Duties of Directors

Duties of DirectorsWho is a director?A director is a person who is responsible for the overall direction of the company's affairs. In company law, director means any person occupying the position of director, by whatever name called. Types of Director De facto directors A de facto director is anyone who is held out by a company as a director, performs the functions of a director and who is treated by the board as a director although they have never been validly appointedTypes of DirectorShadow directors A person might seek to avoid the legal responsibilities of being a director by avoiding appointment as such but using his power, say as a major shareholder, to manipulate the acknowledged board of directors. In other words they seek the power and influence that come with the position of director, but without the legal obligations it entails. Types of DirectorAlternate directors A director may, if the articles permit, appoint an alternate director to attend and vote for them at board meetings which they are unable to attend. Types of Director Executive directors An executive director is a director who performs a specific role in a company under a service contract which requires a regular, possibly daily, involvement in management. Non-executive directors A non-executive director does not have a function to perform in a company's management but is involved in its governance

Types of DirectorThe Chief Executive Officer (Managing Director) A Chief Executive Officer (also commonly known as a Managing Director ) is one of the directors of the company appointed to carry out overall day-to-day management functionNumber of DirectorEvery company must have at least one director and for a public company the minimum is two. The board of directors Companies are run by the directors collectively, in a board of directors. The board of directors is the elected representative of the shareholders acting collectively in the management of a company's affairs. Duties of DirectorsThe Companies Act 2006 sets out the seven general statutory duties of a director. Who are the duties owed to? Section 170 makes it clear that directors owe their duties to the company, not the members. This means that the only company itself can take action against a director who breaches them.Who are the duties owed by? Every person who is classed as a director under the Act owes the company a number of duties. Certain aspects of the duties regarding conflicts of interest and accepting benefits from third parties also apply to past directorsPercival v Wright Mr Percival owned shares per value of 10 in a company whose shares neither had a market price nor were they quoted on the stock exchange and were only transferable with the director's approval. Mr Percival through his solicitors inquired from the company if any body was willing to purchase their shares 12.55 a priced based on independent valuation. Mr Wright who was the chairman of a company, with two other directors, agreed to buy shares from Mr Percival at 12.10 each. Mr Percival then found out the directors had been negotiating with another person for the sale of the whole company at far more than 12.10 a share. The directors had not told Percival. Percival claimed breach of fiduciary duty.

it was held that the duties of the director were owed to the company .

The application of this common law principle is illustrated inPeskin v Anderson4(2001)where the claimants failed to establish that the directors owed duties to the shareholders of the companyPercival v Wright[1902] 2 Ch 401 is aUK company lawcase concerningdirectors' duties, holding that directors only owe duties of loyalty to the company, and not to individual shareholders. This is now codified in the United Kingdom'sCompanies Act of 2006section 170.InCity Equitable Fire Insurance Co Ltd6some directors who were negligent escaped liability due to an exclusion clause in the companys articles. It was held that the director had no obligation to give continuous attention to the affairs of the company. While inRe DJan7a director was negligent in not reading a fire insurance form which resulted in the company going into liquidation. Duties of directorsTo act within the power (s171)This requires a director to comply with the companys constitution and decisions made under the constitution and to exercise the powers only for the reasons for which they were given. They have a fiduciary duty to the company to exercise their powers bona fide in what they honestly consider to be the interests of the companyIn exercising the powers given to them by the articles the directors have a fiduciary duty not only to act bona fide but also only to use their powers for a proper purpose. The powers are restricted to the purposes for which they were given. If the directors infringe this rule by exercising their powers for a collateral purpose the transaction will be invalid unless the company in general meeting authorises it, or subsequently ratifies it.Section 17 of the Act provides that a companys constitution includes not only the companys articles of association but the resolutions and agreements specified in s.29, which includes special resolutions passed by the companyand any resolutions or agreements that have been agreed to, or which otherwise bind classes of shareholders.InHogg v Cromphorn11(1967)Facts: Mr Baxter approached the board of directors of Cramphorn Ltd. to make a takeover offer for the company. The directors believed that the takeover would be bad for the company. So they issued 5707 shares with ten votes each to the trustees of the employees welfare scheme (Cramphorn, an employee and the auditor). This meant they could outvote Baxter's bid for majority control. A shareholder, Mr Hogg, sued, alleging the issue of the shares wasultra vires. Cramphorn argued that the directors' actions were all in good faith. It was feared that Mr Baxter would sack many of the workers.it was held that the power to issue shares was a fiduciary power that had been exercised for an improper purpose and it was irrelevant that the managing director acted bonafide in what he felt was in the best interests of the company. The breach was ,however, ratified by referring the matter to the general meeting for approval by the members.

