company law essay on directors duties

Directors’ Duties Essay

The question of how to make corporate directors accountable has taxed scholars and businesspeople for centuries. [i] A system of corporate governance must strike an appropriate balance between permitting entrepreneurship and risk-taking and the protection of shareholders. Corporate scandals including the demise of corporate behemoths such as Enron and Parmalat show that the current system may tilt the balance too much in favour of directors taking unnecessary risk.  Director power is largely controlled in the UK through a series of directors’ duties contained within the Companies Act 2006. This report aims to outline the rationale for these duties, outline their ambit and to critically assess the advantages and disadvantages of the current UK approach with reference to other jurisdictions.

• Historic Basis and Rationale of Directors’ Duties

With the creation of the Joint Stock Companies Act 1856, the limited liability company has been used to facilitate enterprise. [ii] However, the growth of this corporate form led to a consideration of the relationship between the owners and controllers of a company. The classic treatise by Berle and Means identified two key observations about modern American companies: first, shareholders were the owners of a company but were so vast in number that they could not organise themselves efficiently in order to control management; second, management possessed enormous economic power and this power could be harmful to society. [iii]  Shareholders were cited as becoming disengaged from the running of the company thus allowing directors to have free reign. [iv] This has received judicial support [v] and Article 3 of the Model Articles for Public Companies recognise this in that they state ‘[s]ubject to the articles, the directors of the company are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’. Furthermore, the notion that shareholders controlled directors by virtue of appointing them was a fallacy as the board had control over the agenda of general meetings and therefore it was the directors who possessed this influence. [vi] This separation of ownership and control meant that shareholders had a ‘mere symbol of ownership’ [vii] but had little real impact on the running of the company.

The problem of separation and control meant that companies were largely ran under a shareholder profit maximisation approach whereby companies were run solely in the interests of shareholders. [viii] This led to the ‘characterisation of shareholder interests in strict economic terms’. [ix] Directors would be given unfettered control over the running of the company in order to achieve this aim: as long as directors were making money for the company then shareholders would be less likely to intervene. [x] However, even as far back as 1976, it has been articulated that the problem of director power and shareholder passivity, is less pronounced than presented by Berle and Means. [xi] Nevertheless, in the UK lawmakers were concerned with the drawbacks of a system which placed shareholders’ interests at the pinnacle of corporate governance. As a result the Company Law Review Steering Group was tasked with a wholesale reform of this area. The review led to a move away from shareholder primacy in its purest form to an enlightened approach which involved directors promoting the success of the company for the benefit of shareholders  ‘by taking due account of both the long-term and short-term, and wider factors such as employees, effects on the environment, suppliers and customers’. [xii]  The Review led to the enactment of the Companies Act 2006 which was a codification exercise of common law directors’ duties.  Directors’ duties ‘play an important role in constraining the discretion of directors and holding them accountable if they extract private benefits of control’. [xiii] The next part of this report will summarise and critically examine to what extent the current construction of directors’ duties favour director power over protecting shareholders.

• Current Rules Governing Directors’ Duties

The Companies Act 2006 contains a range of general directors’ duties which are based on common law rules and equitable principles. [xiv] Section 171 contains a duty to act within the powers of the company constitution and exercise powers for the purpose they were conferred. Section 172 contains a duty to promote the success of the company for the benefit of the company as a whole. Section 173 involves a duty to exercise independent judgment while section 174 asserts that directors should exercise reasonable care and skill. A duty to avoid conflicts of interest are contained within section 175 and section 176 involves a duty not to accept benefits from third parties. Section 177 imposes a duty to declare interests in proposed transactions. For the purpose of this research paper, the focus of discussion will be on sections 172, 173  and 174 as these are the most controversial.

• The Individual Duties

The first duty to consider is the duty to promote the success of the company.  This is a reformulation of the common law duty to act bona fide in the interests of the company. [xv]  This was judicially recognised in Cobden Investments Ltd v RWM Langport Ltd [xvi] with Warren J stating that ‘[t]he perhaps old-fashioned phrase acting “ bona fide in the interests of the company” is reflected in the statutory words acting “in good faith in a way most likely to promote the success of the company”’. [xvii]  Section 172 indicates that director should have regard to the interests of stakeholders such as employees, suppliers, the environment and consumers when deciding how best to promote the success of the company for the benefit of members as whole. The aim of this change was to move away from short-termism and shareholder wealth maximisation to an emphasis on the long-term effects of decisions and the social responsibility of business. [xviii]

However, it is certainly questionable how successful section 172 has been. There are only occasional examples of a successful claim for breach of this duty. [xix]  Only two cases have mentioned or considered the list of stakeholders such as suppliers and consumers in a direct way. [xx] Therefore, it appears that section 172 has been an inadequate check and balance on regulating directors’ powers. Grier offers several explanations for this. [xxi]  First, a director only has to ‘have regard’ to the interests of stakeholders as a more obligatory approach would have been ‘a positive deterrent to entrepreneurs setting up companies in the United Kingdom or existing businesses staying in the United Kingdom’. [xxii] Second, directors may be unaware of the changes effected by section 172 and therefore this has not altered director behaviour. The author laments while there may be some awareness within small companies there is less awareness in larger companies. Third, there is a lack of enforcement in that a breach must be pursued as a derivative claim and there are considerable problems with this course of action as discussed later. Keay further adds that the section is not a wholesale march towards a stakeholder approach from a legal viewpoint and that shareholder wealth maximisation remains the primary aim of directors under the new provision. [xxiii] A further criticism of the provision is that the test is a subjective one, reflecting the common law, so that a director will not be in breach providing he believed what he was doing was in the best interests of the company. [xxiv] However, it is submitted that the duty may not be entirely subjective. Where a director’s actions are irrational, [xxv] or where they cause considerable harm, [xxvi] the courts will be more cautious in finding that the standard has been met. The 2006 reform was a missed opportunity to introduce a more objective assessment of this duty. There is evidence that an objective approach has been used in relation to this duty previously, as in Charterbridge Corporation Ltd v Lloyds Bank Ltd where the court held that the proper test where the director has given no regard to this duty is whether ‘an intelligent and honest man in the position of the company concerned, could…have reasonably believed that the transaction was for the benefit of the company’. Therefore, this mixed objective/subjective approach allows for a higher threshold to judge directors’ actions. This would enhance the position of shareholders’ while still allowing directors to operate the company with an appropriate level of discretion.

The Irish Companies Bill s. 229(1), which has yet to be enacted as an Act, is similar to section 172 without the explicit mention of a list of stakeholders. There is instead an obligation to act in good faith in a way the director considers to be in the interests of the company and to act responsibly and honestly in conducting the affairs of the company.  According to Grier, this is an improvement on section 172 in that the words honestly and responsibly lack the specificity so that directors should act honestly and responsibly to other companies as well as their own and is easier to understand and harder to avoid than the duty in section 172. [xxvii] The Irish formulation also has the advantage of making it easier for a shareholder to identify whether a director’s action or omission showed a failure to act responsibly or honestly. [xxviii] It is submitted that such a system would be beneficial in the UK. The list of factors in section 172 could actually be having a counter-productive effect. A less specific approach, as that suggested from Ireland, would tip the balance more towards the protection of shareholders and enhance director accountability.

Section 173

The duty to exercise independent judgment has a long common law history. [xxix] In short, directors were to refrain from fettering their discretion when exercising power.  However, the common law recognised an exception in that discretion could be fettered in order for directors to exercise their discretion to act in a certain way in the future. [xxx] Section 173(2)(a) retains this exception and states that the duty to exercise independent judgment will not be breached if a director ‘acts in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors’.  Furthermore, section 173(2)(b) asserts that the duty will not be breached if a director acts in a way which is authorised by the company constitution.

There have been some criticisms of this provision. Hannigan opines that the duty is meaningless to those who are not familiar with the pre-2006 case law and its application and therefore frustrates the aim of the legislation which was to provide clarity and accessibility. [xxxi] However, Keay submits that the new provision may actually represent a narrowing of the common law exceptions. [xxxii] In the cases under the common law, the ability to fetter future discretion has not always been made by the company, whereas under the new Act such acts must be, [xxxiii] unless the board has the power to act on behalf of the company. [xxxiv] If this is a narrowing of this exception then directors will be more limited in their discretion than under the previous common law.

Section 174

Section 174 dictates that directors should exercise reasonable care, skill and diligence. A similar duty was detected in the common law. [xxxv] The common law duty was highly subjective, [xxxvi] and based on the actual level of skill and experience that a specific director possessed. Similar approaches could be detected in Australia and South Africa. [xxxvii] This resulted in directors being assessed against a low standard of care. [xxxviii] In short, incompetent directors could use their deficiencies to guard against a claim for failing to exercise reasonable care and skill. This had a negative impact on shareholders when poor decisions were made.

Section 174 states that the standard of care and skill is now based on a reasonably diligent person who has the general knowledge and experience that is to be expected of a person carrying out the functions carried out by the director and the general knowledge and experience that director actually possesses. Therefore, the first limb of the test imposes an objective standard in which all directors will be assessed against, [xxxix] therefore, directors can no longer shield behind their incompetence to lower the standard expected. The second limb of the test allows for the standard to be altered where a director possesses a particular skill and has the effect of raising the standard.

