23/10/2023

1 DIRECTORS DUTIES
2 Typical governance structure
1 Shareholders
2 • They elect directors at given intervals.
• They can give directors binding instructions on how to run the
business only by special resolution.
• They must approve certain significant and rare transactions/
decisions as required by statute.
3 Directors
4 • Collectively they have the power to run the business and take all
relevant decisions.
• They delegate the day to day running of the business to one of
them, the Managing Director (MD) or Chief Executive Officer
(CEO).
• The MD/CEO delegates particular powers to managers and they
delegate further.
3 The gap filling function of shareholder voting and directors’
duties
• Shareholders ---- Directors
• “Contract” (i.e. articles of association)
• Running the business is delegated to directors
• Need to protect the shareholders
• Articles cannot predict every possible eventuality.
• So, gap fillers are needed.
• Shareholder voting fills gaps by allowing the shareholders to
decide directly on crucial matters.
• Directors’ duties fill gaps by setting standards of conduct.
4 Directors as fiduciaries
(although they are not trustees)
• Similarity between directors and trustees:
• ‘‘that the property in their hands or under their control must be
applied for the specified purposes of the company or the
settlement; and to apply it otherwise is to misapply it.
• So, even though the scope and operation of such obligation differs
in the case of directors and strict settlement trustees, the nature of
the obligation with regard to property in their hands or under their
control is identical, namely to apply it to specified purposes for
others beneficially’’

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 control is identical, namely to apply it to specified purposes for
others beneficially’’
• Selangor United Rubber Estates Ltd v Cradock (No. 3)
5 List of general directors’ duties under CA 2006
• 171. Duty to act within powers
• 172. Duty to promote the success of the company
• 173. Duty to exercise independent judgment
• 174. Duty to exercise reasonable care, skill and diligence
• 175. Duty to avoid conflicts of interest
• 176. Duty not to accept benefits from third parties
• 177. Duty to declare interest in proposed transaction
6 CA 2017
• S. 204. Duties of directors.—
• (1) Subject to the provisions of this Act, a director of a company
shall act in accordance with the articles of the company.
• (2) A director of a company shall act in good faith in order to
promote the objects of the company for the benefit of its members
as a whole, and in the best interests of the company, its
employees the shareholders the community and for the protection
of environment.
• (3) A director of a company shall discharge his duties with due and
reasonable care, skill and diligence and shall exercise
independent judgment.
• (4) A director of a company shall not involve in a situation in which
he may have a direct or indirect interest that conflicts, or possibly
may conflict, with the interest of the company…..
• (8) Any breach of duty, default or negligence by a director in
contravention of the articles of the company or any of its policy or
decision of the board may be ratified by the company through a
special resolution and the Commission may impose any restriction
as may be specified.
•
7 Legal origins of directors’ duties
1 Equitable duties
2 • Duty of loyalty
•
• Duty to avoid conflicts of interest
3 Common law duties
4 • Duty of skill
•

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4 • Duty of skill
•
• Duty of care
8 Remedies for breach
1 Duties deriving from equity
2 • Equitable compensation
• Restoration of the co’s property (constructive trust for the co)
• Account of profits made
• Injunction or declaration
• Rescission of a contract
3 Common law duties
4 • Damages
9 Directors’ duties are owed to the company
• Duties owed to the company not to shareholders
• For a breach of these duties, Only the company can sue not
individual shareholders. The F v H principle!!
• Exception: derivative claims brought by a member on behalf of the
company with the permission of the court.
• Other instances of enforcement:
• After a takeover by the new board of directors
• After the company is wound up by the liquidator
• By the majority of the board against an individual director
10 Large vs small companies
1 • Small and medium sized companies
• Small number of shareholders
• Stable majority in place
• Most shareholders are also directors
• Directors controlled by majority shareholders
2 • Large public companies listed on a stock exchange
• Huge number of shareholders
• No majority is in place
• Shareholders are not involved in management
• Directors are not controlled by shareholders
11 Who owes the duties?
• De jure director: person appointed as such in accordance with a
company's articles of association
• De facto director: person who stands out to third parties as director
without having been formally appointed

