the position here. It was right that the director should account for the £110,300 received on the sale in 1988 and the £122,500 obtained on the further sale in 1992, in each case after bringing to the credit of that account a proportion of the purchase price of £8,400 and the cost of any works which led to an enhancement in the value of each part of the land.

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. The principal is entitled to the single-minded loyalty of his B. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his T; he must not place himself in a position where his duty and his interest may conflict...

CMS Dolphin Ltd v Simonet subjected the issue of remedies for diverting a corporate opportunity to detailed analysis. He held that S was a CTee of the profits referable to exploiting the corporate opportunity and, in general, it made no difference whether the opportunity is first taken up by the wrongdoer or by a 'corporate vehicle' established by him for that purpose.

do not consider that the liability of the directors in Cook v Deeks would have been in any way different if they had procured their new company to enter the contract directly, rather than (as they did) enter into it themselves and then transfer the benefit of the contract to a new company. The basis of a director's liability in this situation is that, as seen in Cook v Deeks, the opportunity in question is treated as if it were an asset of the company in relation to which the director had fiduciary duties. He thus becomes a CTee 'of the fruits of his abuse of the company's property'

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.

Murad v Al-Saraj [2005] liability to account arises even where the director acted honestly and where the company could not otherwise have obtained the benefit

explained the policy underlying such liability: It may be asked why EQ imposes stringent liability of this nature... EQ imposes stringent liability on a fiduciary as a deterrent - pour encourager les autres. T law recognises what in company law is now sometimes called the 'agency' problem. There is a separation of beneficial ownership and control and the shareholders (who may be numerous and only have small numbers of shares) or beneficial owners cannot easily monitor the actions of those who manage their business or property on a day to day basis. Therefore, in the interests of efficiency and to provide an incentive to fiduciaries to resist the temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an extensive liability to account.

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.'

JJ Harrison (Properties) Ltd v Harrison [2002]

e Court of Appeal has heard an appeal against a decision of a deputy judge that a director of a property company who had acquired property from the company in 1986 for £8,400 without disclosing the development potential of the property was in breach of duty and liable to account for the profits he made from the acquisition when he sold the land in two parts for £110,300 in 1988 and £122,500 in 1992, but was not a constructive trustee for it. The Court of Appeal 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 constructive trustee. The deputy judge had found that on the conveyance of the land to the defendant in February 1986 there was a failure by the defendant to comply with the statutory disclosure requirements of a director and he acted in breach of his fiduciary duties as a director in failing to ensure that the land was sold at its full value. His existing duties as a director required him to ensure that the land was not conveyed at all until the company had received and considered advice as to its value in the light of the change in planning potential. In those circumstances it was impossible to reach a conclusion that the defendant did not hold the development land as a constructive trustee and the deputy judge was wrong not to have so found.

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.

The Law Commissions examined the case for restating directors' duties in statute. Arguments against this were founded on loss of flexibility, while those in favour saw advantages in terms of certainty and accessibility. The Commissions' conclusion was that the case for legislative restatement was made out and that the issue of inflexibility could be addressed by:

ensuring the restatement was at a high level of generality by way of a statement of principles; and by providing that it was not exhaustive: ie while it would be a comprehensive and binding statement of the law in the field covered, it would not prevent the courts inventing new general principles outside the field.

Boardman v Phipps [1967] remedies

even though the profit may arise out of the use of position as opposed to the use of T property, the judges more typically resort to the language of the 'CT' as the means for fashioning a remedy ,

IDC v Cooley [1972] case on the corporate opportunities doctrine, and the duty of loyalty from the law of T. Cooley was an architect employed as managing director of Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial Development Consultants found out and sued him for breach of his duty of loyalty.

even though there was no chance of IDC getting the contract, if they had been told they would not have released him. So he was held accountable for the benefits he received. He rejected the argument that because he made it clear in his discussions with the Gas Board that he was speaking in a private capacity, Mr. Cooley was under no fiduciary duty. He had 'one capacity and one capacity only in which he was carrying on business at that time. That capacity was as managing director of the plaintiffs.' All information which came to him should have been passed on. no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal;

exceptions to the requirement for members' approval which have been consolidated (see ss.204 - 209). These cover:

expenditure on company business (s.204); expenditure on defending proceedings etc (s.205); expenditure in connection with regulatory action or investigation (s.206); expenditure for minor and business transactions (s.207); expenditure for intra-group transactions (s.208); expenditure for money-lending companies (s.209).