The use of an objective baseline is to be commended. Sealy notes that ‘[c]oncepts, procedures, remedies and above all, fact-situations have not remained static, and we must expect the law to respond’. [xl] The previous law, which permitted incompetence, has necessarily been reformed. However, some commentators assert that the codification will stifle entrepreneurship. Bekin argues that ‘economic growth depends on risk-taking and that directors are expected to display an entrepreneurial spirit’ [xli] and that codification prevents this. However, this argument is not defensible. The real risk to economic growth lies in companies being run by incompetent directors. The recent Financial Crisis 2008 is testimony to the fact that directors given the opportunity will not exercise reasonable care and skill. Any reform that attempts to compel them to do this is to be welcomed.

Advantages and Disadvantages of Current System

One of the proposed advantages of the current system is that the law has become clear now that it is in statutory form. However, the preceding discussion casts doubt on this assertion. Much of the law remains unclear.  For example, the current system is that the remedies for breach are not identified within the 2006 Act. Instead, s. 178(1) asserts that the common law will continue to operate in this area. While this has the advantage of flexibility, and allows the remedies to develop in an incremental way, codification would provide clarity in this area and allow business people to regulate their affairs and more precisely predict the outcome of their actions. It is certainly doubtful whether this aim has been achieved. This means that directors can take advantage of ambiguities to enhance their position.

One of the ensuring problems of the UK system is the lack of an effective enforcement mechanism when a duty has been breached. If a company wishes to claim against someone then it is the company that must bring a claim. [xlii] The company is the proper plaintiff as it is the party that has incurred the loss. [xliii] However, where a director has breached their general duties, the board will have to decide if actions should be taken. Arguments against taking such action include the fact that the board are the wrongdoers, the board may be embarrassed by the breach and not want it to impact on the reputation of the company and socio-psychological factors such as having become close to the offending board member. [xliv] The inability or difficulty in claiming against the company led to the creation of the derivative action which allowed shareholders to claim against the company. This involved ‘shareholders bringing proceedings on behalf of their company against directors and perhaps others, and any relief being awarded to the company itself.’ [xlv] However, this approach was subject to trenchant criticism with the Law Commission identifying four main problems: that the common law rules had been fashioned from very old case law which was difficult to apply in modern times, the concept of control was important in a derivative claim but was not clearly defined, a derivative claim for negligence involved a claimant having to show that the negligence conferred a benefit on controlling shareholders and the difficulty in showing standing to bring a claim and proving a prima facie case. [xlvi]

Part 11 of the Companies Act 2006 creates a new statutory derivative action which is the position in Australia, Canada and New Zealand. [xlvii] The new system was designed to make the law clearer and more accessible to shareholders. [xlviii] By virtue of section 261(1) of the 2006 Act a member who wishes to bring a derivative claim must make an application to court for a determination on whether such a claim can proceed. A similar system is operated in Germany. [xlix] However, in several other countries including Austria, Croatia, Denmark and Sweden there are no such hurdles to an action. [l]  Section 261(2) indicates that the first stage of this is to ascertain if the claimant has a prima facie case. This is not an overly cumbersome hurdle and to date most claimants can satisfy this test, a test designed to weed out vexatious claims with no merit. [li] If a prima facie case is established, then the court will apply the mandatory test which is aimed at assessing whether any of the conditions in section 263(2) apply against pursuing a claim; (a) where a person acting under section 172 – promoting the interests of the company – would not pursue the claim (b) where the act or omission is yet to occur and (c) the act or omission has occurred but has been authorised by the company or ratified by the company. Assuming none of these factors are engaged, s. 263(3) contains a list of factors as part of a discretionary test which the court will examine including the importance a director acting in accordance with section 172 would attach to continuing with the claim. [lii]

One of the criticisms of the common law derivative claim was that the courts were reluctant to allow such claims. A survey of case law from 2008-2013 indicates that this same reluctance may be evident under the new law. While there have been some successful applications, [liii] there are considerably more cases where permission has been rejected. [liv] Furthermore, given the balancing act involved in the admission procedure, there can be great uncertainty in how the court’s discretion will be applied. [lv] It is submitted that the current system is not a seismic shift in favour of shareholders. What is needed is a more radical and liberal approach by the courts in order to facilitate these claims. Until this approach is adopted, shareholders will be left with a right with a right without a remedy.

The Companies Act 2006 codified directors’ duties but in many respects, the law remains unaltered. The balance remains in favour of directors to a large extent, especially concerning enforcement. A more radical approach is needed to redress the balance towards shareholders.

2994 words (excluding footnotes).

List of Cases and Statutes

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 (CA)

Bamford v Harvey [2012] EWHC 2858 (Ch)

Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch)

Clark v Workman  [1920] 1 IR 107

Cobden Investments Ltd v RWM Langport Ltd [2008] EWHC 2810 (Ch)

Foss v Harbottle (1843) 2 Hare 461

Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch).

Fulham Football Club Ltd v Cabra Estates Plc  [1992] BCC 863

Hughes v Weiss [2012] EWHC 2363 (Ch)

Hutton v West Cork Railway Co (1883) LR 32 ChD 654 (CA)

John Crowther Group Plc v International Plc [1990] BCLC 460

Kleanthous v Pahitis [2011] BCC 676

Langley Ward Ltd v Trevor [2011] EWHC 1893 (Ch)

Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch)

Odyssey Entertainment Ltd (In liquidation) v Kamp [2012] EWHC 2316 (Ch)

Parry v Bartlett [2011] EWHC 3146 (Ch)

Phillips v Fryer [2012] BCC 176 (Ch)

Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204

Regentcrest plc v Lloyds Bank Ltd [2001] BCC 80 (Ch)

Re Cardiff Savings Bank [1892] 2 Ch 100 (Ch)

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (CA)

Re Englefield Colliery Co  (1878) LR 8 Ch D 388 (CA)

Re Smith and Fawcett Ltd (1942) Ch 304

Re Singh Brothers Contractors (North West) Ltd [2013] EWHC 2138 (Ch)

Ritchie v Union of Construction, Allied Trades and Technicians [2011] EWHC 3613

Stainer v Lee [2010] EWHC 1539 (Ch)

Companies Act 2006

Bibliography

Berle A and Means G,  The Modern Corporation and Private Property  (Harcourt 1932)

Eisenberg M,  The Structure of the Corporation: A Legal Analysis (Beard Books 1976)

Hannigan B,  Company Law  (2 nd edn, OUP 2003)

Healy J,  Corporate Governance and Wealth Creation in New Zealand (Dunmore Press 2003

Journal Articles

Bekink M, ‘Historical Overview of the Director’s Duty of Care and Skill: From the Nineteenth Century to the Companies Bill of 2007’ (2008) 20 South African Mercantile Law Journal 95

Blair M and Stout L, ‘Director Accountability and the Mediating Role of the Corporate Board’ (2001) 79(2) Washington University Law Quarterly 403

Clarke B, ‘Corporate Responsibility in Light of the Separation of Ownership and Control’ (1997) 19  Dublin University Law Journal  50

Fischel D, ‘The Corporate Governance Movement’ (1982) 35 Vanderbelt Law Review  1259

Gerner-Beuerle C and Philip-Schuste E, ‘The Evolving Structure of Directors’ Duties in Europe’ (2014) 15(2) European Business Organization Law Review 191,

Grant N, ‘Mandating Corporate Environmental Responsibility by Creating a New Directors’ Duty’ (2015) 17(4) Environmental Law Review 252

Grier N, ‘Enlightened Shareholder Value: Did Directors Deliver?’ (2014) 2 Juridical Review 95

Keay A, ‘Applications to Continue Derivative Proceedings on Behalf of Companies and the Hypothetical Director Test’ (2015) 34(4) Civil Justice Quarterly 346

Keay A, ‘The Duty of Directors to Exercise Independent Judgment’ (2008) 29(10) Company Lawyer 290

Lian Yap J, ‘Considering the Enlightened Shareholder Principle’ (2010) 31(2) Company Lawyer 35

Lynch E, ‘Section 172: A Ground-breaking Reform of Director’s Duties, or the Emperor’s New Clothes?’ (2012) 33(7) Company Lawyer  196

McConvill J, ‘The Separation of Ownership and Control Under a Hypothesis-Based Theory of the Corporation’ (2005) 26(2) Company Lawyer 35

Valsan R, ‘Board Gender Diversity and the Enlightened Shareholder Principle’ (2016) 37(6) Company Lawyer 171

Official Publications

Company Law Review Steering Group, Building on the Work of the Law Commission’s 1998 (Paper 261 London 1999)

Law Commission, Shareholder Remedies: Report on a Reference Under Section 3(1)€ of the Law Commissions Act 1965 (Law Com No 246 1997)

Working Papers

Du Pleiss J, ‘A Comparative Analysis of Directors’ Duty of Care, Skill and Diligence in South Africa and in Australia’

Keay A, ‘Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value and All That: Much Ado About Little? (January 4 2010)

Kershaw D, ‘The Rule in Foss v Harbottle is Dead; Long Live the Rule in Foss v Harbottle’ (LSE Law, Society and Economy Working Papers 5/2013 2013)

Conference Papers

Sealy L, ‘Directors “Wider Responsibilities – Problems Conceptual, Practical and Procedural’ (Conference Paper AULSA Conference 25 August 1987)

[i] Margaret Blair and Lynn Stout, ‘Director Accountability and the Mediating Role of the Corporate Board’ (2001) 79(2) Washington University Law Quarterly 403, 403.

[ii] Nick Grant, ‘Mandating Corporate Environmental Responsibility by Creating a New Directors’ Duty’ (2015) 17(4) Environmental Law Review 252, 252.

