Director May Manage the Company

“Although a company director may manage the company as he sees fit, he is a fiduciary in relation to the company and must reflect this relationship in all he does.”

Introduction

Directors can be widely defined as a person who have statutory duties such as fiduciary duties in company. There are three types of director, shadow, executive and non-executive. However,who exactly are the directors? In fact, it is just a name. The Companies Act 2006 (s.250) states that directors include “anyone occupying the position of director, by whatever name called”.

Normally,directors will manage most affairs and business in company.Directors are empowered with several powers and duties to make sure that the company can run ethically and smoothly.

Directors’ duties are wide and diverse.One of that are fiduciary duties. Directors owned fiduciary duties to the company. When directors are in fiduciary relationship in the company, they are prohibited from doing any acts deemed prejudicial to the company. In other words, directors can not receive personal gain from their status as directors in a company.

The rest of this essay is arranged as follows. Section 2 focuses on who directors are; types of directors. Section 3 will discuss the power and discretion of directors to manage a company. Section 4 focuses on directors fiduciary duties and limitations on directors power as fiduciaries. Section 5 will give consequences of director’s failure to fulfil their fiduciary duties Section 6 concludes the essay.

Directors

Martin Webster (2007) states that directors are defined in law according to what directors actual do, rather than director’s real job title. Therefore,a person not appointed to the board formally. It might be seen as a director if directors’ role can be considered equivalent to that of a director, or if they have acted as a director.Directors have responsibilities to make sure the success of company. And directors also need ensuring the compliance with relevant regulations. For example,employment law,safety and health , corporate governance and tax.

Martin Webster (2007) believes that those have no legal difference be made between executive and non-executive directors .The distinction is non-executive directors do not get involved in the day-to-day running of the company.

An executive director is a director who also be employeed by the company. Directors’ contract of employment will impose specific duties.For example, a human resource director will be expected to be involved in the day to day manage the human resource of the company.Usually,executive directors are paid by salary or wage. Therefore, executive directors are protected by employment law.

Compare with executive directors, they are not employees of the company. Usually,non-executive directors have a non-executive appointment rather than an employment contract. Therefore,non-executive directors are paid fees, not salaries or wages. Usually,they could be part-time. They have no responsibilities for the day to day running the company.Many duties of them will be the same.

Shadow directors are those who not having a formal appointment letter ,contract of employment and title ,it might be deemed director and have a history of influencing the board.They may be held equally responsible with the normally appointed directors for the consequences of an insolvency.Therefore,the safest course is to assume that if people are company’s directors or act as if they are, they will be personally responsible when something goes wrong.

Power And Duty Of Directors

Davies (2008) suggested that directors of company are authorised by the Articles of Association to manage the company’s bussiness and to practice the company’s powers.Usually,this might be deemed unlimited authority is balanced by the stipulations of the Company Act.Directors’ power is not individually.Usually,they may depute some of directors’ powers to one or more directors.

The duty to act in accordance with the constitution appears uncontroversial, although it was not something that featured greatly in cases decided at common law.(Alcock, A,2007) In other word, to act within proper purposes at common law featured under the heading of fiduciary duties.A duty not to act for improper purposes arises where directors have acted in breach of their contracted purposes, or in breach of purposes inherent in their duties. This duty is a key duty of company’s directors. This is evident in the case of In Hogg-v- Cramphorn [1967] Ch 254. Company director’s aim was to prevent a takeover bid. Buckley J held that this was an improper purpose but could be ratified by shareholders at a general meeting. It can therefore now be argued that S171 has restated the common law. However, academics believe this was not a primary duty as it now appears in terms of its appearance in statutory code.(Alcock, A,2007)

Chuah, J (2007) points out that this very verbose provision in the act recognises the shift in the common law from a purely subjective test (whereby the directors competence and ability are measured based on people with their knowledges and experiences) to some more objective people. The more objective test is one that has its genesis in S214 Insolvency Act 1986. It requires that the director is tested against an objective standard, namely, what we can expect from people with the general skils, knowledges and experiences.The final report recognised that what ‘most people would regard as reasonable standards’ could be seen as ‘impractical and onerous’.

Directors Fiduciary Duties And Limitations

Directors’ duties are wide and diverse.One of that is fiduciary duties.Directors owned fiduciary duties to the company.When directors are in fiduciary relationship in the company , they are prohibited from doing any acts deemed prejudicial to the company. In other words,directors can not and should not receive personal gain from their status as directors in a company.

Company Act 2006 S172 states that the director must act in a way he himself considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so he must take into account a list of non-exhaustive factors. Mukwiri, j (2008) believes that this may limit good judgement were directors simply to adopt the list as a rule book and tick off the list. However, it may enhance what is already the practice of good governance. Therefore it is debatable whether this simplifies the law. It is argued that this restates the common law fiduciary duty including the duty to act bona fide. As seen in the case of Bishopsgate Investment Managed Ltd (In liquidation)-v- Maxwell (no1) [1993] B.C.C. 120 where Lord Hoffman states, ‘he owes a duty to act bona fide’ .In exercising each of the powers conferred upon them by a company’s constitution, directors act not on their own account but for the benefit of the company on whose behalf they are appointed to act. As fiduciaries directors must at all times act bona fide in what they believe consider (not what a court may consider) to be the best interests of the company.