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• De facto director: person who stands out to third parties as director

without having been formally appointed
• Shadow director: person in accordance with whose instructions
the board is accustomed to act
• CA 2006, s 251 and cases law
•
12 CA 2006, section 251
• (1) In the Companies Acts “shadow director”, in relation to a
company, means a person in accordance with whose directions or
instructions the directors of the company are accustomed to act.
• (2) A person is not to be regarded as a shadow director by reason
only that the directors act —
(a)on advice given by that person in a professional capacity;
(b)in accordance with instructions, a direction, guidance or advice
given in the exercise of a function conferred by or under an
enactment;
(c)in accordance with guidance or advice given by that person in
that person's capacity as a Minister of the Crown
• (3) A body corporate is not to be regarded as a shadow director of
any of its subsidiary companies by reason only that the directors of
the subsidiary are accustomed to act in accordance with its
directions or instructions.
•
13 Case law on shadow directors
Ø Re Hydrodam (Corby) Ltd [1994]
• ‘‘to establish that a defendant is a shadow director of a company it
is necessary to allege and prove that
1.the defendant directed those directors how to act in relation to the
company,
2.that those directors acted in accordance with such directions; and
3.that they were accustomed so to act.’’
Ø Secretary of State for Trade and Industry v Deverell [2001]
• First instance: subservient role with no independent judgement
• On appeal:
• Real influence is necessary, but not total loss of independent
judgment
• Objective test to ascertain whether there was a direction given
14 Why do we need Dir Duties?
The Corporate Governance Debate….
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The Corporate Governance Debate….
15 Background to Corporate Governance and Director’s duties
• From 1844, company law emerged out of the practice of creating
joint stock companies (trust combined with partnership)
• As companies increased in size, not all shareholders took part in
management, whilst professional managers were increasingly
appointed from the end of C19
• Berle and Means (among others) identified a divergence between
the identities of those who ‘own’ the company (the shareholders)
and those who ‘control’ it (the managers)
• The result was a system in which managers had broad discretion
to allocate resources (known as ‘managerialism’) – this was
underpinned in law by the business judgement rule which made it
difficult for shareholders to challenge.
• Their 1932 analysis in The Modern Corporation and Private
Property is viewed as the starting point for modern corporate
governance.
•
16 Neo classical economics
and director’s duties
• Neoclassical economic theory claims that managerial discretion
allows managers not to pursue the shareholder interest with
sufficient vigour and to spend money on ‘pet projects’.
• Since shareholders are dispersed, they do not have the correct
incentives to monitor what managers are doing and hold them to
account (they face a ‘collective action problem’)
• The result is that managers impose ‘agency costs’ on their
‘principals’, the shareholders.( legally not correct, but
economically/ Morally correct argument)
• This is a problem because the shareholders have a ‘residual
claim’. In other words, they are entitled to what is left over after the
company has operated within the law and ‘ethical custom’ and
everyone else (employees, creditors etc) has been paid their fixed
claims.
• In not maximising the only residual (that is, variable) claim,
managers are not maximising the aggregate wealth of society.
•
•
17 The role of the Director’s duties in controlling the managers?
• Directors’ duties prevent (albeit imperfectly) the directors from
17 The role of the Director’s duties in controlling the managers?
• Directors’ duties prevent (albeit imperfectly) the directors from
acting in a self-interested manner:
• Fiduciary duties can prevent self-interested transactions
• The duty of care can catch the worst examples of passivity on
the part of non-executives (such as failing to catch blatant
fraudsters)
• However, the business judgement rule means that, provided
directors act in good faith, the courts will not supervise the
intensity with which management pursues shareholder returns, nor
the time frames or means they select under s172 CA 2006.
• In other words, the law cannot impose a positive obligation to
maximize shareholder value.
• Company law has, since 1948, given shareholders the right to
remove the directors by simple majority (ordinary resolution: see
s168(1) CA 2006), but, as the number of shareholders grows and
they become dispersed. the costlier it will be for shareholders to
coordinate action to remove directors (‘a collective action
problem’).
•
18 Director’s duties?
19 Sec 171
• Duty to act within powers
• A director of a company must—
• (a)act in accordance with the company's constitution, and
• (b)only exercise powers for the purposes for which they are
conferred
• The Pakistani CA 2017:
• Sec 204 (1) Subject to the provisions of this Act, a director of a
company shall act in accordance with the articles of the company.
•
•
20 Duty to act in accordance with the company’s constitution –
section 171(a)
• Originates from Re Smith & Fawcett Ltd.
• Legal significance of an objects clause or restriction of the power
of directors in the articles of association
• No cases on this.
• Consequence: compensate the company for any loss it suffers as
a result of the act that goes against the constitution