[iii] Adolph Berle and Gardiner Means,  The Modern Corporation and Private Property  (Harcourt 1932) 19.

[iv] Joseph Healy,  Corporate Governance and Wealth Creation in New Zealand (Dunmore Press 2003) 129.

[v] Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 (CA).

[vi] James McConvill, ‘The Separation of Ownership and Control Under a Hypothesis-Based Theory of the Corporation’ (2005) 26(2) Company Lawyer 35, 38.

[vii] Blanaid Clarke, ‘Corporate Responsibility in Light of the Separation of Ownership and Control’ (1997) 19  Dublin University Law Journal  50, 50.

[viii] Elaine Lynch, ‘Section 172: A Ground-breaking Reform of Director’s Duties, or the Emperor’s New Clothes?’ (2012) 33(7) Company Lawyer  196, 197.

[ix] McConvill (n 6) 39.

[x] David Fischel, ‘The Corporate Governance Movement’ (1982) 35 Vanderbelt Law Review  1259, 1273.

[xi] Melvin Eisenberg,  The Structure of the Corporation: A Legal Analysis (Beard Books 1976).64.

[xii] Company Law Review Steering Group, Building on the Work of the Law Commission’s 1998 (Paper 261 London 1999) 5.

[xiii] Carsten Gerner-Beuerle and Edmund Philip-Schuste, ‘The Evolving Structure of Directors’ Duties in Europe’ (2014) 15(2) European Business Organization Law Review 191, 192.

[xiv] Companies Act 2006, s. 170(3).

[xv] Re Smith and Fawcett Ltd (1942) Ch 304.

[xvi] [2008] EWHC 2810 (Ch).

[xvii] ibid [52].

[xviii] Remus Valsan, ‘Board Gender Diversity and the Enlightened Shareholder Principle’ (2016) 37(6) Company Lawyer 171, 175.

[xix] Odyssey Entertainment Ltd (In liquidation) v Kamp [2012] EWHC 2316 (Ch).

[xx] Langley Ward Ltd v Trevor [2011] EWHC 1893 (Ch) ; Parry v Bartlett [2011] EWHC 3146 (Ch).

[xxi] Nicholas Grier, ‘Enlightened Shareholder Value: Did Directors Deliver?’ (2014) 2 Juridical Review 95-111.

[xxii] ibid 99.

[xxiii] Andrew Keay, ‘Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value and All That: Much Ado About Little? (January 4 2010) available at SSRN: http://www.ssrn.com/abstract=1530990 (accessed 10 May 2016).

[xxiv] Ji Lian Yap, ‘Considering the Enlightened Shareholder Principle’ (2010) 31(2) Company Lawyer 35, 37.

[xxv] Hutton v West Cork Railway Co (1883) LR 32 ChD 654 (CA).

[xxvi] Regentcrest plc v Lloyds Bank Ltd [2001] BCC 80 (Ch).

[xxvii] Grier (n 21) 110-111.

[xxviii] ibid.

[xxix] Re Englefield Colliery Co  (1878) LR 8 Ch D 388 (CA); Clark v Workman  [1920] 1 IR 107; John Crowther Group Plc v International Plc [1990] BCLC 460.

[xxx] Fulham Football Club Ltd v Cabra Estates Plc  [1992] BCC 863.

[xxxi] Brenda Hannigan,  Company Law  (2 nd edn, OUP 2003) 244.

[xxxii] Andrew Keay, ‘The Duty of Directors to Exercise Independent Judgment’ (2008) 29(10) Company Lawyer 290, 295-296.

[xxxiii] ibid.

[xxxiv] ibid.

[xxxv] Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (CA).

[xxxvi] Hannigan (n 31) 277.

[xxxvii] Jean Jacques Du Pleiss, ‘A Comparative Analysis of Directors’ Duty of Care, Skill and Diligence in South Africa and in Australia’ (2010) 1(1) Acta Juridica available at SSRN: http://ssrn.com/abstract=2635291 (accessed 15 May 2016).

[xxxviii] Re Cardiff Savings Bank [1892] 2 Ch 100 (Ch).

[xxxix] Mildred Bekink, ‘Historical Overview of the Director’s Duty of Care and Skill: From the Nineteenth Century to the Companies Bill of 2007’ (2008) 20 South African Mercantile Law Journal 95, 111.

[xl] Leonard Sealy, ‘Directors “Wider Responsibilities – Problems Conceptual, Practical and Procedural’ (Conference Paper AULSA Conference 25 August 1987) 1.

[xli] Bekink (n 39) 113.

[xlii] Foss v Harbottle (1843) 2 Hare 461; 67 ER 189.

[xliii] Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204 , 210.

[xliv] Andrew Keay, ‘Applications to Continue Derivative Proceedings on Behalf of Companies and the Hypothetical Director Test’ (2015) 34(4) Civil Justice Quarterly 346, 347.

[xlv] ibid 348.

[xlvi] Law Commission, Shareholder Remedies: Report on a Reference Under Section 3(1)€ of the Law Commissions Act 1965 (Law Com No 246 1997) [6.0]-[6.10].

[xlvii] Keay (n 44) 348.

[xlviii] Law Commission (n 46) 7.

[xlix] Keay (n 44) 348.

[lii] Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch).

[liii] Hughes v Weiss [2012] EWHC 2363 (Ch); Phillips v Fryer [2012] BCC 176 (Ch); Stainer v Lee [2010] EWHC 1539 (Ch).

[liv] Re Singh Brothers Contractors (North West) Ltd [2013] EWHC 2138 (Ch); Bamford v Harvey [2012] EWHC 2858 (Ch); Ritchie v Union of Construction, Allied Trades and Technicians [2011] EWHC 3613 (Ch); Kleanthous v Pahitis [2011] BCC 676; Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch); Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch).

[lv] David Kershaw, ‘The Rule in Foss v Harbottle is Dead; Long Live the Rule in Foss v Harbottle’ (LSE Law, Society and Economy Working Papers 5/2013 2013) 4.

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6 Directors’ Duties

• Published: January 2020
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This chapter examines the law on directors’ duties, as restated in the Companies Act 2006, other than the core duty of loyalty which is discussed in Chapter 2. It covers the duty of care, the duty to act within powers, the duty to exercise independent judgement, and, most importantly, the application of fiduciary duties to various types of conflict of interest. Many of the most interesting doctrinal questions about company law arise in this area and it is righly placed at the center of many company law courses. However, it may that other sets of rules, discussed in earlier chapters, are more important in practice in the regulation of internal company relations. In addition to the substantive law, the remedies available in respect of breaches are analysed, as is the freedom of shareholders to waive breaches of duty, both after and before the event.

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Understanding Directors in Company Law: Roles, Responsibilities, and Governance

Author : Nimisha Nayak

Updated On : April 9, 2024

Reader's Digest:   Discover the role and types of directors in company law! From decision-making to fiduciary duties, understanding their responsibilities is crucial. Read further to explore the core principles governing directors and their impact on corporate governance. 

This article will delve into the various kinds of directors in company law, their duties, appointment and removal processes and their crucial role in corporate governance. Directors are pivotal in steering the ship, ensuring good governance, and safeguarding shareholders' interests.

Apply For NEXTGEN Internship On Corporate Laws

What is a Director?

A director is an individual appointed to oversee a company's operations and affairs. He or she is essential in guiding and supervising the company's activities. Every registered company must have at least one director.

Directors are decision-makers who help shape the company's direction and are appointed or elected to safeguard its best interests and ensure its success. They have a legal obligation to act in a way that benefits the company and its shareholders, which involves considering the needs of everyone involved, including employees, customers, suppliers, and the community.

To become an effective director, one must have the right skills, knowledge, and experience related to the company's industry and operations. They must make careful and informed decisions, considering the company's unique circumstances and challenges.

Ultimately, directors are responsible for promoting good governance, transparency, and ethical behaviour within the company. They play a vital role in shaping the company's future and ensuring it thrives in a way that benefits everyone involved.

Types of Directors In Company Law

1. executive directors.

• Executive directors are actively involved in the company's day-to-day management. They hold key responsibilities and have the power and potential to make important decisions.
• They are responsible for implementing strategic plans, managing operations, and overseeing the company's performance. These directors are often appointed from within the company or have specific industry expertise.
• They work closely with the management team to execute the company's vision and drive growth. Executive directors have the authority to act on behalf of the company in various transactions, negotiations, and operational matters.
• They are responsible for leading the company towards its objectives while fulfilling their fiduciary duty to act in the best interest of the company and its stakeholders.

2. Non-Executive Directors

•  Unlike executive directors, non-executive directors do not engage in the company's daily operations. Instead, they provide independent oversight and bring diverse perspectives to the boardroom.
• Non-executive directors are appointed based on their expertise, industry knowledge, and ability to provide objective guidance.
• They ensure that decisions are made in the best interest of the company and its stakeholders by offering an external viewpoint and challenging the management when necessary.
• These directors play a vital role in enhancing corporate governance, monitoring risk management, and evaluating the company's performance.
• By actively participating in board meetings and committees, they contribute their valuable insights and contribute to the decision-making process. 

Read:- What is debentures in company law

3. Independent Directors

• Independent directors are non-executive directors who have no material relationship with the company.
• Independent directors are appointed to ensure unbiased decision-making, especially in matters that may pose conflicts of interest. They are a check and balance for the executive directors and management team.
• They bring objectivity, impartiality, and expertise to the boardroom, helping to maintain transparency and protect shareholders' interests.
•  Their role includes evaluating and approving major transactions, assessing the performance of the executive directors, and providing an independent opinion on corporate governance matters.