Directors, being the principal management organ of the company, must act for its benefit and they therefore occupy a fiduciary position

fiduciary status can be traced to the origins of the modern company when companies were established by a deed of settlement that generally declared the directors to be Tees of the funds and assets of the business venture. The courts thus had a ready-made template in the form of Tee liability that was harnessed in order to frame the fiduciary duties of directors. The CL also constructed the duties of care and skill of directors and the legislature has added to the obligations of directors, generally as reactive measures to specific abuses.

Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003] ase concerned the enforceability of a provision in a shareholders ʹ agreement, made in the context of a joint venture company, requiring a member to sell its shares to the other member in defined circumstances. That question turned on whether the triggering event (a purported board decision) was valid or whether it could be regarded as valid by applying the Duomatic Principle of informal shareholder assent Duomatic principle. It is a sound a nd sensible principl e of company law allowing the members of the company to reach an agreement without the need for strict compliance with formal procedures, where they exist only for the benefit of those who have agre ed not comply with them. What matters is the unanimous assent of t hose who ultimately exercise power over the affairs of the company through their right to attend and vote at a general meeting. It does not matter whether the formal procedures in question are stipulated for in the articles of asso ciation in the Companies Acts or in a separate contract between the members of the company concerned. What matters is t hat all the members have reached an agreement. If they have, they cannot be heard to say that they are not bound by it because the formal procedur e was not followed.

found that the Duomatic principle did not apply as, she concluded, that "...there must be a clear agreement by the parties reached after consideration by the parties of all the relevant and known facts" 15 and she found that this was not the case here. I ndeed, at paragraph 106 of the judgment she states: "Indeed, it seems to be accepted t hat when Ms. Goeldner handed over the letter at the November meeting, t here was no discussion at all. It even appears that the letter was not read by the Petroquest directors until sometime after the meeting."

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

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. As explained by 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. As explained by Lord Herschell in Bray v Ford [1896]

Coleman Taymar Ltd v Oakes [2001] Cs brought an action against the first D for breach of confidence and/or fiduciary duty, 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. The first D sought relief under s 727(1) of the Companies Act 1985 on the basis that he had acted honestly and reasonably and ought fairly to be excused his breach of duty.

giving judgment for the first C, that as a director and senior employee the first D owed the first C both contractual and fiduciary duties to do his best to promote its business and to act in complete good faith towards it, but such duties did not prohibit that person while still a director or employee forming the intention to set up in competition once his employment had ceased or taking preliminary steps provided there was no actual competitive activity while the directorship/ employment continued; that the first C's decision to seek an account of profits in lieu of damages did not prevent the first D relying on s 727(1); that s 727 required an essentially subjective approach to the question of honesty, but any test of reasonableness was inherently objective; that even if a director had acted honestly and reasonably the court still had to consider whether in all of the circumstances the director ought fairly to be excused from liability, either absolutely or on such terms as the court thought fit; that by going behind the Cs' back to negotiate leases of the Cs' business premises for his own benefit, the first D may not have acted dishonestly but he had acted unreasonably and so was not entitled to relief under s 727 in respect of that;

Peso Silver Mines v Cropper [1966] the board of Peso was offered the opportunity to buy a number of mining claims. Some of these were located on land which adjoined the company's own mining territories. The board bona fide declined the offer because: of the then financial state of the company there was some 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. When the company was taken over, the new board (as in Regal (Hastings)) brought an action claiming that the D

held his shares on CT for the company. The claim was unsuccessful. It was 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 See also, Laskin J's approach towards the issue of determining liability in Canadian Aero Service Ltd v O'Malley [1973]

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 LJ referred to the submission by Mr Pyke's counsel that Bell v. Lever Bros precluded any liability for holding a directorship which competed with the company. Although unnecessary for the judgment he questioned whether it could still be regarded as correct. In any case, Sedley LJ 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 Lord 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.

Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983] A Liberian subsidiary formed as a joint venture to acquire oil tankers. The directors provided N information in relation to the joint venture. Issue: whether the directors liable for the ensuing loss.

here is no doubt that a director of a limited company owes such a degree of care to that company as a reasonable man might be expected to take in the circumstances on his own behalf. directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders.