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 • Consequence: compensate the company for any loss it suffers as
a result of the act that goes against the constitution
• Where have we talked about this before??
21 Duty to only exercise powers for the purposes for which they
are conferred - section 171(b)
• Origins: Hogg v Cramphorn case
• Colonel Cramphorn, the managing director of a company, issued
shares to an employee trust controlled by him so as to gain
majority and preclude a hostile takeover.
• Issuing shares in order to change the ownership structure and
preclude a takeover was found to be a breach of the duty of
loyalty.
• The proper purpose of the power of directors to issue shares is to
raise funds for the company. NOT to use the power to liquidate
other shareholders!!
• Pre-emption rights also restrict the board’s ability to allot shares to
persons who are not existing shareholders.
22 The proper purpose doctrine at common law
• Howard Smith v Ampol (1974), per Lord Wilberforce (Privy Council
case from Australia):

• “It [is] unconstitutional for directors to use their fiduciary powers

over the shares in the company for the purpose of destroying an
existing majority, or creating a new majority which did not
previously exist. To do so is to interfere with that element of the
company’s constitution which is separate from and set against
their powers.”
23 Extrasure Travel Insurances Ltd v Scattergood
• Not necessary to prove that the director was dishonest or
knowingly pursued a collateral purpose. The test to be satisfied
consists of the following four parts:
• Identification of the power whose exercise is in question
• Identification of the proper purpose for which this power was
delegated to directors
• Identification of the substantial purpose for which the power was
in fact exercised
• Decision on whether the purpose was proper
•
24 The core fiduciary duty of loyalty
Sec 172
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24 The core fiduciary duty of loyalty
Sec 172
25 Section 172: THE DUTY OF LOYALTY
• A director of a company must 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, and in doing so have
regard (amongst other matters) to—
• (a) the likely consequences of any decision in the long term,
• (b) the interests of the company's employees,
• (c) the need to foster the company's business relationships with
suppliers, customers and others,
• (d) the impact of the company's operations on the community and
the environment,
• (e) the desirability of the company maintaining a reputation for
high standards of business conduct, and
• (f) the need to act fairly as between members of the company.
26 Pakistani CA 2017, sec 204
• 2) A director of a company shall act in good faith in order to
promote the objects of the company for the benefit of its members
as a whole, and in the best interests of the company, its
employees the shareholders the community and for the protection
of environment.
•
27 Exploring the subjective nature of the duty
• Re Smith & Fawcett Ltd: ‘‘bona fide in what they consider – not
what a court may consider – is in the best interests of the
company’’ ( upholding the Business Judgement rule)
•
• Regentcrest v Cohen: ‘‘The question is not whether, viewed
objectively by the court, the particular act or omission which is
challenged was in fact in the interests of the company; still less is
the question whether the court, had it been in the position of the
director at the relevant time, might have acted differently.
• Rather the question is whether the director honestly believed that
his act or omission was in the interests of the company. The issue
is as to the director’s state of mind…’’
28 But the court assesses directors’ state of mind objectively
• Item Software (UK) Ltd v Fassihi: ‘‘The conduct in question is
assessed objectively by the court (to determine whether the
director was acting in good faith or not). If a director acts without

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assessed objectively by the court (to determine whether the

director was acting in good faith or not). If a director acts without
considering the interests of the company and there is no basis on
which he could reasonably have concluded that it was in the
interests of the company, the director will be in breach.’’
•
•
29 Exceptionally An objective test applies when no consideration
was paid to the company’s interests
• Charterbridge Corp Ltd v Lloyds Bank Ltd: where a director has
not thought at all whether an act or omission is in the company’s
interests, the court will apply an objective test to decide:
• “whether an intelligent and honest man in the position of a director
of the company concerned could … have reasonably believed that
the transactions were for the benefit of the company”.
•
30 R (on the application of People & Planet) v HM Treasury
• Judicial review of UK governments policy to direct the UKFI Ltd
(via a Green Book) to manage shares owned in banks like RBS in
a purely commercial manner
• Charity argued that UK government ought to pursue its
environmental policy using its voting power in RBS
• Held:
• Government’s discretion was reasonably used.
• ‘‘In my view, that clearly would have a tendency to come to
conflict with, and hence it would cut across, the duties of the
RBS Board as set out in section 172(1). It would also have given
rise to a real risk of litigation by minority shareholders seeking to
complain that the value of their shares had been detrimentally
affected by the Government seeking to impose its policy on
RBS…’’
31 Sec 173
Duty to exercise Independent Judgement
32 Sec 173
• Duty to exercise independent judgment
• (1)A director of a company must exercise independent judgment.
• (2)This duty is not infringed by his acting—
• (a)in accordance with an agreement duly entered into by the
company that restricts the future exercise of discretion by its
directors, or