Read: What is memorandum of association

Appointment and Removal of Directors

The process of appointing and removing directors involves several steps and legal considerations. Here's a glimpse of the key aspects:

Director Appointment Process - Section 162 

• The appointment process begins with the nomination and selection of potential directors. Companies often establish a nomination committee to identify suitable candidates based on their skills, experience, and qualifications.
• Shareholders are typically allowed to propose and endorse candidates at general meetings. The appointment of directors in company law requires shareholder approval through a resolution passed at a general meeting.
• This ensures that the shareholders can appoint individuals who will govern the company.
• The director appointment process aims to select individuals with the necessary expertise, integrity, and commitment to fulfil their fiduciary duties. It must also comply with the requirements outlined in the company's articles of association and relevant legal provisions. 

Also read: What is prospectus in company law

Director Resignation and Retirement -  Section 168

• Directors have the right to resign from their positions voluntarily.
• Resignation letters are typically submitted to the board or the company secretary, indicating the effective resignation date.
• Additionally, the articles of association can clarify the types of directors in company law and relevant provisions that may outline the mandatory retirement age or term limits for directors.
• Retirement can be enforced when a director reaches a certain age, completes a specific term, or meets other contractual obligations.
• These processes ensure smooth transitions, facilitate succession planning, and enable the company to maintain a balanced and dynamic board composition.
• Companies should have clear procedures for handling director resignations and retirements to ensure compliance with legal requirements and governance standards. 

Director Removal -  Section 169

• Shareholders can remove directors by passing special resolutions at general meetings.
• This authority is granted to shareholders to protect their interests and hold directors accountable for their actions.
• A director may be removed if shareholders have lost confidence in their ability to fulfil their discharge of the duties of director in company law or if misconduct or breach of fiduciary duties are alleged.
• However, the removal process must follow legal provisions and company laws , and the director in question should be allowed to present their case.
• In certain cases, the court can also intervene if there are serious allegations or the removal process is deemed unfair or prejudicial.
• The legal provisions surrounding director removal aim to balance shareholders' interests with the need for fair and transparent decision-making.

Read: Which company law book to choose ?

Qualifications of Directors In Company Law

As required by company law, the qualifications and criteria of a director would differ from jurisdiction to jurisdiction, including, in particular, the laws that regulate corporations therein.  Here are some of the key qualifications for a director:

• Age: The majority of states and jurisdictions insist that one must be of the age of 18 years for eligibility to act as a director, with some localities differing in the age requirement.
• Capacity: A director must have the legal capacity to act as a director. This normally means that a director may not be disqualified by the law for reasons of bankruptcy, mental incapability, etc.
• Qualification: A director must not be disqualified from the duties of a director by company law or any other relevant legislation. The said disqualifications may come from criminal convictions, being declared insolvent, and failure to comply with due compliance with legal requirements, amongst others.
• Membership : In some companies, especially private or smaller companies, the qualification of a director will extend to being a shareholder or a member of the company, which is not universally required.
• Special Requirement of Listed Companies : Listed companies must adhere to some special requirements with a certain compulsion for the independence percentage of directors. Those are general requisites and may differ; depending on the company's type, more requirements or exceptions may be requested by the jurisdiction. It is, therefore, always advised to look at the applicable company law of incorporation or, better still, seek advice from corporate legal practitioners for specific details.

Directors' Duties and Responsibilities

Directors have several duties in company law to the company and its stakeholders. Let's explore the core responsibilities they carry.

Fiduciary Duty -  Section 166(2)

• Fiduciary duty is a fundamental obligation of directors in company law. It requires directors to act in good faith and the company's best interest.
• The power of directors in company law is to make decisions with the utmost loyalty, honesty, and integrity. They should avoid conflicts of interest and not misuse their position for personal gain.
• This duty ensures that directors prioritize the company's and its stakeholders' welfare above personal interests.
• It protects shareholders and other stakeholders, instilling trust and confidence in the board's decision-making processes.
• Directors who breach their fiduciary duty may be subject to legal action and personal liability. 

Read:- Company Law Bare Act

Duty of care and skill -  section 166(3).

• Directors are expected to exercise reasonable care, skill, and diligence in their responsibilities.
• They should apply their expertise, knowledge, and experience to make informed decisions and act in the company's best interest.
• Directors should stay informed about the company's affairs, keep up-to-date with industry trends, and seek professional advice when necessary.
• The duty of care and skill requires directors to take the time to understand complex issues, critically analyze information and ask relevant questions during board discussions.
• While directors are not expected to be experts in every aspect of the business, they are expected to contribute their expertise and actively participate in board deliberations.
• The duty of care and skill is essential for prudent and well-informed governance.

Duty to Promote Success of the Company -  Section 172

• Directors have a responsibility to promote the long-term success of the company.
• This duty goes beyond short-term profitability and requires directors to consider the broader implications of their decisions on stakeholders, the environment, and society.
• Directors should take a strategic approach to ensuring the company's sustainability and growth. They should actively engage in strategic planning, risk management, and performance monitoring to achieve the company's objectives.
• To fulfil this duty, it is essential to balance the interests of various stakeholders, such as shareholders, employees, customers, suppliers, and the community.
• The duty to promote success is embedded in the corporate governance framework and encourages directors to make decisions that align with the company's purpose and values.

Directors' Liabilities and Protections

While directors carry significant responsibilities, they are also exposed to potential liabilities. Here's a glimpse of the legal provisions and protections in place:

Breach of Duties -  Section 166 (7)

• Directors who breach their duties may face consequences such as legal actions and personal liability.
• Shareholders or other affected parties can seek remedies for damages caused by a director's misconduct, negligence, or breach of fiduciary duties.
• Legal provisions and case law regarding director liability vary across jurisdictions, but they generally aim to hold directors accountable for their actions and provide remedies to those affected.
• Directors should be aware of their duties, act diligently, and seek professional advice when facing complex situations to mitigate the risk of breaching their duties.
• Breach of duties can lead to reputational damage, personal financial loss, and legal repercussions, highlighting the importance of fulfilling their obligations.

Read:- Administration in company law

Indemnification and Insurance -  Section 463

• Companies may indemnify directors, protecting them from personal liability arising from their duties.
• Indemnification provisions can be included in the company's articles of association, bylaws, or separate indemnification agreements. These provisions ensure directors can carry out their duties without undue personal risk.
• In addition to indemnification, companies often secure Directors and Officers (D&O) insurance. D&O insurance provides financial protection to directors in case of legal claims against them. It covers legal costs, settlements, and judgments resulting from claims related to the directors' actions.
• These measures encourage competent individuals to serve as directors and provide them with some level of financial security. 

Read:- Types of meetings in company law

Role of the Board of Directors

The board of directors plays a crucial role in a company's governance. Let's explore some key aspects:

Board Composition and Structure

• The board's size and diversity influence its effectiveness. A balanced mix of skills, experience, and backgrounds promotes robust decision-making.
• The board composition should reflect the company's needs and consider industry knowledge, gender diversity, and independence.
• Additionally, the roles of the Chairman and CEO should be clearly defined to avoid conflicts of interest and ensure a separation of powers.
• The board's composition and structure directly impact its ability to fulfil its responsibilities and provide effective oversight. 

Board Meetings and Decision-Making

• Board meetings provide a platform for directors to discuss and make important decisions.
• Regularly scheduled meetings should take place to address strategic matters, financial performance, risk management, and other pertinent issues.
• The frequency and conduct of board meetings should comply with legal requirements and best practices.
• During board meetings, directors engage in constructive discussions, share their perspectives, and collectively make decisions that benefit the company.
• Proper voting procedures and decision-making protocols should be established to ensure fair and transparent outcomes.
• The minutes of the board meetings should be accurately recorded to maintain a record of the board's deliberations and decisions. 

Committees and Delegation

• Boards often establish committees to address specific areas, such as audits, compensation, and nominations to enhance efficiency and effectiveness.
• Committees consist of selected directors who possess relevant expertise in the respective areas. The establishment of committees allows for more focused attention and in-depth analysis of key issues.
• The board delegates certain responsibilities to these committees while retaining overall decision-making authority. Committees meet regularly, review pertinent matters, and make recommendations to the board.
• Delegation to committees ensures that the board can manage complex issues effectively while optimizing the expertise of its members. 

Remuneration Of Directors In Company Law

Directors' remuneration and disclosure play a vital role in transparency and accountability. Here's what you need to know:

Director Compensation

• Directors are compensated for their time, expertise, and responsibilities.
• Director compensation can take various forms, such as fixed salaries, performance-based bonuses, equity-based incentives, and other benefits.
• Determining director remuneration should be fair, transparent, and aligned with the company's overall remuneration policies.
• Remuneration packages should reflect the director's contribution, responsibilities, market standards, and the company's financial performance.
• Companies should disclose director remuneration details in their annual reports and financial statements to ensure transparency and provide shareholders with relevant information.

Disclosure Requirements

• Companies are required to disclose director compensation in their financial statements.
• This disclosure allows shareholders and other stakeholders to understand the remuneration structure and evaluate whether it aligns with the company's performance.
• Additional disclosure requirements may exist depending on the jurisdiction and applicable regulations.
• Companies should communicate director remuneration policies and practices in their corporate governance reports or separate remuneration reports and financial statements.
• Open communication and engagement with shareholders promote trust and accountability and facilitate an understanding of how director remuneration is determined. 