Dorchester Finance Co Ltd v Stebbing [1989] Dorchester Finance, which had gone insolvent, made a claim against Mr Stebbing and two other non-executive director accountants who often signed blank cheques which were later countersigned by Mr Stebbing.

held that directors of a company were bound to act in good faith and in the interests of the company (see now, s.172 Companies Act 2006). They also had to display such skill and care as should be reasonably expected from people with their knowledge and experience (see now, s.174 Companies Act 2006). The system of signing blank cheques was held to be negligent, and liable for losses under s.214 IA 1986. Furthermore, no distinction should be drawn in principle between an executive and a non-executive director. Foster J held further that it would not be appropriate for the court to exercise its discretion to relieve the three directors on the basis that they acted "honestly and reasonably" under s.448 of the Companies Act 1948 (see now s.1157(1) Companies Act 2006).

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]

held that informal disclosure to all members of the board would suffice

Re Duckwari plc [1997] company had acquired a non-cash asset from a person connected with one of its directors for £495,000. Four years later in 1993, following the collapse of the property market, the property was valued for the purpose of the proceedings at £90,000. It was no longer possible to avoid the transaction and so the company sought an indemnity for its losses.

held that irrespective of whether the transaction is or can be avoided, the director or connected person and any other director who authorised the transaction will be liable to account to the company for any profit or loss sustained as a result of the breach of s.190 CA 2006 (see Re Duckwari plc (No 2) [1999] Ch 253 and Re Duckwari plc (No 3) [1999]

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] Hivac Ltd v Park Royal Scientific Instruments Ltd [1946]

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)

held that shareholders cannot absolve directors from a breach of duty to creditors so as to bar the liquidator's claim. In Dillon LJ's view the following passage from Street CJ's judgment in Kinsela was of particular note. In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise... But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration...

North-West Transportation Co Ltd v Beatty (1887))

held that the director could vote, qua shareholder, in favour of the resolution ratifying his breach of duty. The reform follows the recommendation of the CLRSG which took the view that the question of the validity of a decision by the members of the company to ratify a wrong on the company by the directors (whether or not a fraud) should depend on whether the necessary majority had been reached without the need to rely upon the votes of the wrongdoers, or of those who were substantially under their influence, or who had a personal interest in the condoning of the wrong. See DTI Consultation Document (November 2000) Completing the Structure para 5.85.

Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 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.

Re Welfab Engineers Ltd [1990] directors of a company which had been trading at a loss sold its main asset for the lower of two competing bids on the understanding that the company would continue to be run as a going concern. Shortly afterwards the company went into liquidation. The liquidator brought misfeasance proceedings against the directors.

held that the directors had not acted in breach of duty in accepting the lower offer but, even if they had, it was a case in which relief would be granted under s.1157. Hoffmann J took the view that the directors were motivated by an honest and reasonable desire to save the business and the jobs of the company's employees.

Bhullar v Bhullar principle that directors must avoid any possibility of a conflict of interest, particular relating to corporate opportunities Each side owned 50% of ordinary shares. The directors were Mr Mohan Bhullar, his son Tim, Mr Sohan Bhullar and his sons Inderjit and Jatinderjit. The company had a grocery store at 44 Springwood Street, Huddersfield. It also owned an investment property called Springbank Works, Leeds Road, which was leased to a bowling alley business called UK Superbowl Ltd. In 1998 the families began to fall out.[1] Mohan and Tim told the board they wished for the company to buy no further investment properties. Negotiations began to split up the company, but they were unsuccessful. In 1999, Inderjit went bowling at the UK Superbowl Ltd alley. He noticed that the carpark next door (called White Hall Mill) was on sale.[2] He set up a company called Silvercrest Ltd (owned by him and Jatinderjit) and bought, but did not tell Bhullar Bros Ltd. But Mohan and Tim found out and brought an unfair prejudice claim (now s 994 CA 2006) on the basis that Inderjit and Jatinderjit had breached their fiduciary duty of loyalty to the company.

held that there was a clear breach of the rule that directors must avoid a conflict of interest. " 41. Like the defendant in Industrial Development Consultants Ltd v Cooley,[3] the appellants in the instant case had, at the material time, one capacity and one capacity only in which they were carrying on business, namely as directors of the Company. In that capacity, they were in a fiduciary relationship with the Company. At the material time, the Company was still trading, albeit that negotiations (ultimately unsuccessful) for a division of its assets and business were on foot. As Inderjit accepted in cross-examination, it would have been "worthwhile" for the company to have acquired the Property. Although the reasons why it would have been "worthwhile" were not explored in evidence, it seems obvious that the opportunity to acquire the Property would have been commercially attractive to the Company, given its proximity to Springbank Works. agree with the judge when he said (in paragraph 272 of his judgment) that "reasonable men looking at the facts would think there was a real sensible possibility of conflict".