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 company that restricts the future exercise of discretion by its
directors, or
• (b)in a way authorised by the company's constitution.
•
33 Duty to exercise independent judgement (section 173)
• Contract committing a company to a long-term policy for
commercial reasons is not a breach. See 173(2) and Fulham BC v
Cabra Estates
• Issue of nominee directors: appointed by a particular shareholder
or group of shareholders or others à if enshrined in the
constitution it will not be a breach by virtue of 173(2) (b).
• Excessive delegation of powers without supervision may be a
breach of this duty and also a breach of the duty of care.
34 Sec 174
Duty to exercise reasonable care, skill and diligence
35 174 Duty to exercise reasonable care, skill and diligence

• (1) A director of a company must exercise reasonable care, skill

and diligence.
• (2) 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, and (b) the general knowledge, skill and
experience that the director has.
36 Pakistani CA 2017, sec 204
• (3) A director of a company shall discharge his duties with due and
reasonable care, skill and diligence and shall exercise
independent judgment.
•
37 What constitutes a breach of the duty of care today?
1 Reasonable behaviour: no breach
2 • Following a reasonable decision making process
• Obtaining competent expert advice
• Putting in place a system to monitor the discharge of delegated
functions and its financial position
3 Unreasonable behaviour: breach
4 • Acting in a grossly negligent manner while making business
decisions

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2
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4 • Acting in a grossly negligent manner while making business
decisions
• Relying excessively on other directors, being a ‘sleeping director’
• Failing to monitor managers and to have internal controls
38 Duty of care:
Stringent or lenient standard of care
1 Stringent standard
2 • Reduction of transaction costs
• Encouraging investment and trust
3 Lenient standard
4 • More difficult to attract talented individuals to act as directors
• Over-cautious and risk – averse decision making leading to lower
profits
39 Re Barings plc (No. 5) [1999] 1 BCLC 433

• Facts: A bank went insolvent due to large scale fraud committed

by a senior manager in the Singapore branch of the bank. The
directors faced disqualification proceedings on the ground of
unfitness (due to breach of their duty of care) because they failed
to supervise management.
• The competence of the respondent was assessed in the context of
and by reference to the role in the management of the company
which was in fact assigned to him or which he in fact assumed,
and by reference to his duties and responsibilities in that role. For
example, where the respondent was an executive director the
court assessed his conduct by reference to his duties and
responsibilities in that capacity
40 Objective standard of Care???
• While the requisite standard of competence did not vary according
to the nature of the company's business or to the respondent's role
in the management of that business, and in that sense, it might be
said that there was a 'universal' standard, that standard had to be
applied to the facts of each particular case. […]
• The court, whilst taking full account of the demands made upon a
respondent by his management role, would determine
incompetence in whatever circumstances and at whatever level of
management it occurred, from the chairman of the board down to
the most junior director.
41 So what kind of duties does a Dir have when they delegate
their functions?
41 So what kind of duties does a Dir have when they delegate
their functions?
• “Each individual director owed duties to the company to inform
himself( herself) about its affairs and to join with his co-directors in
supervising and controlling them.
• Subject to the articles of association of the company, a board of
directors might delegate specific tasks and functions.
• Some degree of delegation was almost always essential if the
company's business was to be carried on efficiently: to that extent,
there was a clear public interest in delegation by those charged
with the responsibility for the management of a business.
42 The responsibility of the office? Objective test???
• A person who accepted the office of director of a particular
company undertook the responsibility of ensuring that he
understood the nature of the duty a director was called upon to
perform.
• That duty would vary according to the size and business of that
particular company and the experience or skills that the director
held himself or herself out to have in support of appointment to the
office. The duty included that of acting collectively to manage the
company.
43 Subjective vs Objective duty?
• Directors had, both collectively and individually, a continuing duty
to acquire and maintain a sufficient knowledge and understanding
of the company's business to enable them properly to discharge
their duties as directors.
• Whilst directors were entitled to delegate particular functions to
those below them in the management chain, and to trust their
competence and integrity to a reasonable extent, the exercise of
the power of delegation did not absolve a director from the duty to
supervise the discharge of the delegated functions. No rule of
universal application can be formulated as to [this] duty.”
44 Four observations on the applicable benchmark for the
standard of care:

