inIIn his judgement in the case
of Imperial Hydropathic Co. v Hampson,
Lord Judge Bowen observed that “directors are described sometimes as agents,
sometimes as trustees and sometimes as managing partners. But each of this
expression is to be used not as exhaustive of their powers and responsibilities,
but indicating useful points of view from which they may for the moment and for
the particular purpose be considered.1” It can be said that the board
of directors should unequivocally be considered the cornerstone of any
successful company, with the principles of trust and diligence exercised
throughout all aspects of their occupation, in order to secure the best
interests of a company and its shareholders. Their fiduciary duties are
fundamental in maintaining the successful growth of a business and, where those
duties are breached, catastrophic consequences can befall a company. Although
the importance of a director’s role within a corporate governance system has
always been acknowledged, previous legislation2 was “widely regarded as
being too complex and detailed,”3 and containing provisions
which were “obsolete and unwarranted.”4 Thus, a law reform gave
way to the Companies Act 20065, and more importantly, led
to the codification of the general duties of directors within the corporate
legislation of the UK. These general duties are found in Chapter 2 of the
Companies Act, namely subsection 171 through 1776, and were formed using
equitable principles and decisions in common law. Before it can be assessed to
what extent these obligations are adhered to, it is necessary to understand
what they are, the reasoning behind them, and to whom they are applicable;
which is the intention of this chapter.

 

Section 171 of the Companies
Act states the first of these duties as “to act within powers,7” with the intention that a
director may only exercise their authority in “accordance with the company’s
constitution,8”
and not for their own benefit, but for the best interests of the company as a
whole, including those of the shareholder. This provision provides a broad
spectrum of protection to shareholders of a company, in that a director
misusing their power at shareholders’ detriment can be held accountable for
these actions in a court of law. The ramifications of a breach of this principle
can be highlighted in Criterion
Properties Plc v Stratford UK Properties LLC9,
in which a director was dismissed after forming a “poison pill” contract in
order to raise the cost of any external bids by causing inflation in the price
of shares. In this case, the court declared that the agreement could not be
binding as the director acted outside of his jurisdiction, and thus, it was an
improper use of power.

 

Section
172 underlines the duty for a director to “promote the success of the company,10”
in that their actions must be in good faith and benefit members of the company
as a whole; considering long term consequences, interests of all employees, the
maintenance of external relationships, any impacts on the community or
environment, the need to promote a good reputation, and also equality and
fairness between members of the company. Hugh Alexander Grossman muses that “a
company’s core objective of profit maximisation must be underpinned by a
proactive approach to corporate social responsibility11,”
suggesting that to maximise profitability and success, there are key external
factors which must also be considered. Although not directly specified in the
previous provisions, section 172(3) suggests that in certain circumstances,
directors may also be required to “consider or act in the interests of
creditors of the company,12”
particularly where insolvency may present itself as an outcome. Lord Justice
Dillon held this principle in Liquidator
of West Mercia Safetywear Ltd v Dodd13,
citing the New South Wales Court of Appeal in Kinsela v Russell Kinsela Pty Ltd in which it was held that, “in a
solvent company the proprietary interests of the shareholders entitle them as a
general body to be regarded as the company when questions of the duty of
directors arise, but where a company is insolvent the interests of the
creditors intrude.14”

 

The “duty to exercise
independent judgment;15” is found within section
173 of the Companies Act. This provision also requires directors not to fetter
their discretion in so much that their independent judgement is infringed. This
obligates a director to act in what they believe is the best interest for the
company’s affairs. Section 173(a)(b) gives rise to no exceptions where there is
“an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors,16” and also in the event
that it is used in a way “authorised by the company’s constitution.” In Fulham Football Club Ltd v CABRA Estates,
Lord Justice Neil said: “It is trite law that directors are under a duty to act
bona fide in the interests of their company. However, it does not follow from
that proposition that directors can never make a contract by which they bind
themselves to the future exercise of their powers in a particular manner, even
though the contract taken as a whole is manifestly for the benefit of the
company. Such a rule could well prevent companies from entering into contracts
which were commercially beneficial to them17,” thus fortifying the
impression that the best interests of the company are paramount.

 

Arguably the most imperative
of the directors’ duties is found in section 174; “to exercise reasonable care,
skill and diligence,18” as would be “exercised
by a reasonably diligent person.19” However, section 174(a)(b)
define this as an individual with the “general knowledge,
skill and experience that may reasonably be expected of a person carrying out
the functions20” of a
company’s director, and must be in relation to the “general knowledge, skill and
experience that the director has.21”
Evidence of this provision’s definition can be located throughout common law
judgements. In Re City Equitable Fire
Insurance, Justice Romer stated that “a director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his knowledge
and experience,22” thus suggesting that a
director need only perform their occupation in a way that is reflective of the
expected standards of the individual.