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: the agreement with the landlords was part of a contract that conferred significant benefits on the company the directors, in giving their undertaking to Cabra, had not improperly fettered the future exercise of their discretion. In fact, it was not a case of directors fettering their discretion because they had exercised it at the time they gave their undertaking. The Court drew a distinction between: directors fettering their discretion, which is a clear breach of duty directors exercising their discretion in a manner which restricts their future conduct; this is not a breach of duty.

Re Brian D Pierson (Contractors) Ltd [1999] built and maintained golf courses. It fell into difficulty after contracting parties failed to pay on two projects. It continued to trade. In June 1994 the auditor reported a 'fundamental uncertainty' about whether the company would continue as a going concern. (Importantly, this was not, however, what is known as a 'going concern qualification' of the accounts which would amount to an expression of the auditor's 'significant doubt' about the company's ability to continue as a going concern.) It went into insolvent liquidation in January 1996. The liquidator, amongst others, applied for a contribution for wrongful trading for the period after June 1994. The court considered whether at that point in time the directors ought to have realised that there was no reasonable prospect of avoiding insolvent liquidation.

held there was wrongful trading from June 1994, but company's losses were partly due to extraneous actors like bad weather. The order was accordingly reduced by 30%. She noted that under IA 1986 s 214, 'One cannot be a "sleeping director"; the function of "directing" on its own requires some consideration of the company's affairs to be exercised.' Furthermore, the absence of warnings from one's advisers is no excuse for wrongful trading.

Lord Wilberforce's opinion delivered in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. What steps should the court go through when determining whether or not an exercise of power by directors was for an improper purpose?

i. consider the nature and scope of the power whose exercise is in question (in this case, a power to issue shares) ii. identify the limits within which it may properly be exercised iii. identify the substantial purpose for which it was actually exercised iv. having given credit to the bona fide opinion of the directors and accepting their judgment as to matters of management, determine whether the substantial purpose (point iii, above) fell within a legitimate purpose determined according to point ii, above. v. If the substantial purpose is proper, the exercise of the power will not be set aside because some other improper, but merely incidental, purpose was also achieved.

Coleman v Myers [1977] 2 NZLR 225. What were the special circumstances that led the court to distinguish Percival v Wright and hold that the directors owed fiduciary obligations to the shareholders? Coleman v Myers the board of a family company had recommended to the shareholders a takeover offer by a company controlled by one of the D directors

in a small private company where the minority shareholders habitually looked to the directors for advice on matters affecting their interests, a duty of disclosure arose which placed the directors in a fiduciary relationship with the shareholders. Woodhouse J stated that while it is impossible to lay down a general test as to when the fiduciary duty will arise, the following factors will be material to the court's determination: 'dependence upon information and advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and... the extent of any positive action taken by or on behalf of the director or directors to promote it'.

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, Mr Ball applied to register the trademark 'The Eden Project' in his own name. On 5 June 2000, Mr Ball was removed as a director of EPL, and in October 2000 brought proceedings against the trust and EPL seeking quantum meruit compensation for the work put into developing the project. The Defendant counterclaimed, amongst other things, for an order that Mr Ball should assign the registered trademark to EPL and the Register of Trade Marks be rectified to show that ownership. EPL now sought summary judgment on this part of their counterclaim.

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 plc 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

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.'

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

Gwembe Valley Development Co Ltd v Koshy [2000]

it should be noted that the board has to be given precise information about the transaction in question HELD (dismissing K's appeal. allowing GVDC's appeal from form of order for account of profits) (1) K did breach the rule of EQ that a company director could not make a secret profit from his fiduciary position. The provision in the articles of association of GVDC, which permitted K to contract with the company, was subject to a formal declaration of interest to be made by the director at a board meeting (Movitex v Bulfield [1988] BCLC 104 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.

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]

Consent, approval or authorisation by members Certain transactions require the approval of the members of the company. These are contained in Part 10, Chapter 4 of the CA 2006 and include

long-term service contracts (s.188) substantial property transactions (s.190) loans, quasi-loans and credit transactions (ss.197-214) payments for loss of office (ss.215 - 222).

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.

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] BCLC 460. Balston Ltd v Headline Filters Ltd [1990] FSR 385. Framlington Group plc v Anderson [1995] 1 BCLC 475. Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749.

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.

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.

Carlen v Drury (1812)

non-interventionist policy (the internal management rule) was explained by Lord Eldon LC in Carlen v Drury (1812) 1 Ves & B 154, who said: 'This Court is not required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.'