• 1. The benchmark is highly situation-specific (depends on the

nature of the business of the company, the role of the defendant
director and particularly whether he was executive or not and the
level or remuneration that he was entitled to).
• 2. A failure to perform basic tasks which leads to material financial
loss normally results in a finding of breach of duty.
 • 2. A failure to perform basic tasks which leads to material financial
loss normally results in a finding of breach of duty.
• 3. An abdication of one’s substantive role as director (complete
inactivity) normally results in a finding of breach of duty.
• 4. Following a reasonable decision-making process and especially
obtaining expert independent advice normally results in a finding
that there is no breach of duty.
•
45 Duty to avoid conflicts of interest

Sec 175
46 175 Duty to avoid conflicts of interest

• (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).
• (3) This duty does not apply to a conflict of interest arising in
relation to a transaction or arrangement with the company.
• (4) This duty is not infringed—
• (a) if the situation cannot reasonably be regarded as likely to give
rise to a conflict of interest; or (b) if the matter has been authorised
by the directors.
• (7) Any reference in this section to a conflict of interest includes a
conflict of interest and duty and a conflict of duties.
47 Pakistani CA 2017 sec 204:
• (4) A director of a company shall not involve in a situation in which
he may have a direct or indirect interest that conflicts, or possibly
may conflict, with the interest of the company…..
•
48 So historically there are two different situations?
There are two types of situation where directors face a conflict of
interest:
• (a) Directors enter into a transaction with the company (e.g.
purchase assets from the company or sell assets to it) either
directly or indirectly usually through another company in which the
director has an interest. This can be labelled as “self-dealing”. Will
 directly or indirectly usually through another company in which the
director has an interest. This can be labelled as “self-dealing”. Will
be dealt with under sec 177-182
• (b) Directors exploit a corporate opportunity which the company
has an interest in, and which usually arises out of corporate
information or out of the company’s assets; again, directly or
indirectly. This can be labelled as “exploiting corporate
opportunities”. The core sec 175 duty.
•
49 Duties( rules) deriving from the law of Trust ( Fiduciaries)
• First no-profit rule: A fiduciary cannot derive any personal
advantage or benefit from the execution of his duty, without the
informed consent of the beneficiary. If he does, he has to account
to the beneficiary for the profit.
• This applies to opportunities that are directly connected to the
management of the trust or company. See e.g. the 1726 case of
Keech v. Sandford [1558– 1774] All ER Rep 230, concerning
obtaining a lease by a trustee in their personal capacity of a
property after the expiration of a lease held on trust for a
beneficiary minor. The rationale was to prevent the exercise of
power of the fiduciary being infected by their own interest:
• ‘‘I very well see, if a trustee, on the refusal to renew, might have a
lease to himself, few trust- estates would be renewed to the cestui
que use; though I do not say there is a fraud in this case, yet [the
trustee] should rather have let it run out, than to have had the
lease to himself. This may seem hard, that the trustee is the only
person of all mankind who might not have the lease: but it is very
proper that rule should be strictly pursued, and not in the least
relaxed.’’
•
50 Duties( rules) deriving from the law of Trust ( Fiduciaries)
• Second no-profit rule:
• “This second no-profits rule stands separately from the first non-
profit rule and its prophylactic function.
• It provides that a fiduciary cannot make a profit where the profit is
afforded to the fiduciary by virtue of her role and where there is a
close connection between the profit that is made and the assets or
legal interests of the trust.
• It is applicable even where the taking of that opportunity does not
put the fiduciary’s personal interests in conflict with his undertaken
duties.”

