Director’s duties question

Question 5 Zone B 2021 – DD

Supermarche plc runs a chain of supermarkets. The company’s directors are Alice, who is an accountant,
Brian and Clarissa. Pamela owns 40 per cent of Supermarche’s shares. She is the mother of Brian and
Clarissa, and often tells them what decisions she thinks they should take at board meetings.

In 2020, the directors voted to sell only free-range eggs and poultry in the company’s supermarkets.
They did this because they felt it was ethically right. Their decision reduced the company’s profits by
£200,000.

In January 2021, Brian began working as a consultant for Thriftiness plc, which also runs a chain of
supermarkets. Brian’s contract with Thriftiness says it will pay him £250,000 a year for his work, but this
will be reduced to £100,000 if he ceases to be a director of Supermarche.

In February 2021, Supermarche purchased, for £300,000, three stores from Martwall plc, another
supermarket chain. Supermarche’s board spent 10 minutes discussing the purchase. Alice voted in
favour because she had looked at the accounts produced for these three stores and thought the stores
looked very profitable. In fact, the stores had been trading at a loss for several years, as the accounts
showed, and were accordingly worth far less than the price paid by Supermarche. Brian and Clarissa
approved the purchase because Pamela had told them to do so.

Supermarche has recently appointed a number of new directors. Advise them whether Supermarche
could take any action in respect of the foregoing events.

Introduction

The question above calls for a discussion on the law of directors duties and how the law applies to Brian,
Alice and Clarissa and whether Pamela as well can be caught by the law on directors duties since she
seems be to acting as a shadow director based on the facts of the case. Directors owe a duty to the
company as per Percival v Wright. Any breach of duties by the director, is wrong done to the company.
The company can bring a claim against the said director/s and as to account for the profit made as per
Foss v Harbottle.

The directors decision to only sell free-range eggs

To begin, the first issue to be addressed is with regards to the director’s decision to only sell free-range
eggs and poultry in the company’s supermarkets as they felt that this was ethically right to do. Their
decision then led to the company’s profits to be reduced by £200,000.

By virtue of s172(1) of the CA 2006, provides that a director must act in a 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, and in doing so have regard towards the matters from (a) to (f)

Section 172, is the compromise which proposes that directors should promote ‘enlightened shareholder
value.’ For example, directors should ultimately promote the interests of the shareholders, but at the
same time taking into account the company’s relationship with other stakeholders.
Therefore, on the facts of the case, it can be argued that the Directors of Supermache should have
considered efforts to maximize profits for shareholders, the act of using free-range eggs, have led to a
drop to the company’s income, and that goes against the need to promote the success of the company.

However, the Directors of the Company may argue that they believed that the act of selling free-range
eggs, is in the benefit of the company in the long run by virtue of s172(1)(a) and this act will have a
positive impact on the community and the environment by virtue of s172(1)(d).

The difficulty under this section is that of the interest between the company and the stakeholders
between subsection (a) to (f). Due to some of the factors, not being in concern or priority of the
shareholders above profit. It is advised that Directors take detail minutes of meetings and decisions
which will help them prove that the factors listed have been noted.

Next, in reference to s174(1) of CA 2006, whereby it states that a director of a company must exercise
reasonable care, skill and diligence and by virtue of s174(2) of CA 2006, this means the care, skill and
diligence that would be exercised by a reasonably diligent person with, (a) the general knowledge, skill
and experience that may reasonably be expected of a person carrying out the functions, carried out by
the director in relation to the company(objective test), and (b) the general knowledge, skill and
experience that the director has(subjective test).

Hence by virtue of s174(2)(a), the question that needs to be answered is whether, any other director in
the same position as Alice, Brian and Clarissa would have acted in the same way? In this case, no. Any
reasonable director would know that the sale of an alternative product will have an effect on the
company’s income. Consumers are accustomed to consuming normal eggs, the act of only selling free-
ranged eggs, would almost certainly cause a fall in the company’s income. Therefore, any reasonable
director would have been aware of such a repercussion.

It needs to be noted that if a director fails the objective test, there is generally no need to even consider
the subjective test.

Brian

Moving on, with regards to Brian, it can be seen that he is a director of Supermache Plc and Thriftiness
Plc, both companies which are in the same line of business, as they run a chain of supermarkets. He also
receives a benefit of £250,000 a year from Thriftiness for his work.

Brian’s actions can be seen to be in breach of s175(1) of the CA 2006, whereby 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.

This section conflates or combines three equitable principles but for Brian’s case, only the first two will
apply.

Firstly, is the ‘no conflicts rule,’ where a fiducirary must not put himself in a position where his duty of
loyalty to the company and his personal interest may conflict. Like in Aberdeen Railway Co Ltd v Blackie
Brothers, the courts held that a director cannot enter into an agreement that has competing interest.
Also in Bhullar v Bhullar 2003, it was stated that by being a director of two competing companies
amounts to a breach of s175 of CA 2003.
Hence in Brian’s case, since both the companies are in the same line of business and by such, apprarent
conflict with each other.

Then the provision of s176 of CA 2006, which is in concern with the fact that a director shall not receive
any third-party benefits, has now been codified as a ‘non-profit rule’ under s175(1) of the CA 2006.