The Company Act 2006 restates this point by stating ‘what he consider’ giving a presumption that follows case law that it is not what a court considers.

The most relating limitation of the subjective test is that it exonerates the incompetent but honest director from his actions on the basis that he can do no better.(Bruce,2008) It is maybe viable to say that the CA 2006 helped solve this ‘defect in the present law’ and furthermore clarified it.

In order to restrict the potential abuse of power within the corporation, directors in exercising their powers are subject to a number of controls and restrictions imposed by statute, common law and equity. In law directors are fiduciaries and agree to undertake to act for, or on behalf of the company where they have been appointed. Fiduciary duties can be seen to be an umbrella term to cover many aspects of director’s duties in common law(Bourne,2008). It can now be argued that at times this can be seen as unclear therefore the introduction of the CA 2006 can be said to bring greater clarity as it breaks down all the duties separately.

A key principle applicable to anyone in a fiduciary position is that a director must avoid actual or possible conflicts of interests or duties. The case of Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461 where it was classically stated in the following terms, ‘No one, having such 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’.

CA 2006 S175 accurately reflects the dictum above and codifies an approach long held at common law. Bourne, N (2008) points out a very important issue that under common law, a conflict of interest caused by the director can only be excused or approved by the shareholders unless there are other procedures provided for in the articles of association (add case). However the new law thus makes it less onerous for directors seeking the conflict of interest to be authorised. S172 provides that a conflict may be authorised either by the members or by the directors. This can be seen to be a very radical structural change.(Chuah.J, 2007) Furthermore this can be said to clarify the law.

The CA 2006, S176 seeks to codify the common law rule, not to except benefits from third parties, which renders a director accountable for any benefit obtained by the virtue of his position.This duty derives from the common law concepts dealing with conflict of interest and creates a new specific duty.(Mukwiri, J. 2008) The common law duty was shown in the case of Regal (Hastings) Ltd-v- Gulliver [1942] 1 ALL ER 378 where it was held that, even if the director ‘s profit would not have accrued to the company, he must still account for it if the opportunity to make it arose though directorship. It can now therefore be argued that S176 has simply restated the law.

S177 state that a director must disclose any interest, direct or indirect, that he has in relation to a proposed transaction or arrangement with the company to the other director’s. Furthermore he should state the degree of his interest to other company’s directors at a meeting of the directors or by notice to all the directors either by notice in writing or by a general meeting. This has merely affirmed the common law situation as demonstrated in that case of Aberdeenwhere the company was not bound by the transaction as the director did not disclose his interest.

Directors’ Breach Of Their Fiduciary Duties

The most basic duty is best interest for company.Directors have to act bona fide.Directors should act their consideration what is in the best interests for the company, not what a court might consider to be those interests.As seen in the case of Re W & M Roith Ltd [1967] 1 WLR 432 a director,Mr Roith, a company’s director,had entered into a service contract with his company providing for pension.The pension to be given to his wife in the event of his death without taking into consideration whether the contract was for the benefit of the company. The whole object of the contract was considered not to be binding on the company as it was to benefit Mrs Roith. It was not to benefit the company.

To analyse this particular case,it could be seen as Mr Roith did not act for the best interest of the company.In fact Mr Roith acted the “best interest” for his wife.In other word,Mr Roith breached his fiduciary duty what is the duty to act the best interest of the company.Therefore,the court held that the contract was not binding to the company.

Conclusion

In conclusion, Chuah, J (2007) states that some have argued that a statue-based law reduces the necessary flexibility so effective in case law. However, the company law review however took the view that codification provides lucidity on what directors expect and make it more approachable. In addition it could be argued that the changes are not radical enough and there is little distinction between the new law and common law position. However,Chuah, J (2007) believes that the new regime does require certain significant adjustment to current practice and it is important to consider the wider and more policy-orientated approach to the evaluation of director’s duties.

References

Books

Martin Webster (2007) The Director’s Handbook:Types of director the second edition,Pinsent Masons.

Alcock, A. Birds, J. Gale, S. (2007) Companies Act 2006: The new Law. 1st Edition. Bristol: Jordan Publishing Limited

Davies, Paul L, Gower and Davies (2008) Principles of Modern Company Law, 8th ed.,Sweet and Maxwell

French, Derek, Stephen Mayson and Christopher Ryan (2008), Company Law, 25th ed.,Oxford University Press

Bourne, N (2008) Bourne on Company law. 4th Edition. United Kingdom: Routledge Cavendish

Bruce, M. (2005) Rights and Duties of directors. Seven Edition. West Sussex: Tottel Publishing.

Cases

Re W & M Roith Ltd [1967] 1 WLR 432

Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461

Hogg-v- Cramphorn [1967] Ch 254

Bishopsgate Investment Managed Ltd (In liquidation)-v- Maxwell (no1) [1993] B.C.C. 120

Lee-v-Chou Wen Hsien [1984] 1 W.L.R 1202

Statutes

Companies Act 2006

Insolvency Act 1986

Journals

The Company Law Review (June 2006),” Modern Law Review for an competitive economy: final report” , Vol 1 pp.14

Mukwiri, J. (2008) Directors’ duties in takeover bids and English Company Law. International Company and Commercial Law Review.19 (9), 281-289

Chuah, J. (2007) The new Companies Act 2006 and Directors’ Duties. Finance and Credit Law vol.6