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 put the fiduciary’s personal interests in conflict with his undertaken
duties.”
•
51 Cook v. Deeks [1916] 1 A.C. 554 [Privy Council decision from
Canada]

• The directors of a Canadian company negotiated on behalf of the

company for a railway construction contract which they eventually
took in their personal capacity, whilst they remained directors of
the company. The company had obtained several prior
construction contracts from the same customer. It was held that
the directors were liable to account for the profit made:
• “Men who assume the complete control of a company’s business
are not at liberty to sacrifice the interests which they are bound to
protect . . . and divert in their own favour businesses which should
properly belong to the company they represent.”
• Note: this fits within the first no-profit rule, as the opportunity is
connected to their duty.
•
52 Case law taking a strict approach (1966 onwards)
53 Phipps v Boardman [1966] UKHL 2

• Lord Upjohn, in his dissenting judgment, took the view that there is
only one substantive rule, the rule that a fiduciary may not put
himself in a position where his interests conflict with the interests
of the beneficiary. He also discarded the view that a company can
have a property interest in information. This view has determined
the reasoning of the courts in subsequent company law cases.
Furthermore, he stated that:
• “The phrase 'possibly may conflict' requires consideration. In my
view it means that the reasonable man looking at the relevant
facts and circumstances of the particular case would think that
there was a real sensible possibility of conflict;
• not that you could imagine some situation arising which might, in
some conceivable possibility in events not contemplated as real
sensible possibilities by any reasonable person, result in conflict.”
54 Industrial Development Corporation (IDC) v. Cooley [1972] 2 All
ER 162

• The managing director of IDC, a construction services company,

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• The managing director of IDC, a construction services company,

was a well-known architect. He was approached in his personal
capacity in relation to a design opportunity which IDC had
previously attempted, but failed, to obtain.
• The third-party company made it clear that it had no intention of
dealing with IDC but were keen to instruct the managing director
personally.
• The court ruled that, as the opportunity was relevant for the
company to know, there was a duty to disclose it to the directors
and failing this, the director was liable to account for the profit
made.
55 Bhullar v Bhullar [2003] EWCA Civ 424

• A director of a deadlocked retail supermarket company (two

members holding 50% of shares each and disagreeing), which
was not actively pursuing any new opportunities, purchased a
property next to one of the company’s existing properties.
• Should that amount to a breach of sec 175??
• The director was held liable to account for the profit made. It was
sufficient that the opportunity was relevant to the general corporate
interest of the company.
56 The Current line of judgements on sec 175
• The current legal position according to most recent cases and a
literal reading of the Act is based on a broad no-conflict rule which
renders the two no-profit rules redundant and abandons any
requirement that the benefit must be made in the course of the
exercise of duty or that company must have a specific interest in
the opportunity.
• Currently, opportunities that come to a director in their private
capacity or in which the company only has a general corporate
interest (without having pursued them or without any connection to
tis assets) are within the scope of the prohibition.
• It is not clear whether the duty is limited to opportunities within the
line of business of the company as the cases are divided on this
point, but it appears that it is not.
• So it is now stricter for the Directors to ensure they don’t have any
conflict of interest, even if they may be acting In their personal
capacity and the opportunity/information is not directly connected
to the Company as such.
•

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 to the Company as such.
•
•
57 O’Donnell v. Shanahan [2009] EWCA Civ. 751

• The Court of Appeal held that directors were liable to account

under the no-conflict rule where they, having failed to broker the
sale of a property on behalf of the company’s client, participated
themselves in the purchase of the property, which resulted in the
company not receiving the commission it was due to receive under
the original deal. Liable???
• Rimer LJ also concluded that the rule is not subject to any
business line limitations, and therefore it applies to opportunities
that are outside the company’s line of business, because directors
are subject to “wider obligations of accountability”.
• This position was affirmed by the High Court decision in Cullen
Investments Limited v. Brown [2017] EWHC 1586.
58 Does section 175 apply post-resignation?
• CA s 170 (2): A person who ceases to be a director continues to
be subject— (a) to the duty in section 175 (duty to avoid conflicts
of interest) as regards the exploitation of any property, information
or opportunity of which he became aware at a time when he was a
director.
59 Canadian Aero v. O’Malley [Canadian 1974 case]

• The Canadian Supreme Court held that an opportunity could not

be taken:
• (i) where the opportunity is a maturing business opportunity,
• (ii) which the company is actively pursuing, and
• (iii) either the director resigned in order to take the opportunity or it
was afforded to him by his position whilst a director.
•
60 Island Export Finance Ltd v Umunna [1986] BCLC 460