Howard Smith Ltd v Ampol Petroleum Ltd 1974 facts: Shareholders who held 55% of the issued shares intended to reject a takeover bid for the company. The directors honestly believed that it was in the company's interest that the bid should succeed. The directors allotted new shares to a prospective bidder so that the shareholders opposed to the bid would then have less than 50% of the enlarged capital and the bid would succeed. Decision: The allotment was invalid. 'It must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority or creating a new majority which did not previously exist'Bishopsgate Investment Management Ltd v Maxwell Facts: defendant who controlled Maxwell Group plc and bought theDaily Mirrorin 1984, fell off his yacht in theCanary Islandson 5 November 1991. It transpired he had used the company pension funds to fund his own lifestyle.Ian Maxwellwas Roberts son and a director of Bishopsgate Investment Management Ltd, which was meant to be safeguarding the company pension plans. He had signed share transfers from Bishopsgate to Maxwell Group plc for noconsideration. The shares had been held on trust for a number of pension schemes. The liquidators of Bishopsgate sued Ian Maxwell to compensate for the value of the shares, on the basis that it was an improper use of the company's property.Held:that Ian Maxwell was liable for the value of the shares, not even on the basis of any negligence, but merely by misapplying the assets.[1]Bamford v Bamford 1969 facts: The directors of Bamford Ltd allotted 500,000 unissued shares to a third party to thwart a takeover bid. A month after the allotment a general meeting was called and an ordinary resolution was passed ratifying the allotment. The holders of the newly-issued shares did not vote. The claimants (minority shareholders) alleged that the allotment was not made for a proper purpose. Decision: The ratification was valid and the allotment was good. There had been a breach of fiduciary duty but the act had been validated by an ordinary resolution passed in general meeting. Duties of Directors Duty to promote the success of the company (s 172) In performing this duty, a director must have regard to all relevant matters, but the following are specifically identified in legislation: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 standard business conduct; and the need to act fairly as between members of the company.Re Smith & Fawcett Ltd [1942], Facts: Act 10 of the company constitution said directors could refuse to register share transfers. Mr Fawcett, one of the two directors and shareholders died. Mr Smith co-opted another director and refused to register a transfer of shares to the late Mr Fawcetts executors. Half the shares were bought, and the other half offered to the executors.Held: that in absence of mala fides, this was properDuties of DirectorsTo exercise independent judgment, (173)that is, not to subordinate the directors power to the will of others. This does not prevent directors from relying on advice, so long as they exercise their own judgement on whether or not to follow it. Duty to exercise independent judgment Broadly this means that directors cannot allow others to influence their decisions or to make decisions for them.A director will not breach this duty if they:act in accordance with an agreement entered into by the newly set up company which restricts the exercise of the directors discretionact in a way authorised by the companies constitutionrely on the advice or work of others in making their decisionsFulham Football Club v Cabra Estates plc [1994])In this case the directors of a company had entered into an undertaking to support and refrain from opposing planning applications by another party for the development of certain land in return for the receipt by the company of large sums of money. The directors subsequently wanted to give evidence to a planning inquiry opposing the development and sought a declaration that they were not bound by the undertakings and were entitled to give such evidence to the inquiry as they considered to be in the interests of the company. The court of Appeal disagreed. It held that they had not improperly fettered their discretion.