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.

effectof 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: 55.1. Where there exists 'a maturing business opportunity' enjoyed by the company; and 55.2. Where this opportunity is being actively pursued by the company; and 55.3. 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.

Re Duckwari plc (No 2)

point was made obiter that a director who intends to profit by way of a direct or indirect personal interest in a substantial property transaction could not be said to have acted reasonably and therefore would be denied relief under s.1157

in its statement on directors' duties, what, can broadly be characterised as the objective of companies. This is primarily set out in s.172(1).

previous CL position on the corporate objective issue, which, as noted above, was a bona fide duty to act for the benefit of the company as a whole, a position that has ostensibly been equated with the shareholder value principle: companies exist to maximise the interests of the shareholders ahead of any other interested parties who might have claims against the company.

Re Duomatic Ltd [1969] Duomatic principle

provides that where all the shareholders who have a right to attend and vote at a general meeting of a company assent to a matter in a shareholders' agreement which could be carried into effect at a general meeting of the company, that assent is as binding as a general meeting 's resolution. In the case in question, the CA held that it did not matter whether the formal procedures for agreeing on a particular matter were stipulated in the Articles of Association, in the Companies Act 1985 or in a separate contract between the members of the company concerned. What mattered instead was that all the members, who ultimately exercise power over the affairs of the company through their right to attend and vote at a general meeting, had reached an agreement on that matter. Consequently, as long as the members had previously reached an agreement, they were unable to purport that they were not bound by a particular matter simply because the formal procedure for assenting to it was not followed.

Section 239(1)

provision applies to the ratification by a company of conduct by a director 'amounting to N, default, breach of duty or breach of T in relation to the company.' It thus extends the ratification process to all breaches of the duties set out in the statutory restatement in Part 10 of the Act. The CL is modified by s.239(3) and (4) which provide that the ratification is effective only if the votes of the director in breach (and any member connected with him) are disregarded. The effect therefore is to disenfranchise the defaulting director.

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.

Law Commissions' approach

regard for the wider economic context in which company law, particularly that regulating directors, operates. It is asserted that in regulating the enterprise, the law should operate efficiently, promoting prosperity (LCCP para 2.8). More particularly, it is recommended that the law 'should move towards a general principle of meaningful disclosure, and that approval rules should be seen as the exception CLRSG proposed that the duties of directors should be restated and to this end the general duties owed by a director of a company to the company are set out in Part 10 CA 2006.

effect of a breach of ss.197, 198, 200, 201 or 203

regardless of whether the company has elected to avoid the transaction, an arrangement or transaction entered into in contravention of the provision renders the director (together with any connected person to whom voidable payments were made and any director who authorised the transaction or arrangement) liable to account to the company for any gain he made as well as being liable to indemnify the company for any loss or damage it sustains as a result of the transaction or arrangement (s.213(4)). A director who is liable as a result of the company entering into a transaction with a person connected with him has a defence if he can show that he took all reasonable steps to secure the company's compliance with ss.200, 201 or 203. The Act does not define 'loan', although s.199 does define the term 'quasi-loan' and related expressions (see s.199).

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

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) 40 DLR (3d) 371, 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 "It would...be surprising to find that directors alone, because of the fiduciary nature of their relationship with the company, were restrained from exploiting after they had ceased to be such, any opportunity of which they had acquired knowledge while directors. 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 conflict of interest. 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 ex debito justitiae, 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.

classic case which is now given the force of statute by s.170 is Percival v Wright [1902] 2 Ch 421. The directors offered to buy the shares held by the company's members without disclosing that at the time of the purchase they were negotiating with an outsider for the sale of the company at a higher price.

shareholders claimed that the directors were in breach of their fiduciary duty to them and that the sale ought to be set aside for non-disclosure. The court rejected their claim. The duty was owed to the company and, in any case, there was no unfair dealing by the directors. The shareholders had initially approached the directors asking them to purchase their shares leaves the critical question unanswered; namely, what is the company?

