inIIn his judgement in the caseof 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 thisexpression 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 forthe particular purpose be considered.1” It can be said that the boardof directors should unequivocally be considered the cornerstone of anysuccessful company, with the principles of trust and diligence exercisedthroughout all aspects of their occupation, in order to secure the bestinterests of a company and its shareholders. Their fiduciary duties arefundamental in maintaining the successful growth of a business and, where thoseduties are breached, catastrophic consequences can befall a company.
Althoughthe importance of a director’s role within a corporate governance system hasalways been acknowledged, previous legislation2 was “widely regarded asbeing too complex and detailed,”3 and containing provisionswhich were “obsolete and unwarranted.”4 Thus, a law reform gaveway to the Companies Act 20065, and more importantly, ledto the codification of the general duties of directors within the corporatelegislation of the UK. These general duties are found in Chapter 2 of theCompanies Act, namely subsection 171 through 1776, and were formed usingequitable principles and decisions in common law. Before it can be assessed towhat extent these obligations are adhered to, it is necessary to understandwhat they are, the reasoning behind them, and to whom they are applicable;which is the intention of this chapter. Section 171 of the CompaniesAct states the first of these duties as “to act within powers,7” with the intention that adirector may only exercise their authority in “accordance with the company’sconstitution,8″and not for their own benefit, but for the best interests of the company as awhole, including those of the shareholder. This provision provides a broadspectrum of protection to shareholders of a company, in that a directormisusing their power at shareholders’ detriment can be held accountable forthese actions in a court of law.
The ramifications of a breach of this principlecan be highlighted in CriterionProperties Plc v Stratford UK Properties LLC9,in which a director was dismissed after forming a “poison pill” contract inorder to raise the cost of any external bids by causing inflation in the priceof shares. In this case, the court declared that the agreement could not bebinding as the director acted outside of his jurisdiction, and thus, it was animproper use of power. Section172 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 companyas a whole; considering long term consequences, interests of all employees, themaintenance of external relationships, any impacts on the community orenvironment, the need to promote a good reputation, and also equality andfairness between members of the company. Hugh Alexander Grossman muses that “acompany’s core objective of profit maximisation must be underpinned by aproactive approach to corporate social responsibility11,”suggesting that to maximise profitability and success, there are key externalfactors which must also be considered.
Although not directly specified in theprevious provisions, section 172(3) suggests that in certain circumstances,directors may also be required to “consider or act in the interests ofcreditors of the company,12″particularly where insolvency may present itself as an outcome. Lord JusticeDillon held this principle in Liquidatorof 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 asolvent company the proprietary interests of the shareholders entitle them as ageneral body to be regarded as the company when questions of the duty ofdirectors arise, but where a company is insolvent the interests of thecreditors intrude.14” The “duty to exerciseindependent judgment;15″ is found within section173 of the Companies Act. This provision also requires directors not to fettertheir discretion in so much that their independent judgement is infringed. Thisobligates a director to act in what they believe is the best interest for thecompany’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 futureexercise of discretion by its directors,16” and also in the eventthat 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 actbona fide in the interests of their company. However, it does not follow fromthat proposition that directors can never make a contract by which they bindthemselves to the future exercise of their powers in a particular manner, eventhough the contract taken as a whole is manifestly for the benefit of thecompany.
Such a rule could well prevent companies from entering into contractswhich were commercially beneficial to them17,” thus fortifying theimpression that the best interests of the company are paramount. Arguably the most imperativeof the directors’ duties is found in section 174; “to exercise reasonable care,skill and diligence,18” as would be “exercisedby 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 outthe functions20” of acompany’s director, and must be in relation to the “general knowledge, skill andexperience that the director has.21″Evidence of this provision’s definition can be located throughout common lawjudgements. In Re City Equitable FireInsurance, Justice Romer stated that “a director need not exhibit in the performance of his duties a greaterdegree of skill than may reasonably be expected from a person of his knowledgeand experience,22” thus suggesting that adirector need only perform their occupation in a way that is reflective of theexpected standards of the individual.Section 175of the Companies Act relates to the “duty to avoid conflicts of interest,23” and assuch, a director must avoid any agreement in which their personal interests maywaver that of the company’s.
