Professional Documents
Culture Documents
DLS - DIRECTOR DUTIES Part 2
DLS - DIRECTOR DUTIES Part 2
Section 175(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 interest of the company."
- JJ Harrison (2002) - It was held that the proceeds / profits made from a breach of fiduciary duty is held by the director as a constructive trustee.
- Bray v. Ford (1896)
Lord Herschell stated “it is an inflexible rule of equity that a person in a fiduciary position is not allowed to put himself in a position where his interests and
duty conflict."
Diverting Corporate Opportunities (whether in same line of business or not) Competing Directorships
The company (Regal) owned a Cinema. The directors wished to buy two further Cinemas so that all the three Cinemas can be sold at a profitable value. Regal
formed a subsidiary for acquiring additional cinemas. The landlord was not ready to grant the lease to the subsidiary unless the subsidiary paid up capital was
at least £5000. At that time Regal could not inject more than £2000. The directors, therefore, decided to inject the remainder £3000 in the subsidiary. Later,
the whole business was sold off and the directors made a handsome profit. Later, the directors were sued for breach of fiduciary duty and the company
claimed for accounts of profits.
Lord Russell held the directors liable as they fiduciary is not allowed to make a profit from exercising his fiduciary obligations. This is not dependent on the
commission of fraud or mala fide intentions - it is simply based on making of profit.
Corporate Opportunities
It will be a breach of fiduciary duty by a director to appropriate for his own benefit and economic opportunity which is considered to belong rightly to the
company which he
serves.
This is because the opportunity is considered as the asset of the company which cannot be misappropriated by the directors.
Could held (Roskill, J) that he was liable to the company for all the profits received under the contract. The information which came to the MD while he was
with the company was of concern to the company and was relevant for them to know. He had a duty to pass that information to the company. It was irrelevant
that he was approached in his personal capacity and that the Gas Board would have never contracted with IDC.
- Peso Silver Mines v. Cropper (1966) (SC of Canada) only persuasive authority and other common law jurisdictions have taken lenient
approach in this but not UK
Peso was offered the opportunity to buy 126 mining claims, some of which were located adjacent to the company's existing mining territories. The Board
bona fide declined the offer because of the financial state of the company, the risks involved and value of these mining claims. Later, three of the company's
directors along with the company's geologists formed a syndicate (partnership) and purchased these claims, which turned out to be successful / profitable.
The company later claimed that the profits are held on constructive trust by directors.
The court held that there is no violation of director duties as the initial decision of the directors to reject the opportunity was made in good faith and for
sound commercial reasons in the interest of the company.
Courts held that even though the Bhullar board had resolved not to buy further to disclose and forward the opportunities to the company.
It seems that any opportunity within the company's line of business is off limits to the director unless the company's permission to proceed is first obtained.
This strict approach was reaffirmed by the CoA in O'Donnell v. Shanahan (2009), where Rimer, LJ stated the rationale of the "no conflict and no profit rules"
is to underpin the fiduciary duty of undivided loyalty to his beneficiary. If an opportunity comes to him in his capacity as a fiduciary his principal is entitled to
know about it. The director cannot be left to make the decision as to whether he is allowed to help himself to its benefits.
Competing Dictatorships
Initially it was thought that there was a duty to avoid conflict between personal interest and duty as a company's director. Therefore, a director was allowed
to hold offices in two competing companies - Chitty, J in London & Mashonaland (1891).1
However, the modern courts have taken a stricter stance for competing directorship and in Bristol & West Building Society, Millet J held that double
employment is clearly an example of conflict of interest.
Sedley, J in Plus Group stated that it is questionable whether London & Mashonaland still stands as good law.
Section 175(7) - now, clearly states that competing directorships would be a breach of s. 175.
Such duty, whether breached or not, after resignation will depend on the facts of the case.
the director uses the trade secrets (such as company databases, customer lists, supplier's agreements and business and sales strategy) of the company in
establishing the competing business. (Item Software v Fassihi)
the director takes a corporate opportunity which was offered to the company while he was a director (Cook v. Deeks)
Authorization of Breach
As seen above the case law developed on avoidance of conflict is very strict and fetters entrepreneurial activity by existing directors.
Company Law Review recommended that law should only prevent the exploitation of business opportunities where there is a clear case of exploitation.
Self-Dealing
Section 176 prohibits the directors from accepting benefits conferred by reason of:
This duty will not be violated if acceptance of benefits cannot reasonably be regarded as likely to give rise to a conflict of interest. The term 'benefit' is
undefined in the act, however, the Hansard (parliamentary recordings) that ordinary dictionary meaning should be given (which includes non-financial
benefits as well). Unlike Section 175 breach of this duty cannot be avoided by prior authorization.
It requires a director to declare / disclose any interest, whether direct or indirect that he has in a proposed transaction. The duty is only to disclose the interest
before entering into the transaction.
