Directors Duties in UK Company Law

The statement demands an extensive analysis of Directors duties in the UK Company law. Along the lines of our analysis we will highlight the core concepts surrounding the directors’ duties. Whether there has been no great difference in the Director’s duties as a result of CA 2006 will be a major debate in our analysis. We will then establish the extent to which there have been significant changes in the law regarding such duties. Before we proceed with the discussion on the changes brought by CA 2006 on directors duties, we first need to understand the role of a director in a company. A director is generally that person who owes his duties to the company for the benefit of the members as a whole and not to individual shareholders. However, in some circumstances, he can owe duty to other people as well such employees and creditors in an insolvency situation.

Directors, being the principal management organ of the company must act for its benefit and the courts have long held that they occupy a fiduciary position. The classic statement on the position of directors was given by Lord Cranworth in Aberdeen Rly Co v Blakie (1854) : ‘ the directors are a body to whom is delegated the duty of managing the general affairs of the company.’ In tracing the origins of the director/trustee concept, Sealy (1967) points to the widely held view ‘that the concept had its origin in the fact that, in the earliest companies, the director was a trustee in the full technical sense’.

Before the Companies Act 2006 statute was enacted the law on directors’ duties consisted of a mixture of common law and statute law. Directors had long been recognized as being in a fiduciary relationship to their company. As Lord Porter put it in Regal (Hastings) v Gullier (1942), Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form’. Directors’ duties can easily be split into two parts: the directors’ duty of care and skill and directors’ fiduciary duties. These rules are largely common law and equitable rather than statutory, however, some rules in CA 1985 and elsewhere are relevant to this area. The 2006 statute has brought some radical changes to company law, the foremost being the codification of the directors’ fiduciary duties in the Act. The codification of directors’ duties is said to convert the law in these areas to more dependable, accessible and indisputable.

The Companies Act 2006 has superseded the Companies Act 1985, although parts of the 1985 Act remain in force until it is repealed in the final implementation order, currently scheduled for 1st October 2009. The Companies Act 2006 contains a statement of directors’ fiduciary and common law duties. Although the statement sets out directors’ general duties, with some amendment to the regulation of conflicts of interest, it is expected that they will be explained and put in action identically to the common law and the equitable rules.

The codified duties apply to all directors of a company (including shadow directors and, in certain circumstances, former directors) and are owed to the company and only the company may enforce them. The most significant changes in relation to directors’ duties from the old common law position are: there is now a statutory requirement for directors to have regard, amongst other things, to a list of factors in exercising their duty of good faith when deciding upon the business and transaction of the company; and it is now permitted for independent directors to authorize a director’s conflict of interest where a conflict arises between that director and the company.

The seven codified duties in simple terms are as follows :

Section 171 to act within their powers

Section 172 to promote the success of the company

Section 173 to exercise independent judgement

section 174 to exercise reasonable care, skill and diligence

section 175 to avoid conflict of interests

section 176 not to accept benefits from third parties

section 177 to declare an interest in a proposed transaction with the company

The directors, especially new directors, will certainly gain great benefits by the clearness and assuredness to directors’ duties, due to this Act. Benefit to the companies is also expected by these changes in the long run. However, there are also those critics arguing that in the short term there is a possibility to create confusion and uncertainty in some areas, for instance, the duty to promote company’s success. It is distinct that along with other things, Wider Corporate Social Responsibility is introduced by this duty in the directors’ decision making process. The Act does not define ‘Success’. It is yet to beseen how a director, in practice, balances all the some time favourable factors in his decision, e.g. an environmental consideration may not always uniform with share holders interests.

The Companies Act 2006 introduces a new statutory procedure enabling a shareholder to bring a claim against the directors of the company for negligence, breach of trust, breach of duty or default. There is genuine concern that the codified directors’ duties coupled with the enhanced right to bring derivative claims has increased the exposure of directors to such claims consequentially in the short term, this may end in more claims being brought against directors as discontended shareholders (especially in a hostile take over bid) with the new statutory right of ‘derivative actions’ will bring test cases.

While discussing the changes the CA 2006 has brought it is essential to analyze it with some case law to understand the level of significant change and see whether the new legislation if applied today would change the decision of the previous cases.