Role Of Director In Company Law & Corporate Governance:

Directors contribute significantly to the overall governance framework of a company. Let's explore their role in more detail:

Relationship with Shareholders

• Directors represent shareholders' interests and should foster strong relationships with them.
• Shareholders are essential stakeholders in a company, and directors must consider their views and concerns.
• Regular communication, transparency, and engagement are crucial for building trust and respecting shareholder rights.
• Annual General Meetings (AGMs) allow shareholders to participate in key decision-making processes and raise questions or concerns.
• Proxy voting mechanisms allow shareholders who cannot attend the meetings to exercise their voting rights.
• Directors should be attentive to shareholder feedback and actively seek ways to align the company's objectives with shareholder expectations. 

Board Evaluation and Performance

• Regular evaluations of the board and individual directors' performance are essential. Evaluations provide an opportunity to assess the board's effectiveness, identify improvement areas, and enhance governance practices.
• The evaluation process may involve self-assessment, peer reviews, or external assessments. It should consider factors such as director participation, decision-making, strategic vision, board dynamics, and adherence to corporate governance principles.
• Evaluations also contribute to ongoing professional development, ensuring that directors remain up-to-date with evolving governance practices and relevant regulations.
• Continuous improvement in board performance ultimately enhances the company's overall governance framework. 

Read:- What is business laws

• Directors in company law have a critical role in ensuring good governance, protecting stakeholders' interests, and promoting the company's long-term success.
• Understanding the types of directors in company law, their various responsibilities, legal obligations, and the governance framework they operate is vital for effective corporate leadership.
• By upholding their duties, directors contribute to building sustainable and prosperous businesses. 
• Remember, the information provided in this article is meant to serve as a general guide.
• For specific legal advice and provisions in your jurisdiction, it is advisable to consult with legal professionals who specialize in company law. 

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What Are the Duties of Directors in Company Law?

The duties of directors in company law are to act in the best interest of a company and its shareholders within the bounds of the law. 3 min read updated on February 01, 2023

The duties of directors in company law are to act in the best interest of a company and its shareholders within the bounds of the law.

Legal Duties and Responsibilities of Directors

Most companies act through two groups:

• Shareholders
• The board of directors

A company's well-being rests on the shoulders of its directors. These people are responsible both for the company's interests and those of its shareholders. Directors can basically be considered fiduciary agents that are obligated to perform duties in service to the company. Fiduciary agents are those who have undertaken the responsibility to act on another's behalf in matters pertaining to relationships of confidence and trust.

The two distinguishing obligations of fiduciary agents are:

• Faithfulness

Simply put, a director's primary responsibility is to remain loyal to their company. These duties apply, not only in regards to decisions that are made in the boardroom, but also:

• When a director acts as an officer on behalf of the company
• When a director takes action regarding business affairs
• When a director handles company assets

These duties are owed by every one of the company's directors on an individual basis beginning from the very first day of the director's official appointment. Even in the event that a director resigns or is removed from their position, they may still be held liable for any breach of duty that occurred while they still held the office. The duties that are owed by a director are meant to benefit:

• The company as a whole
• Present company members
• Future company members

These duties do not pertain to individual people within the company and are broadly meant to benefit the company itself. A director is appointed by company shareholders to handle the company's daily affairs in a manner that will ultimately benefit the company and its shareholders. Their duties are based on certain equitable principles and rules established under common law.

General Restrictions or Requirements on the Identity of Directors

There is no limit in place that restricts the required age for corporate directors . However, corporations may impose age requirements in:

• The terms of its Certificate of Incorporation
• Company bylaws
• Corporate governance guidelines

It's worth noting that, of the top 100 companies in the United States, 79 have set mandatory retirement ages for non-employee directors. In fact, only 33 of these companies permit the company's board or board committees to make exceptions to this requirement. Most require that directors retire no later than the age of 72. In many cases, employee directors (excluding the chairman of the board in some scenarios) will retire from the company's board at the same time that they retire their employment with the company.

Generally speaking, there are no restrictions in place regarding a director's nationality. However, a director's nationality may be a relevant factor in certain regulated industries. Directors also don't typically have to be a resident of the state the company is incorporated in.

There are also no requirements stating that companies have to have a certain ratio of women to men, or vice versa, on its board. However, most companies try to make their board as diverse as possible, taking things into account such as:

• Professional experience
• Nationality

Some people are prohibited from being able to act as directors, such as:

• Bankrupt individuals
• Disqualified persons
• A person acting as an auditor of the corporation

There are no mandatory qualifications to become a director. However, a company's director is required to perform a number of duties and responsibilities and should be capable of doing this without issue.

Legal Enforcement of Director's Duties

The specific duties of a director are outlined in the Companies Act of 2006. These duties are not up to the director to decide to perform or not perform. Directors are expected to carry out their duties with all due diligence. Any breach or threat of breach is treated as a serious issue in the realm of corporate governance. A director's duties can't be considered important if they can't be fully enforced. Likewise, if the duties can't be enforced, they're not important and might as well not exist.

If you need help with duties of directors in company law, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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• Fiduciary Duties of Directors
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Hall Ellis Solicitors

Directors’ Duties: Legal Standards for Directors in Law (Companies Act)

If you’re a new or established director of a company, a series of statutory duties apply to your appointment as a director.

Companies are governed by directors. The general duties set out in the Companies Act 2006 sets the legal standard of behaviour for directors when running companies

Each statutory duty applies alongside each other duty. And more than one duty can be breached by one single act by a single director.

When more than one director cooperates with one another in a breach of duty, joint and several liability may arise amongst all of the directors involved.

Directors' Duties: Owed to Whom?

It's a cardinal principle of company law that the duties of directors are owed to the company and not to individual shareholders. There are limited exceptions.

The duties apply to directors who are consultants, employees, formally appointed or not formally appointed at all, such as de facto directors and shadow directors. They also apply whether they are paid as part of their appointment or not.

When breaches of duty arise, it is the company that has the right to sue against individual directors, rather than the individual shareholders. Outsiders to the company may have claims against directors in other areas of law, such as people effected by a bribe .

When they Don't Apply

A director’s duties do not apply to:

• holding companies or subsidiaries of the company to which the director is appointed, unless the individual is also a director of those companies, or
• third parties dealing with the company.

Also, the duties do not come to an end when the director resigns. In some important respects they continue - full-throttle - post-termination. Usually, that's when some benefit continues obtained during the appointment continues, after the end of the appointment.

Action by Shareholders

If the company does not take action to address a breach:

• an individual shareholder may be permitted by a court to commence a derivative action on behalf of the company to obtain redress on behalf of the company
• shareholders may have resource against a director where a special fiduciary relationship arises between the directors and the shareholders. This possibility arises when directors become agents of the shareholders, and this in turn may lead to a conflict of interest and compromise the independent judgment.

Directors Duties: Standards Expected

From a legal standpoint, when decisions are made by directors as part of running a company, it is not a matter of whether one director is commercially right and another is commercially wrong. That’s not what the law is set up to do.

A commercially unreasonable position might be adopted by a director. However, that does not necessarily place the director in breach of their duties.

The focus of directors’ duties is to whether the board and each director has acted consistently with the constitution of the company and the directors' duties which are imposed by the Companies Act, as opposed to pragmatically, prudently, with common sense, business acumen or insight.

This means that:

• The actions of any single director are assessed against the standards fixed by the general duties set out in the Companies Act, and supplementary duties which stem from them
• Individual directors may not exercise powers that they do not have or are not vested in them under the company’s constitution, and
• If they have exercised directors act otherwise than in good faith and in the best interests of the company or for an improper purpose, they are liable for breach of their duties.

List of Directors Duties

Directors’ duties set out in sections 171 to 177 of the Companies Act 2006.

Directors have the general duties to:

• section 171 : act within their powers
• section 172 : promote the success of the company
• section 173 : exercise independent judgment
• section 174 : exercise reasonable care, skill and diligence
• section 175 : avoid conflicts of interest
• section 176 : not accept benefits from third parties
• section 177 : declare their interests in proposed transactions or arrangements in the company

The list of duties is deceptively simple and straightforward. A wider range of duties than those set out in may apply in addition to the general duties listed in any particular case.

Also, these director’s duties overlap with one another. Breaching one of the director’s duties usually involves breach of another of the duties.

Also, directors aren't able to agree that they do not apply. However, agreements may reduce the scope of the breadth of application of the duties.

These are the statutory duties which apply to directors:

1. Section 171: Duty to act within powers 

Directors are required to ensure that they act within the corporate powers of the company, that is

only exercise powers for the purposes which they were conferred 

What is the Purpose?

Corporate powers and purposes are defined by the Articles of Association, resolutions of shareholders and the board and to a limited degree, contracts which the company has with third parties.

It is the company's constitution which define what is within the powers of the company ( intra vires ) and what is not ( ultra vires ).

Assessing whether the exercise of a corporate power for a proper purpose is a staged process.

It involves identifying:

• the power which is being exercised
• the proper purpose for which such power was conferred
• the substantial purpose for which the power was exercised.

When the exercise of the power is for a proper purpose, directors act within their authority.

Legitimate powers of the company can be abused in any number of ways, for example:

• defeating a takeover bid or allowing a takeover bid to come to pass
• diluting the shareholding of another shareholder
• create a majority or destroying an existing majority
• Power to require forfeiture of shares: using powers relating to forfeiture of shares to expel members
• Deprivation of rights: depriving shareholders of their constitutional rights, such as to receive a dividend pari passu with other shareholders with the same class of share, when a dividend is declared for that class of share by the board.