Boulting (1963)
Upjohn, LJ "directors may sometimes be placed in a position that though their interest and duty conflict, they can honestly and properly give their services to
both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands
what are his rights in the matter, there is no reason why he should not relax the rule and it may commercially be very much to his advantage to do so.
Informal disclosure to the board is sufficient. (Lee v. Panavision (1992)), Runciman (1992), Macpherson (1999). However, precise information must be given.
(Gwembe Valley (2000))
In certain transactions the chances of conflict are so high that a members' approval is required to be taken before undertaking such transactions. These
transactions are:
(a) Section 188 of CA 2006 - long term service contract of director (more than 2 years)
(d) Section 215 – Section 222 of CA 2006 – payment* for loss of office
Requires that SPT (substantial property transaction) which involves acquisitions or disposal of substantial non-cash asset be approved by shareholders.
SPT is where the assets value exceeds £100,000 or 10% of the company's net value (whichever is lower).
The company will not be liable where the approval is not forthcoming.
SPT will not be valid without prior shareholder approval and no obligation of the company will arise under such transaction and the contract will be voidable
at the option of the company.
Re Duckwari (1997)
The company purchased an asset worth £495,000 from a person connected with a director. Four years later, it was found that the asset was worth £90,000.
The director was held liable to account for any profits made as a result of the breach.
CA 1980 following the serious of DTI (Department of Trade and Investment) investigations severely tightened the law governing loans to directors.
CA 2006 - Section 194 - Section 214 requires a prior approval of the company's members (and in some cases even from the members of the holding company)
for giving a loan to director / shadow director/connected person or giving a guarantee on their behalf.
A loan without the shareholders' approval will be voidable at the instance of the company.
Whether the company choses to avoid a loan or not, the director will be liable to account for any gains he made to the company and indemnify the company
for any loss it suffers.
REMEDIES
The company can seek the following remedies from a director for breach of his director duties:
(i) liability to account even arises where the director had acted honestly and that the company could not have obtained the benefit in any case
(Regal Hastings and IDC v. Cooley).
(ii) (Murad v. Alsaraj (2005)
Arden, LJ- stated that "equity imposes stringent liability on a fiduciary as a deterrent in the interest of efficiency and to provide an incentive to
fiduciaries to resist the temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an extensive liability to
account."
(iii) The liability to account by the director is by way of constructive trust.
JJ Harrison (2002)
Chadwick, LJ stated "any director who disposes of the company's property in breach of their fiduciary duties are treated as having committed a breach of
trust...he is also described as a constructive trustee.
(d) injunctions
(e) recession of contract where the director failed to disclose the interest.
(b) Courts relieve the liability of the directors under s. 1157 of CA 2006
RATIFICATION
Section 239 of CA 2006- provides that the shareholders can ratify any breach committed by the directors by ordinary resolution.
Section 239(3) The ratification is effective only if the votes of director is in breach are disregarded. [Under old law the director in breach could also vote
Northwest (1887) - The law was changed following the CLRSGs recommendations].
1) First, any authorisation (and presumably any ratification too) will be effective only if the director has made full and frank disclosure to the shareholders
(prior to their voting) about the director's conduct: Cullen Investments Ltd v Brown [2015]. The shareholders must know fully what it is they are being asked
to authorise or ratify;
2) Second, CA 2006 tightened up the process for ratifications (it did not do so for authorisations and the reason for this inconsistency is unclear). Under
s.239(4), a ratification is effective only if it is passed without counting the votes in favour of the ratification by the wrongdoing director, or anyone connected
with them. Thus, s.239(4) seeks to ensure that ratifications, at least, must be passed in a somewhat disinterested way by not allowing the votes of the
wrongdoer, or anyone connected with them, to be counted;
3) The third qualification is a little more complex and uncertain. At common law, it was unclear whether all breaches of duty were capable of being
authorised/ratified by shareholders. Two points of view emerged:
a. Some academics, drawing on case law in support, argued that some breaches of duty (which were labelled 'fraudulent breaches') were simply beyond the
capacity of shareholders to authorise or ratify. This was true however disinterested the shareholder vote might be. Because the authorisation/ratification of
this class of breach would be ineffective, the company would always be free, later, to sue the director for breach. And a shareholder would also be able to
bring what was then known as a 'derivative action';
B. Other academics, again with some case law support, took a different line. They argued that even fraudulent breaches of duty could be authorised/ratified
but such breaches of duty would have to be authorised/ratified in a very disinterested
Re D'Jan of London
The director had incorrectly filled an insurance form due to which coverage was not given by the insurer when the company's property caught fire. The
director's liability for breach of Section 174 was partly relieved. The rationale behind this was that 99% of the company's shares were owned by director
himself and the 1% remaining by his wife. The economic reality was that the director made a loss for himself. The judge observed that it seems odd that a
person found to have been called been guilty of negligence can never satisfy that he acted reasonably.