Duties of Directors Duty to exercise reasonable skill, care and diligence (s 174) This requires a director to be diligent, careful and well informed about the company's affairs. If a director has particular knowledge, skill or experience relevant to his function (for instance, is a qualified accountant and acting as a finance director), expectations regarding what is reasonable will be judged accordingly (regulation 25). -(Re City Equitable Fire Insurance Co Ltd [1925],Facts:some directors who were negligent escaped liability due to an exclusion clause in the companys articles. It was held that the director had no obligation to give continuous attention to the affairs of the company. Re DJan of London Ltd [1994], a director was negligent in not reading fire insurance form which resulted in the company going into liquidation. Hoffmann LJ held that the standard of care expected of a director was contained in the wrongful trading provisions in s214(4)IA 1986.This recognises the idea of a reasonable director and applies the higher of either an objective or subjective standard.

Duties of DirectorsDuty to avoid conflicts of interest Section 175 CA 2006 - directors, as fiduciaries, must respect the trust and confidence placed in them and should do nothing to undermine or abuse their position as fiduciaries. The practical effect of the rule is that any conflict of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. In the case of a private company, a conflict can be authorised by the other directors of the board unless the companys constitution provides to the contrary. The position is the same for public companies, except that the constitution must expressly permit authorisation by the board. Duty to avoid conflicts of interest Directors have a duty to avoid conflicts of interest after they register a company. Where one may arise they will need to disclose this to non-conflicted directors and allow them to make the decision regarding the relevant transaction.

(Boardman v Phipps [1967],Upjohn in Boardman v Phipps(1966 )26 to whether a reasonable man looking at the relevant facts and circumstances would think that there is a real sensible possibility of conflict with the interests of those whom the fiduciary is bound to protect.Bhullar v Bhullar [2003])

where two directors of a family company were held to be in breach of the no-conflict rule when they acquired property adjacent to the company without telling the company that the property was available for purchase. Their personal interest in acquiring the land was in conflict with their duty to promote the companys interest which required them to pass on the existence of the opportunity to the company which could then have assessed whether to acquire it.Duties of Directors Duty not to accept benefits from third parties Under s.176, a director must not accept a benefit from a third party, which is conferred by reason of (a) his being a director or (b) his doing (or not doing) anything as director. This duty is an aspect of the previous general duty to avoid conflicts of interest, but it has been stated separately in order to ensure that the obtaining of a benefit from a third party by a director can only be authorised by members of the company rather than by the board.

In Towers v Premier waste management Ltd (2011)32 the court of Appeal held that a company director had breached his fiduciary duty when he accepted a free loan ofequipment from a customer without disclosing the transaction or seeking approval for it.

Duties of DirectorsDuty to declare to the companys other directors any interest a director has in a proposed transaction or arrangement with the company Under s.177 CA 2006 a director must declare to the other directors any situation in which they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company. Again this further emphasises the duty to avoid a conflict of interests by ensuring that directors are transparent about personal interests, which could, even remotely, be seen as affecting their judgement.In Neptune (Vehicle washing equipment)Ltd v Fitzgerald (1996) 33Lightman J held that to comply with s177 F ,the former director of the company should have declared his interest and recorded in the minutes the resolutions terminating his employment contract and the payment of 100,000 compensation when a new management sought a declaration that F should have declared his interest in the contract.

QUESTION

The directors of a company owe a strict and non-negotiable fiduciary duty to the company. Directors must act in the best interests of the company and must never allow their personal interests to conflict with their duties. However, this has not always been the case and breach of directors duties are rampant in modern business environment (The Examiner, 2014).

You are required to:

(1).critically examine the laws and legal principles relating to directors duties in the Companies Act 2006 (approximately 1,500 words) AND

(2).provide one (1) mini case study on how directors duty has been breached in a publicly listed company in Malaysia or other countries (approximately 500 words)