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

Loans and guarantees regulation of loans by companies to their directors dates back to the Companies Act 1948. It was severely tightened in the CA 1980 in order to address the growing problem identified in a series of DTI investigations of directors secretly directing money to themselves under the guise of loans from their companies on highly favourable terms In contrast to the CA 1985

ss.197-214 CA 2006 do not impose an absolute prohibition on loans to directors (including shadow directors (s.223(1)(c)) and connected persons, but make such transactions subject to the approval of the company's members by resolution and, in certain circumstances, also subject to the approval by the members of its holding company. Further, there are no criminal sanctions for breach of the provisions but rather s.213 provides for civil consequences only and s.214 also provides for subsequent affirmation.

policy underlying the requirement of shareholder approval of these specified transactions was explained by Carnwath J in British Racing Drivers' Club Ltd v Hextall Erskine & Co [1997]

stressed that the possibility of conflicts of interests in these circumstances is such that there is a danger that the judgment of directors may be disTed and so it ensures that 'the matter will be... widely ventilated, and a more objective decision reached.' Section 180 thus sets out, in part, the relationship between the general duties of directors and these more specific provisions contained in Part 10, Chapter 4 of the Act.

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.

Canadian Aero Service Ltd v O'Malley

t anyone in a supervisory or controlling role of a company has a fiduciary duty towards the company which includes the duties of " . loyalty, good faith and avoidance of a conflict of duty and self-interest" . .

Criterion Properties plc v Stratford UK Properties LLC [2003] takeover defences that a board of directors may employ to prevent a bidder buying shareholders' shares without the board's consent. 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.

t first instance struck down the pill. Quoting from Megarry VC's judgment in Cayne v Global Natural Resources Plc, he 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 breach of their fiduciary duty, and as this had not been determined in summary judgment, the case was remitted for trial. Lord Justice 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, Lord 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 unjust enrichment, 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. The remarks are clearly obiter, but they represent a 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

Allen v Hyatt (1914)

the directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. It was held that the directors had made themselves agents for the shareholders in the sale of the shares and must therefore account to them for the profit they had made on the sale.

A corporate opportunity is viewed as an asset of the company which may not therefore be misappropriated by the directors. In Cook v Deeks [1916] 1 AC 554, three of the four directors diverted to their own personal benefit certain railway construction contracts which were offered to the company. Notwithstanding that their conduct was ratified by the company, the directors were held accountable.

the directors, 'while enTed 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.

Greenhalgh v Arderne Cinemas Ltd [1951]

the phrase, 'the company as a whole', does not (at any rate in such a case as the present) mean the company as a commercial entity distinct from the corporators. It means the corporators as a general body . the phrase, 'the company as a whole', does not (at any rate in such a case as the present) mean the company as a commercial entity distinct from the corporators. It means the corporators as a general body. It is fair to say thatmuch of the subsequent English case law39 has been traditionally interpreted as holding that directors must act for shareholders, of which there is only a slim number, and simply reiterates Evershed M.R.'s formulation without further study.

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

Peskin v Anderson Former members of the Royal Automobile Club Ltd sued the directors for failing to disclose that they had plans to demutualise. They could have got £35,000 but had given up their membership. They claimed that the directors had breached a duty owed to them as shareholders to inform them of the upcoming demutualisation plan.

there was no breach of duty. General duties are always owed to the company, and specific duties owed to shareholders can only be generated through voluntary assumptions of responsibilities, in relationship to specific transactions. There was no such assumption of responsibility here.

Section 180(1) provides that if the requirement of authorisation is complied with for the purposes of s.175 (see s.175(4) and (5), above), or if the director has declared to the other directors his interest in a proposed transaction with the company under s.177,

these processes replace the equitable rule that required the members to authorise such breaches of duty. This is made subject to any enactment (for example, the above transactions contained in Chapter 4 of Part 10) or any provision in the company's articles which require the authorisation or approval of members.

Dranez Anstalt v Hayek [2002]

whether in the circumstances a covenant which sought to prevent H, as the inventor of the oscillator, from competing in the business of manufacturing and selling ventilators world-wide for so long as the companies were conducting that business was reasonable having regard to the respective interests of H and the investors and to the interest of the public at large that H should not be restrained from applying his inventive skills in the field of medical science. The investors were taking a 7.5% stake in Holdings to which the patent rights were transferred by Dranez subject to the licences already granted to Flexco and Breasy. They obtained the protection from competition which registration of the patents provided but it was not clear why the judge thought it reasonable that H should be prevented from competing with Breasy and Flexco in so far as competition with those companies did not involve infringement of the patents. The judge should have concluded that the restraint on competition contained in the side letter was unenforceable on grounds of public policy. Since the side letter was unenforceable against H there could be no claim against Medivent for inducing a breach of its terms.

Standing to sue The question of standing to sue to enforce this duty (locus standi) arose in Yukong Line Ltd of Korea v Rendsburg Investment Corpn of Liberia (No 2) [1998]

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).