Lord Cranworth stated that those with fiduciaryduties will not be “allowed to enter into engagements in which he has… apersonal interest conflicting, or which possibly may conflict, with theinterests of those whom he is bound to protect,24″namely the shareholders and other members of the company, and this is crucial inorder to conduct company affairs in an equitable and impartial approach. This leadson to the “duty not to accept benefits from third parties25” underSection 176 of the Companies Act; any undisclosed profits received by adirector 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, anassociated body corporate or a person acting on behalf of the company.26” Thisincludes any benefits received as part of external negotiations, and, as per CMS Dolphin Ltd v Simonet27, this alsoincludes benefits received through any use of the company’s confidentialinformation. It is significant to note that under s176(4), this duty is notinfringed if the acceptance of the benefit does not give rise to a conflict ofinterests.28 Finally, section177 of the Companies Act states that directors have a “duty to declare interestin proposed transactions or arrangements,29” and assuch, any anticipated agreement that may be beneficial to the company must bedisclosed to the Board, whether it is via written or verbal correspondence asper section 182 of the Companies Act,30 andmust be disclosed preceding its formation. This aims to ensure no conflicts ofinterest as agreed upon by all members of a company.
It is notable that failureto comply with section 182 is considered a criminal offence. In order toassess the efficiency of compliance to these duties, it is greatly significantto address who they obligate. According to the Companies Act31, adirector can be anyone over the age of 16, regardless of nationality, so longas they are not disqualified under the Directors Disqualification Act 198632, consideredan undischarged bankrupt, or previously the director of a company which hasgone 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 betweenthe duty held by directions and that of shadow directors, or any individualwhose function serves the same purpose as that of a director.34 This isjust one way in which provisions of corporate legislation aim to enforcecompliance to the directors’ duties; by voiding possible loopholes, andnegating ambiguities within an individual’s position. There areseveral different means of enforcement in regards to directors’ duties that showto establish the true breadth that legislation allows the implementation ofthese obligations; these include enforcement via the state, statute, andderivative actions on behalf of a company itself.
In order to evaluate the discussiontopic, it is vital to consider how current legislation deals with a breach induty, and what remedies and restitution are offered.1 ImperialHydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 12Companies Act 19853 SarahWorthington, ‘Reforming Directors’ Duties’ (2001) 64 Modern Law Review4 SarahWorthington, ‘Reforming Directors’ Duties’ (2001) 64 Modern Law Review5Companies Act 20066CompaniesAct 2006 s171-1777Companies Act 2006 s1718 CompaniesAct 2006 s1719 CriterionProperties plc v Stratford UK Properties LLC 2004 UKHL 2810 CompaniesAct 2006 s17211 HughAlexander Grossman, ‘Refining The Role Of The Corporation: The Impact OfCorporate Social Responsibility On Shareholder Primacy Theory’ (2005) 10 DeakinL. Rev.12 CompaniesAct 2006 s172(3)13 WestMercia Safetywear Ltd v Dodd 1988 BCLC 25014 Kinselav Russell Kinsela Pty Ltd (1986) 10 ACLR 39515 CompaniesAct 2006 s17316 CompaniesAct 2006 s173(a)(b)17 FulhamFootball Club Ltd -v- Cabra Estates plc 1994 1 BCLC 36318 CompaniesAct 2006 s17419 CompaniesAct 2006 s17420 CompaniesAct 2006 s174(a)(b)21 CompaniesAct 2006 s174(a)(b)22 ReCity Equitable Fire Insurance Co 1925 Ch 40723 CompaniesAct 2006 s17524 AberdeenRailway Co v Blaikie Brothers 1854 UKHL 125 CompaniesAct 2006 s17626 CompaniesAct 2006 s176(2)27 CMSDolphin Ltd v Simonet 2001 EWHC Ch 41528 CompaniesAct 2006 s176(4)29 CompaniesAct 2006 s17730Companies Act 2006 s18231 CompaniesAct 2006 s15732 DirectorsDisqualification Act 198633 InsolvencyAct 1986 s21634Companies Act 2006 s170(5)