Section 175
of the Companies Act relates to the “duty to avoid conflicts of interest,23” and as
such, a director must avoid any agreement in which their personal interests may
waver that of the company’s. Lord Cranworth stated that those with fiduciary
duties will not be “allowed to enter into engagements in which he has… a
personal interest conflicting, or which possibly may conflict, with the
interests of those whom he is bound to protect,24”
namely the shareholders and other members of the company, and this is crucial in
order to conduct company affairs in an equitable and impartial approach.

 

This leads
on to the “duty not to accept benefits from third parties25” under
Section 176 of the Companies Act; any undisclosed profits received by a
director via third parties whilst in office will result in disciplinary action.
Section 176(2) defines a third party “as any person other than the company, an
associated body corporate or a person acting on behalf of the company.26” This
includes any benefits received as part of external negotiations, and, as per CMS Dolphin Ltd v Simonet27, this also
includes benefits received through any use of the company’s confidential
information. It is significant to note that under s176(4), this duty is not
infringed if the acceptance of the benefit does not give rise to a conflict of
interests.28

 

Finally, section
177 of the Companies Act states that directors have a “duty to declare interest
in proposed transactions or arrangements,29” and as
such, any anticipated agreement that may be beneficial to the company must be
disclosed to the Board, whether it is via written or verbal correspondence as
per section 182 of the Companies Act,30 and
must be disclosed preceding its formation. This aims to ensure no conflicts of
interest as agreed upon by all members of a company. It is notable that failure
to comply with section 182 is considered a criminal offence.

 

In order to
assess the efficiency of compliance to these duties, it is greatly significant
to address who they obligate. According to the Companies Act31, a
director can be anyone over the age of 16, regardless of nationality, so long
as they are not disqualified under the Directors Disqualification Act 198632, considered
an undischarged bankrupt, or previously the director of a company which has
gone into liquidation within the last 5 years as per the Insolvency Act 198633.
Section 170(5) of the Companies Act refers that there is no distinction between
the duty held by directions and that of shadow directors, or any individual
whose function serves the same purpose as that of a director.34 This is
just one way in which provisions of corporate legislation aim to enforce
compliance to the directors’ duties; by voiding possible loopholes, and
negating ambiguities within an individual’s position.

 

There are
several different means of enforcement in regards to directors’ duties that show
to establish the true breadth that legislation allows the implementation of
these obligations; these include enforcement via the state, statute, and
derivative actions on behalf of a company itself. In order to evaluate the discussion
topic, it is vital to consider how current legislation deals with a breach in
duty, and what remedies and restitution are offered.

1 Imperial
Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1

2
Companies Act 1985

3 Sarah
Worthington, ‘Reforming Directors’ Duties’ (2001) 64 Modern Law Review

4 Sarah
Worthington, ‘Reforming Directors’ Duties’ (2001) 64 Modern Law Review

5
Companies Act 2006

6Companies
Act 2006 s171-177

7
Companies Act 2006 s171

8 Companies
Act 2006 s171

9 Criterion
Properties plc v Stratford UK Properties LLC 2004 UKHL 28

10 Companies
Act 2006 s172

11 Hugh
Alexander Grossman, ‘Refining The Role Of The Corporation: The Impact Of
Corporate Social Responsibility On Shareholder Primacy Theory’ (2005) 10 Deakin
L. Rev.

12 Companies
Act 2006 s172(3)

13 West
Mercia Safetywear Ltd v Dodd 1988 BCLC 250

14 Kinsela
v Russell Kinsela Pty Ltd (1986) 10 ACLR 395

15 Companies
Act 2006 s173

16 Companies
Act 2006 s173(a)(b)

17 Fulham
Football Club Ltd -v- Cabra Estates plc 1994 1 BCLC 363

18 Companies
Act 2006 s174

19 Companies
Act 2006 s174

20 Companies
Act 2006 s174(a)(b)

21 Companies
Act 2006 s174(a)(b)

22 Re
City Equitable Fire Insurance Co 1925 Ch 407

23 Companies
Act 2006 s175

24 Aberdeen
Railway Co v Blaikie Brothers 1854 UKHL 1

25 Companies
Act 2006 s176

26 Companies
Act 2006 s176(2)

27 CMS
Dolphin Ltd v Simonet 2001 EWHC Ch 415

28 Companies
Act 2006 s176(4)

29 Companies
Act 2006 s177

30
Companies Act 2006 s182

31 Companies
Act 2006 s157

32 Directors
Disqualification Act 1986

33 Insolvency
Act 1986 s216

34
Companies Act 2006 s170(5)