For instance, in Criterion Properties plc v Stratford UK Properties LLC [2002] S appealed against a decision granting C’s application for summary judgment on its claim for a declaration that an agreement with its joint venture partners was unenforceable against it. In order to deter a potential takeover of C, the parties entered into a supplementary agreement, varying the investment and shareholders’ agreement governing their limited partnership to include a “poison pill” arrangement whereby, on a takeover of C, or upon its chairman, N, or managing director, G, ceasing to be involved in its management, S would be entitled to have its interest bought out. S contended that there was nothing wrong in principle in the adoption of a poison pill scheme to deter a takeover bid. S argued that the judge applied too low a test for disentitling it to rely upon the agreement as good faith on its part should have been sufficient. C submitted that the simple question was whether S was on notice of the breach of authority by the board of C, and it was sufficient that S had actual knowledge of the circumstances which made the agreement a breach of the board’s duties.

It was held that allowing the appeal and setting aside the declaration that the question was whether the issues in the case were suitable for summary resolution. The judge’s conclusion that the agreement was an improper use of the board’s power to bind C was valid because of the range of events which could trigger the buyout clause, including any takeover, hostile or beneficial, or the departure of N or G for reasons unrelated to the particular threat faced by C at the time. Even if the purpose of deterring a specific predator and the power of directors to use a contingent transfer of assets to achieve it was accepted as lawful, it was difficult to see how the agreement could be justified as a reasonable exercise of that power in C’s interests. The judge had been wrong to consider that actual knowledge of the circumstances by S was sufficient. The conscionability of the actions of one party to the agreement could not be considered in isolation from the position of the other, applying the approval endorsed by Nourse, L.J. in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch. 437 CA (Civ Div). It was not enough that S had actual knowledge of the circumstances rendering the agreement a breach of duty by C’s board. It was necessary to consider S’s knowledge and actions in the context of the commercial relationship between the parties, Akindele applied. The appeal was determined on the assumption that the agreement was entered into at the instigation of N, who now wished to set it aside as it had achieved its purpose.

Consequently, the issue was not suitable for summary resolution. If CA 2006 is applied to this case the court upheld hart J finding that supplementary agreement was in an improper use of director power to bind C because, this agreement involved not the issue of share but the gratuitous disposition of the company’s assets…` CA 2006 highlights two fold approach regarding S.171.In light of CA06 the directors would have made liable for the breach of duties under S.171(Duty to act within their powers). It confirms and restates the case law principles from Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 and also add further responsibility according to which the director are required to act in compliance with Company’s constitution. Duties of S would have been subjected to the requirement of acting in compliance with company’s constitution And S.175 will also come in effect which reflects negatively expressed aspect of the conflict duty, that a director must not make an undisclosed and unauthorized secret profit.

In Regencrest v Cohen (2001) the Liquidators sought damages for a breach of fiduciary duty arising from the second defendant’s agreement, in his capacity as a director of the claimant company, R, to waive that companies entitlement to clawback a sum from the vendors of a company, G. The liquidators contended that by his actions, the second defendant had disposed of the clawback asset for negligible consideration and for an improper purpose. The second defendant submitted that he had agreed to the waiver for a valid commercial reason and had honestly believed that he was acting in the best interest of the company and in accordance with his duties as a director. It was alleged that the directors did not honestly believe that the waiver was in the interests of the company and that the sole reason for agreeing to it was to protect vendors (their fellow directors) from liability. If CA 2006 provisions are applied on this case then as to my submission there does not seem to be a great difference in the decision of this case because the core of s.172 duty simply reflects the pre-06 case law that dictated that directors owe fiduciary duty to exercise their wide powers of management bona fide for the benefit of the company and not for some collateral motive and S.172 duty is still a subjective one. Generally the section may have expanded the scope of the previous case law duty. It has shifted the focus away from what a director ought not to do when exercising a power (be personally motivated) to what he ought to do (promote the success of the company by taking a range of matters into account). The Act ordains a duty on the director to act, in good faith, to what would most likely further aid the success of the company. even though the member as a whole still owns this duty, the director should rightly consider to various non-exhaustive list of factors listed in s.172 (1), while exercising. this includes the relations with the customers, suppliers; the long term resultant of the decisions with the interests of the employees; the desire of keeping in level a reputation for immense standards of business conduct; the effect of the decision on the community and environment; and to certainly act fair between members of the company.

In view of the above discussion it can be concluded that the Companies Act 2006 has not failed to earn the Initial criticism because of its sheer size, which is 1300 clauses long. The experts comment, The Companies Act 2006 lacks simplicity and is too complex to be interpreted by the layman of the business world. Furthermore, the courts will be overburdened by such a vast expansion of the companies’ act where many aspects were left for the court to decipher which are not yet clear. The Companies Act 2006 is just like an old wine in a new bottle. And it also fails to provide pills for the old ills. We are keen to bring your attention to the fact, which very few are aware of. Both the Acts of 1985 and 2006 failed to put enough weight age on the issue.