Liability for breach of duty arises when the director:

• knows the purposes of the exercise of the power are improper, or
• knows that the facts which make the purpose improper, without necessarily being aware that it is an improper one or involves a breach.

When directors of a company enter transactions with other companies with which they are associated (ie connected persons ), they are assumed to know the constitutional limitations of the company. That has consequences for directors who enter proposed transactions or arrangements entered by the company under section 177 (see below).

Even then, when a power is said to been exercised for an improper purpose:

• exercise of the power is not invalid unless it substantially motivated by the improper purpose.
• it is irrelevant that the director was acting in the best interest of the company, because the power was conferred for a purpose, and the exercise was not within the bounds fixed by the constitution of the company
• simply because the exercise of the power is commercially beneficial or profitable to the company is beside the point.

When the company’s powers are exercised for an improper purpose, the exercise of the power is voidable: the exercise of the power is deemed to have no legal effect. It may however be ratified by the shareholders in a general meeting.

Shareholders may prevent the company from acting outside its powers, and do so with an injunction.

Legal remedies are also available to make good the wrong, which may involve requiring directors involved to pay the company the amount of loss suffered by the company caused by the breach out of their own pocket.

When individual directors act outside the powers of the company, and that leads to a breach of another duty, the duty to avoid conflicts of interest ( section 175 ) applies. That in turn requires disclosure of the transaction to the board: acting in the company's interests (see section 172 ) means that a director is required to disclose the breach to the board of directors.

It follows that when one or more directors act outside the corporate purpose of the company, each of them are jointly liable for the loss caused to the company.

Third Party Interests

Transactions which are entered for an improper purpose are likely to remain enforceable by third parties against the company due to the operation of the indoor management rule , which is set out in section 39(1) . The indoor management rule operates to entitle third parties to assume that the directors (or those authorised by them) were acting within their powers unless they were otherwise put on notice.

2. Section 172: Duty to promote the success of the company  

The duty requires a director to:

act in the way he considers, in good faith , would be most likely to promote the success of the company for the benefit of its members as a whole .

The standard required depends in part on the skill and experience of the director, and particularly skills and experience of the director.

“Good Faith”

The good faith requirement requires directors to exercise their discretion bona fide in what they consider (not what a court might consider) to be in the interests of the company.

The duty requires the director to act (in good faith) in a way which would likely to promote the success of the Company for the benefit of its members as a whole .

It’s what the director believes to be the best interests of the shareholders, assessed as a whole . That's because companies are appointed by shareholders to run the company; the appointment to the company brings about the duty to act for the benefit of the shareholders.

The good faith requirement:

• is about honesty and loyalty, rather than the competence of the director. It doesn't impose an objective standard of managerial competence. The level of competence which directors must meet is the subject of another director’s duty (the duty of care, skill and diligence)
• relies on whether the director honestly believes that an act or omission is in the interests of the company

The duty of good faith means a director can act unreasonably and mistakenly and is not liable for a breach, so long as they were honest in the mistaken belief.

“benefit of its members”

The shareholders of a company are a collective body. Different shareholders will have different and potentially competing interests within the general body of shareholders, because the nature of their interests may differ within company.

Shareholders may choose to own shares in a company for a whole series of reasons. A particular shareholder might become involved for:

• dividend payments for their class of share in the near future
• voting rights attached to the shares
• the prospect of increases in value of shares over an extended period of time
• investment of money for capital growth, rather than investing their own time.

Then some shareholders may not be primarily interested in a company for financial reasons, such as a family businesss.

"as a whole"

Decisions by directors in board meetings may impact different classes of shareholder differently.

The duty to promote the success of a company under section 172 requires a director to consider shareholders' common interests to:

• to promote the success of the company,
• even when those common interests conflict; and
• when common interests impact differently upon interests of classes of shareholder.

So, “for the benefit of members as a whole” does not mean:

• only to the benefit of majority shareholders
• the interests any particular shareholder or one class of shareholder, or
• the interests of directors who might happen to own shares.

“Promote the success”

There is a list of factors which a director must have regard to fulfil the duty. It’s not about just ticking boxes. 

Those factors are broader, more long-term interests of the company, and form part of section 172 :

• the likely consequences of any decision in the long term
• the interests of the company's employees
• the need to foster the company's business relationships with suppliers, customers and others
• the impact of the company's operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct, and
• the need to act fairly as between members of the company.

When decision-making

The interests of a company will also involve the company’s own objectives and purpose.

The objectives and purposes between a charity, a bank, an insurer, a software development company and an IT services company are likely to differ significantly.

The duty is breached when a decision made is one which no reasonable director could have arrived at in the best interests of the company.

Who must prove a breach?

Consistent with the principles associated with the burden of proof which applies when claims are made that the director’s duty has not been discharged to the required standard, it is not for the director to justify or prove that their decision was “correct”. 

Rather, it’s a matter of the decision being made consistently with the legal standard.

It’s for those alleging that the director failed to do so, to prove the breach of duty . That can be quite difficult.

Also, where conflict arises between this duty and the other duties, the director’s duty to promote the success of the company usually prevails.

Disclosure of Misconduct

Also, this duty of good faith requires directors to disclose their own misconduct.

When a company is solvent, it is the interests of shareholders as a whole, present and future which prevail.

As a company moves towards insolvency, the directors must have regard for the interests of the creditors, and not only the shareholders.

3. Section 173: Duty to exercise independent judgement

Decision-making by directors in board meetings serves to support the function of the board: to manage business of the company.

To do so, directors are required to exercise their own independent judgement, in the sense that it is the director’s own judgment.

In decision-making, each individual director is required to:

• make their own decisions: Decisions of directors cannot be delegated to someone else to make. This not to say that the board cannot delegate decisions to others where the constitution of the company permits it
• make up their own mind: The duty is geared to prevent avoiding improper influence or permitting themselves being dominated or manipulated by other directors, the shareholders or other third parties
• avoid subordinating or subrogating their authority to others: An appointment as director means that the powers associated with the appointment is for the director to exercise.

The duty does not prevent a director from relying on the advice or work of others, such as managers of the business, other directors or external advisors.

In the process of decision-making, directors are not prevented from acting consistently:

• with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
• with the company's constitution.

The Other Side of the Line

Individual directors are not permitted to:

• go behind one another’s backs and criticise the Board's management. Acting to undermine the other directors is not an acceptable practice.
• impose their own will on the company to the exclusion of other directors. It undermines a proper functioning board of directors
• ignore decisions of the board simply because they are majority shareholders

Rather, individual directors are expected to raise their concerns, engage in discussions, consider the merits and disadvantages of any particular course, and form part of the majority or minority in a vote in board meetings.

4. Section 174: Duty to exercise reasonable care, skill and diligence 

The duty in section 174 imposes an objective standard on directors to exercise care, skill and diligence.

This is the “duty of care” required to be discharged by directors. It is owed to the company and not to other directors or the shareholders.

The objective standard for directors is fixed by two factors.

It is the general knowledge, skill and experience:

• that may reasonably be expected of a director carrying out the functions for the specific company. Directors are precluded from depending claims for breach on the basis that they did not have the general knowledge, skill or experience reasonably to be a director or perform the functions required of them. The director should not have accepted the appointment in the first instance and should have resigned their appointment.
• that the director personally possesses . The greater the general knowledge, skills and experience of a director, the greater the standard of performance expected of the director.

When a director has special skills, those skills heighten the standard of performance of the duty.

Factors in the Standard Required

Different companies distribute responsibilities amongst directors in different ways.

The scope and extent of the duty for any particular director depends on factors such as:

• the nature of the company's business
• the responsibilities allocated to the director in question and the other directors
• the tasks delegated to management, bookkeepers and accountants, and other skilled professionals engaged by the business.

Even then, directors are not required to perform their duties to a greater degree of skill and care than may reasonably be expected from a person of their knowledge and experience.

Whether or not a director has failed to meet the standard required by the duty depends on the courses open to them directors acting competently. 

Errors of Judgement

Nevertheless, directors are not responsible for errors of judgement.

Incorrect choices do not make directors personally liable for the consequences of those decisions.

That is, provided the required level of care, skill and diligence was exercised. Directors do not underwrite the success of the business of the company by their decisions.

5.  Section 175: Duty to avoid conflicts of interest

It would be a mistake to think that companies “owe” directors something for their appointment.

It is benefits which the board assents to, after the board has been informed of all the relevant facts and events that the director is entitled to be remunerated.

As trustees of companies’ assets, directors hold a responsible role in companies. They control assets and property of the business, which includes property treated as assets of the company, such as business opportunities obtained by the company.

Section 175 of the Companies Act states:

(1) 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. (2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

The classic statement is this:

… it is a rule of universal application that no one having [directors] duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which may possibly conflict with the interests of those whom he is bound to protect.

Then there is this:

A director is however precluded from obtaining for himself, either secretly or without the informed approval of the Company, any property or business advantage either belonging to the Company or for which it has been negotiating], even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the Company and where it was his position with the Company rather than a fresh initiative that led him to the opportunity which he later acquired. 

Conflicts of interest can arise between director and:

• company itself; and
• companies which the director has personal interest, such as another company where the director is a director or shareholder
• other forms of legal entity , such as a partnership, and/or
• dealings with independent third party individuals or companies.

Ownership of Company Assets

It is not for directors to use company assets as if it was their own personal property.