• “A director's fiduciary duty did not necessarily come to an end

when he ceased to be a director.
• A director was precluded from diverting to himself a maturing
business opportunity which his company was actively pursuing
even after his resignation where the resignation was prompted or
influenced by a desire to acquire that opportunity for himself.”
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 even after his resignation where the resignation was prompted or
influenced by a desire to acquire that opportunity for himself.”
61 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200

• “Where directors are firmly in place and dealing with their

company's property, it is understandable that the courts are
reluctant to enquire into questions such as whether a conflict of
interest has in fact caused loss. […]
• Where, however, directors retire, the circumstances in which they
do so are so various, as the cases considered above illustrate,
that the courts have developed merits based solutions.
• At one extreme (In Plus Group v Pyke) the Defendant is director in
name only, so when he resigns, is it fair to hold him to a continuing
duty under sec 175?
• At the other extreme, the director has planned his resignation
having in mind the destruction of his company or at least the
exploitation of its property in the form of business opportunities in
which he is currently involved (IDC, Canaero, Simonet, British
Midland Tool).
62 Is there a middle ground??
• In the middle are more nuanced cases which go both ways: in
Shepherds Investments v Walters the combination of disloyalty,
active promotion of the planned business, and exploitation of a
business opportunity, all while the directors remained in office,
brought liability;
• in Umunna, Balston, and Framlington, however, where the
resignations were unaccompanied by disloyalty, there was no
liability.”
•
63 177 Duty to declare interest in proposed transaction or
arrangement

• (1) If a director of a company is in any way, directly or indirectly,

interested in a proposed transaction or arrangement with the
company, he must declare the nature and extent of that interest to
the other directors.
• (2) The declaration may (but need not) be made: (a) at a meeting
of the directors, or (b) by notice to the directors in accordance
with: (i) s 184 (notice in writing), or (ii) s 185 (general notice).
• (4) Any declaration required by this section must be made before
the company enters into the transaction or arrangement.
 • (4) Any declaration required by this section must be made before
the company enters into the transaction or arrangement.
• (6) A director need not declare an interest—
• (a) if it cannot reasonably be regarded as likely to give rise to a
conflict of interest;
• (b) if, or to the extent that, the other directors are already aware of
it (and for this purpose the other directors are treated as aware of
anything of which they ought reasonably to be aware); or
64 Sec 182 Declaration of interest in existing transaction or
arrangement

• (1) Where a director of a company is in any way, directly or

indirectly, interested in a transaction or arrangement that has been
entered into by the company, he must declare the nature and
extent of the interest to the other directors in accordance with this
section.
• This section does not apply if or to the extent that the interest has
been declared under section 177 (duty to declare interest in
proposed transaction or arrangement).
65 Sec 183 Offence of failure to declare interest
•
• (1) A director who fails to comply with the requirements of section
182 (declaration of interest in existing transaction or arrangement)
commits an offence.
• (2) A person guilty of an offence under this section is liable— (a)
on conviction on indictment, to a fine; (b) on summary conviction,
to a fine not exceeding the statutory maximum.
66 Courts discretion: excuse the Dir of any breach!!!
• Sec 1157
• Power of court to grant relief in certain cases
• (1)If in proceedings for negligence, default, breach of duty or
breach of trust against—
• (a)an officer of a company, or
• (b)a person employed by a company as auditor (whether he is or
is not an officer of the company),
• it appears to the court hearing the case that the officer or person is
or may be liable but that he acted honestly and reasonably, and
that having regard to all the circumstances of the case (including
those connected with his appointment) he ought fairly to be
excused, the court may relieve him, either wholly or in part, from

67
 those connected with his appointment) he ought fairly to be
excused, the court may relieve him, either wholly or in part, from
his liability on such terms as it thinks fit.
•
67 Ratification of breaches of duty by directors
• Section 239 Companies Act 2006
• All breaches of duty are now ratifiable: negligence, default, breach
of duty and breach of trust
• Modification of the pre-existing common law process: the votes of
the director concerned and of any member connected with him
must be disregarded.
• Ratification is also possible by unanimous agreement of all
shareholders
• The last sub-section preserves pre-existing case law that
invalidates a ratification if it constitutes fraud on the minority.
• Pakistani CA 2017 sec 204:
• (8) Any breach of duty, default or negligence by a director in
contravention of the articles of the company or any of its policy or
decision of the board may be ratified by the company through a
special resolution and the Commission may impose any restriction
as may be specified.
•