The property, information or business opportunities are owned by the company arising from its status as a separate legal entity . The company owns the assets, not the director.

Directors' Conflicts with the Company

Conflicts of interest arise when individual directors take advantage of their position as a director for their own personal benefit. A personal interest comes to conflict with the interests of company.

It happens when directors overlook or see past that the company has its own legal existence which:

• owns or leases a property and receives rent payments, or sublets it to receive rent;
• licensing revenue derived from intellectual property rights;
• sales of assets of the business including tools of the trade;
• confidential information
• capital investment into the company
• is entitled to the benefit business opportunities which arise for the company; and
• all of the benefits that those bring - or may bring - to the company.

Conflicts of interest between the interests of the company and the personal interests of directors usually arise in the context of:

• using company property for the director’s own personal benefit or for another business with which they are associated
• receiving revenue personally which properly belongs to the company
• transfers company property away from the company at an undervalue
• acting in favour of another company or business, when they should not

Conflicts do not arise only between the director’s own person interests and the company.

They also arise when director has two or more principals.

Dual Conflicts: The Director and Separate Principals

Directors are perfectly entitled to be directors of two or more companies.

However, directors owe fiduciary duties to each company to which they are appointed.

A breach of duty doesn’t arise when acting for both, provided that the director does not act to undermine that fundamental duty of loyalty to both companies. That can be a difficult feat.

A conflict of interest is more likely to arise where a director is appointed to one company and a second company, where the second company:

• competes with the first company
• supplies goods or services to the first business
• is a customer of the first business

Also, a conflict is likely to arise where the director:

• owns personally owns property used by either the company to trade
• an accountant
• an engineer or
• other form of consultant
• earned a profit through their own assets and property

Liability still arises where:

• the company was not able to take the opportunity for itself
• the director held an honest opinion and acted in good faith
• the company benefited from the transaction 

A general resolution of directors to approve the transaction and any profit received by the director is required before the opportunity is taken up.

Conflicts of Interest and Business Opportunities

The classic case of a conflict of interest between a director and a company is where a director takes up an opportunity which was not pursued or could not be pursued by the company, whether during the term of the appointment as a director or after resignation.

There are three different ways that business opportunities might be diverted away from a company:

• the director diverts the opportunity to a related company that takes up the opportunity
• a friend or business associate runs another company, and the opportunity is diverted to them to take up
• resignation to take up opportunity , where the director fails to disclose a business opportunity to the company business opportunity, and decides to pursue it themselves. Resignation to take up a business opportunity to does provide an escape route for a director. The opportunity arose during term of the appointment and so the duty attaches to the opportunity, whether or not the director remains a director of the company
• preparation and resignation , by preparing to take up an opportunity during their appointment with a view to competing with the company post-resignation

The duty applies when the business opportunity is in the company’s line of business where the information is received by the director in his private capacity.

Whether there has been a breach will depend on a series of factors such as:

• position or office held by the director
• the nature of the business opportunity
• the amount of knowledge possessed by the director
• the maturity of the opportunity
• the timing of taking the opportunity, and
• any related business entities involved. 

Defences to Conflicts of Interest

The defences to misuse of company’s assets are limited.

Primarily, situations giving rise to conflicts of interest and potential conflicts must be authorised by the board, provided that the constitution of the company does not invalidate or prevent authorisation.

The benefit must be disclosed to the board of directors and authorised by the board in order to steer clear of the consequences of a conflict of interest.

In any case, the interested director is not permitted to count in the quorum to approve the transaction.

Also, a director cannot act in good faith in the best interests of the company, and promote the interests of the company ( section 172 ) if its business opportunities are siphoned away from the company.

6. Section 176: Duty not to accept benefits from third parties

As individuals, directors of companies are vested with powers to control the property of companies and enter into contracts for the company. The company can’t do those things itself. The company relies on human beings to do those things for it.

With the ability to control what happens with the property of the company comes with the ability to abuse it.

The directors are legally bound do the right thing with the property of the company.

The duty not to accept benefits from third parties is a duty to prevent directors from accepting secret commissions (aka bribes) from third parties. 

The duty recognises that directors may not be able to prevent benefits offered; when they are offered they must be handed over to the company because the company is the principal of the director.

The duty applies to benefits:

• received by directors in their personal capacity, anything connected to their appointment as a director
• which are more than trivial.

Benefits for the purposes of section 176 include benefits of any description, and not just money. It includes on-financial benefits.

It does not matter that the benefit is not actually received by the director themselves.

Secret commissions are considered to fundamentally taint the decision-making process of the director, whether or not it actually does.

For example, it would include:

• payment of tuition fees for a director’s children or a relative's children
• benefits unrelated to the appointment as a director or the company. For instance, a director might be offered a landscaping services on their own home at no cost in exchange for the reward of a contract in favour of a supplier
• shares received from company with whom the director was negotiating on behalf of the company
• commissions paid out of the purchase money for a property

8. Section 177: Duty to declare interests in proposed transactions or arrangements

Directors have ultimate control over assets of companies to which they are appointed. With that power, comes the opportunity to abuse it, either inadvertently or deliberately.

The potential to do so arises in both public and private companies, where the shareholders are also directors, or own competing entities which stand to benefit from an appointment as a director of the first company.

Section 177 establishes a statutory procedure which:

• requires directors notify the board when they have a personal interest in the transaction, before the company enters the transaction.
• applies whether the transaction is direct and indirect.
• is designed to prevent a benefit of a conflict of interest arising, without the approval of the board
• whether to enter into the transaction
• on what terms; and
• to establish appropriate safeguards should be adopted to protect company.
• Contracts with the company where the director or a company under their control, such as loan contracts 
• sales of shares in the company to another company which a director owns shares
• Contracts of supply of goods or services to the company

The Declaration

Section 177 provides that a director's interest in a proposed transaction or arrangement with the company, must be accompanied by full disclosure of any conflict which may arise. It is a formal declaration to the board.

Accordingly, declarations should include:

• the interest : the nature and extent of that interest to the other directors, sufficient for the board to understand what they were approving To simply mention that they have an interest is not enough to discharge the duty
• method of declaration : usually by giving written notice to the board
• timing : the interest before the interest is acquired
• corrections and clarifications : where the disclosure does not properly address the nature or extent of the interest, a further declaration must be made.

The duty to declare interests applies to de facto directors and shadow directors, where they are persons in accordance with whose directions or instructions their directors were accustomed to act.

A director is not obliged to declare:

• matters which they are not aware of and what a director ought reasonably to be aware of. However, directors cannot close their eyes to whether they have an interest or not and/or
• what the other directors already know.

Consequences of Non-Disclosure

If the director's interest falls within section 177 , then the director must declare the interest. There is no option not to.

If it is not disclosed to the directors:

• the transaction may be set aside by approval by the shareholders in a general meeting
• the director is liable for an account of profits to the company and to rescind the transaction, in favour of the company

Transactions between them are voidable by the company. The company is entitled to an indemnity from the director(s) involved for loss arising from the transaction, which is usually in the form of an order for rescission), to and account to the company for any gain derived from the transaction.

The third parties however may be able to avoid liability by showing that they were not aware of the constitutional limitations.

Existing Interests

Also, section 182 applies in addition to section 177 to:

• require directors to declare interests in existing transactions or arrangements of the company, unless the director concerned disclosed the transaction before the company entered into it
• applies to impose potential criminal consequences rather than civil consequences

Shareholder Approval Required

Some transactions require more than board level disclosure.

They require approval of the members in a general meeting, after proper disclosure of the details of the transaction have been made available, such as:

• when appointments of directors are guaranteed for in excess of 2 years
• more than 10% of the company’s value, which that amount is more than £5,000
• in excess of £100,000.
• any loan - of any amount – given to directors
• loans given by directors are guaranteed by the company.

Additional Duties of Directors

The directors’ duties at section 171 to 177 are the general duties of the directors.

Directors owe further duties to companies which aren’t so readily apparent.

Duty to report misconduct

As part of a director's duty to promote the success of the company, directors are under a duty to report to the board actual breaches of duty which damage the interests of the members as a whole in respect of:

• their own misconduct
• breaches of duty by other directors.

In some cases it applies to threatened breaches too. 

Duty to Monitor Staff

Directors owe duties to the company to know the company’s affairs and cooperate with other directors to supervise them.

In this way, duties also exist to:

• duty to monitor employees upon whom significant reliance is placed, and
• ensure that there are in place appropriate supervisory and review systems.

The standard to be met is that of reasonable skill and care, having regard to the distribution of work between the directors and management within the company, and the allocation of responsibility between them.

Avoiding Payment of Unlawful Dividends

Liability for the payment of unlawful dividends is usually strict .

However it can also depend on the role the director played in authorising the payment and the degree of fault attributable to the individual director.

When it is subject to the degree of fault on the part of a director, relevant circumstances include:

• knowledge of the background leading up to the unlawful payment
• the extent of care in preparation of proper accounts of the company
• the extent that they could and were entitled to rely on the opinion of others, in the accuracy of the company’s accounts

When directors are liable, and dividends have not been paid lawfully (ie from distributable reserves), directors are usually required to restore the full amount of money wrongfully paid out.  

Protection of Confidential information

Companies have their own legal personality .

As a result, it own rights in its own confidential information: the rights in confidential information is not that of individual directors. The confidentiality vests in the company.

Allowing such commercially sensitive information to be shared with any third party, without the approval of the board breaches those rights. It can't be in the best interests of the company for disclosure of confidential information to damage to the company’s business relationships.

Disclosure of confidential information to shareholders is the equivalent disclosing confidential information to a person that has no relationship with the company at all.

Confidential information which exists in companies vary from company to company and includes information relating to the business, such as:

• business plans and strategies
• affairs and finances of the company
• source code of software developed by the company is spirited off to another company connected to a director
• of employees of the company, consultancy agreements, commission agreements
• with suppliers to the business
• prices paid for goods and services supplied
• lists of customers
• financial, pricing, unpublished and price-sensitive information, such as amounts paid for products or services by customers of the business, or any particular customer
• trade secrets , where the rights have been adequately preserved and treated as trade secrets by the company
• investment related information
• accounting records

Where directors are also shareholders, misuse of confidential information by the shareholder may well be brought home to the director by an action for breach of confidential information by the director and:

• lead to a breach of the duty of good faith
• lead to a requirement to disclose the wrongdoing to the board
• amount to a conflict of interest, and
• evidences a failure to discharge the duty to exercise independent judgment.

Directors' Duties: Board Proceedings Administrative Duties

Administrative duties of directors include duties to maintain company records, which include duties to:

• section 248(1) : prepare and preserve minutes of meetings
• section 386 : maintain proper accounting records and books of accounts
• section 113 : Register of Members, with the prescribed particulars, and where there are more than 50 shareholders, an index of shareholders
• section 162 : Register of Directors, with the prescribed particulars
• section 808 : Register of Interests Disclosed
• section 743 : Register of Debenture Holders
• section 165 : Register of Directors’ Usual Residential Addresses, with the prescribed particulars
• section 275 : Register of Secretaries should a secretary be appointed
• section 790M(1) : Register of People with Significant Control

Each of the Registers is required to be made available for inspection by the shareholders and by members of the public for the prescribed fee.

• section 853A : Confirmation Statements
• section 853B : Notifications of relevant events
• section 853C : Statements of Capital
• section 87 : change of registered office
• special resolutions, such as changes to the articles

Then, it is the directors’ responsibility to ensure that the company complies with the general law, such as:

• pay the taxes due to be paid by the company
• observe the requirements of the Bribery Act 2020
• anti-money laundering legislation, where it applies to the company
• comply with the environmental protection laws

Corporate Governance

Shareholders invest time, money or both in companies.

Companies may look for investors and issue shares as part of a financial investment or contribution of their time to enhance the value of the company.

At the end of the cycle, shareholders of established companies may come to a point when they wish to sell their shares for a price, rather than settle for dividends over time.

Shareholders are entitled to trust directors to manage the affairs of the company properly. The directors exercise their powers through the board of directors.

Management Structure of Companies

There is a schism between the responsibilities of directors acting as the board, and the interests and rights of shareholders. 

• The board is the executive body of the company. It is responsible for making decisions on corporate and business strategy and the day-to-day management of the company. Directors collectively participate in board meetings so that the board may perform its executive function.
• shareholders and employees on the other hand have an interest in the outcome decisions of the board, but no direct role in the making of decisions by the board or responsibility for making them. 

The directors, operating as the board, collectively control the company.

Directors’ duties are owed to the company, not to shareholders.

That remains the case irrespective of how unhappy shareholders may be with the exercise of executive power by the board; provided the exercise of powers is within the constitution of the company.

Role of the Board

Decisions made by directors are represented by their vote in board meetings. Each individual director is able to contribute their own knowledge and expertise when they vote. The company receives the benefit of combined experience and expertise of all of its directors in resolutions made by the board.

The board acts when the directors vote in board meetings and the directors vote to make decisions and pass resolutions:

• unanimously in support of a resolution, whereby all directors concur on a vote for on a resolution by a show of hands or in writing; or
• by majority, where equally divided chairman has a casting vote to resolve what would otherwise be a deadlock

So it's the directors voting in board meetings that controls what the company decides, rather than the individual directors acting on their own: ie without the approval of the board.

Role of Individual Directors

The directors are the human agents that direct the actions of the company. After all, companies do not exist in the real world; they cannot do anything for themselves.  They are a legal fiction: they are attributed rights - predominantly by the Companies Act and judge-made law. 

Each director is likely to have their own separate skill sets that they bring to the company. The board decides which roles and responsibilities each of shall have.

The directors are:

• agents for the company, when dealing with other business and consumers in their dealings with the company
• treated as trustees of the assets of the company
• custodians of business opportunities of the company

Individual directors have no authority to exercise the powers of the company on their own without a delegation from the board of directors. It is the board of directors in board meetings which passes resolutions to make decisions of the company and control the affairs of the company.

Enter Director's Duties

It is the fact that they appointed as directors of the company's affairs which gives rise to legal responsibilities. Those responsibilities include a series of legal duties which impose the standards of conduct required by the law when exercising their functions.

How the rules that apply to any director are decided by:

• the company’s constitution: its Articles of Association and resolutions made by the shareholders, all of which combine to control the behaviour of the company, what it can do and what it can’t
• the provisions of the Companies Act which sets the standards of conduct: directors’ duties.

The statement of general duties of directors are made more accessible by their inclusion in the Companies Act.

These basic legal duties are clearer than what they were when they could only be found in the judge-made law which governed the standards for over 200 years (which by the way, were not significantly changed when they were codified).

Breach of Directors’ Duties

The duties are owed to the company, rather than shareholders other directors or those not involved in the company. That’s because the company is its own legal entity and owns the causes of action which arise from wrongs committed against the company.

Accordingly, it is primarily for the company to decide to take action for wrong doing by a resolution of the board, which requires a majority of directors.

Member may bring proceedings against a director for breach of their duties in the form of:

• section 260 : a derivative action under of the Companies Act; and
• section 994 : unfair prejudice claim

They can also be enforced by liquidators on behalf of the company.

Directors are liable when they:

• do not meet the standards of skill and care expected of them in accordance with section 175 , or
• if they participated in the breach
• sanctioned the conduct constituting the breach.

Resignation

Resignation of a director does not cure a breach of their statutory duties. 

Accordingly,  directors are not usually able to avoid liability for breach of statutory duties simply by resigning unless they bring the breach and the circumstances to the attention of the board and in some cases the shareholders too.

Liability of Multiple Directors

Many functions of  directors are performed jointly.

Breaches are actionable separately.

Just because one director is liable does not mean that all directors are liable. Directors are not agents for the other directors, and the other officers of the company are not the agents of the directors.

Furthermore, where there is a cooperation amongst directors’ wrongful conduct – whether intentionally or not – it can be said that the directors performed relevant acts jointly, and are therefore jointly and severally liable for the loss suffered by the company, as part of a conspiracy .  It's usually an as part of a unlawful means conspiracy , as breaching duties to the company is an unlawful means  

Liability continues to exist in a liquidation, for breach of their fiduciary duties and misfeasance, which includes (amongst many others):

• use of the money or property of the company for their own purposes, or
• for the purposes of another business.

Standing by and Doing Nothing

Directors also breach their duties to the company when they allow themselves:

to be dominated, bamboozled or manipulated by a dominant fellow director

Directors who knowingly standby, take no steps to prevent wrongdoing and permit other directors do so, commit a breach of trust against the company.

• fail in their duty to exercise reasonable skill, case and diligence
• attracted liability to themselves and are treated as party to the breach of the fiduciary duty and seen as having authorised or permitted it

Directors’ Duties: Defences to Liability

Courts have a limited power to forgive liability on the part of directors in limited circumstances.

For the defence to be available under section 1157 , the director must have acted

acted honestly and reasonably, and that having regard to all the circumstances of the case.

In those cases, court retain a discretion to excuse the director from liability on terms that it considers appropriate.

A director may also take the initiative and proactively apply for relief from their own  negligence, default, breach of duty or breach of trust.

The directors are also able to ratify a number of wrongful acts of directors, and in some cases the ratification may only be given by shareholders, and provided that the constitution of the company permits it.

Remedies: Breach of Directors’ Duties

Remedies are based on compensating the company for breaches of duty, which may involve:

• requiring a director to compensate the company for negligent acts
• return property of the company which the director applied for their own purposes
• if property cannot be returned, make an award to the company for equitable compensation against the delinquent director(s)
• an award of the remedy of an account of profits, which is designed to identify the profit gained by the wrongdoing, with a view to making an award in that amount
• treat the property or money acquired by the director as having acquired for the benefit of the company
• otherwise put the company in the position it would have been in, had the director properly performed their duties

These objectives are brought about by a combination of court orders, which include orders for:

• account of profits
• injunctions, either mandatory and prohibitive
• between the company and third parties, and/or
• the director and third parties,

whether from the moment they were created or for the future only

• constructive trusts, so that property and assets obtained by the director are treated as owned by the company.

There are divisions of responsibility of directors within a company. The board has the power to delegate responsibility for particular aspects of the management of a company.  

When tasks are delegated to others, directors remain responsible for proper supervision of those delegated tasks and to exercise reasonable skill and care in doing so. 

It is the directors’ responsibility to ensure that they are properly supervised and proper monitoring procedures are in place, and observed.

By imposing directors’ duties, the law sets standards of integrity and probity which must be met by directors appointed to the companies they control.

Each individual director by those statutory duties owes personal responsibilities to the company. Failure to meet the legal standard required by the duties attracts personal liability for the director, which the company is able to recover its loss.

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Essay on Critical Evaluation of powers and duties of directors under the company Law.

2021, Academia Letters

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