Directors of a Company

Who are directors

• Definition - Sec 2 ;includes shadow directors and alternate or

substitute director
• Not an employee unless is employed separately
• May or may not be a member
Requirements for Directors

• Sec 196(1) –minimum no of directors:

(a) 1 for a private company
(b) 2 for a public company
• Residential requirement: Section 196(4)

• Sec 196(2)- must be a natural person and at least 18 years old

Disqualifications of Directors

• Section 198 (1) (a)- (e)

• Exceptions: 198(3)- (6)
• Sec 201- Consent requirement
• Retirement of directors- sec 205
• Removal of directors- sec 206
• Vacation of office of director- sec 208
• Sole director- Sec 209
• Service contracts- Sec 231 and 234
• Function of Board- Sec 211
• Proceedings of Board (Third Schedule)- Sec 212
• Fees of Directors- sec 230
• Prohibition of tax free payment- sec 226
• Payment for loss of office
Director Duties

(1) Statutory duties

(2) Fiduciary duties

(3) Duties of skill, care and diligence

Percival Wright
F:A director was approached by a shareholder wishing to sell his
shares. The director agreed without disclosing pending takeover bid.
The shareholder claimed that the director had breach the fiduciary
duty.

H: The directors only owe fiduciary duties to the company as a whole

and not to individual shareholders.
Exceptions

• Where there is agency relationship between the directors and the

members

Allen v Hyatt
F: Directors approached the shareholders and induced them to give
the option to purchase their shares for the purpose of amalgamation
and the directors made profit
H: Directors became agents of the shareholders & owe such duty to
them
• In other special circumstances i.e.nature of the company &
transaction, dependence of the shareholders on the directors etc

Coleman v Myers
H: The directors owe fiduciary duties to the shareholders because of
the family character of the company, the position of father and son
in the family and in the company and their high degree of inside
knowledge
Fiduciary Duty

• Duty to act bona fide in the interest of the company

• Duty to act for proper purpose

• Conflict of interest
Duty to act bona fide in the interest of
the company
• ‘ to act honestly’
Gowans J in Marchesi v Barnes & Keogh
‘ acting bona fide in the interests of the company in the performance
of the function attaching to the office of director’
Who is to decide what is in the interest
of the company
• May be decided by the company at general meeting
• When powers left to the BOD, it would be the directors who decide.
• Directors should act bona fide in what they consider in the interest of
the company
• Court will only interfere if no reasonable man would consider it as
bona fide in the interest of the company
Case: Re Smith & Fawcett Ltd

• Lord Greene MR
They must exercise their discretion bona fide in what they consider-
not what the court may consider-to be in the interests of the
company, and not for any collateral purposes
Re W.& M. Roith Ltd

F: R owned a majority shares in a company and was also a director. R

wanted to make a provision for his wife after his death and had
entered into a contract with the company. Later R died and his
executor claimed his wife pension. Liquidator rejected the claim.

H: The directors had entered into a contract which was not in the
interest of the company
• John Crowther Group Plc v Carpets International Plc
Vinelott J:
…directors owe a fiduciary duty to act in the interest of their company
and to make full and honest disclosure to shareholders before they
vote on such a resolution
• Dawson International Plc v Coats Patons Plc & Ors
H: When the directors decided to advise the shareholders concerning a
particular bid they have a duty to advise them in good faith and not
to mislead either deliberately or carelessly
Whose interest is the company’s
interest
• Interest of the shareholders

• Interest of the creditors

• Interest of the employees

Interest of the Shareholders

• Greenhalgh v Arderne Cinemas Ltd

‘the company as a whole’ does not mean the company as a
commercial entity distinct from its corporators, it means the
corporators as a general body

• i.e.interest of the shareholders of the company (as a whole)

Interest of the Creditors

• Dillon LJ in Multinational Gas & Petrochemical Co (1983) 2 AER 563

‘ they (the directors) owe fiduciary duties to the company though not
to the creditors, present or future, or to individual shareholder’
• Judicial recognition in UK, Australia, NZ ; creditors interest should be
taken into consideration where the company is insolvent

• Lornho v Shell Petroleum, Lord Diplock

‘ it is the duty of the Board to consider…the best interest of the
company. These are not exclusively those of its shareholders but may
include those of its creditors’
Other Cases

• Walker v Wimborne
Mason J: It should be emphasized that the directors of a company in
discharging their duty to the company must take account of the
interest of its shareholders and creditors…His interests (creditors)
may be prejudiced by the movement of funds between companies in
the event that the companies become insolvent
• Winkworth v Edward Baron Development Co
• Ltd
Lord Templeton: A duty is owed by the directors to the company and
to the creditors of the company to ensure that the affairs of the
company are properly administered and its property is not dissipated
or exploited for the benefit of the directors themselves to the
prejudice of the creditors
Interest of the Employees

• Sec 309(1) of UK CA 1985

Directors need to regard the interest of the employees of the
company in the performance of the functions and duties

• Similar provision in S’pore CA but not in our CA

Duty to exercise power for proper
purpose
• Power vested to the directors by the AOA is held in trust for the
company and must not be exercised for improper purpose
• Similarly with the company’s property
• Liable for breach of fiduciary duty
• Improper purpose in the exercise of power or misapplication of
company’s property overrides the bona fide of the directors
• Re Duomatic Ltd
F: Directors made a payment (compensation) to ex-director and not
disclosed to the shareholders as required by the Act

H: The honest belief of directors due to their ignorance of the law does
not justify the breach of duty of the directors.
Case: Howard Smith Ltd v Ampol
Petroleum Ltd

F: App (HS) & Resp (AP) wanted to take over Millers. Directors of
Millers considered that it would be in the best interests of the
company to be taken over by App. Accordingly Millers issued new
shares to App in order to block the takeover by Resp
Privy Council:Nullified the issue of shares, the directors had misused
their power

Lord Wilberforce:
This was an abuse of the power even though the directors had not
acted to further their self-interest
Conflict of Interest

i) No profit rule

ii) No conflict rule

- transaction with the company
- competition with the company
No profit rule

• Director/s cannot use his position as director to obtain profit for

himself:
- By misappropriating the assets of the company
- Misuse the information of the company
- Usurping the opportunities that are available to the company
Regal Hastings Ltd v Gulliver

F: Regal wanted to acquire the lease of two cinemas. For that purpose
they incorporated Amalgamated(subsidiary). Directors of Regal
subscribed certain amount of shares from Amalgamated. The deal to
acquire the cinemas failed. Later all the shares in Regal and
Amalgamated were sold to a new owner. Directors who bought
shares in Amalgamated make a profit. New owner of Regal claimed
that they had breached their duty.
H: The directors were held liable to account the profit made. The
opportunity had come to them in their capacity as fiduciaries of the
company. They have to disclose that to the shareholders.
Regal Hastings Ltd v Gulliver:

“…they(the directors) may be liable to account for the profits which

they have made, if, while standing in a fiduciary relationship to (the
company), they have by reason and in course of that fiduciary duty
made a profit.”
Lord Russell of Killowen
IDC Ltd v Cooley
F: C was the managing director of IDC Ltd. The company tried to obtain
a contract from Eastern Gas Board but failed. However the EGB
approached C to become their project manager of the said contract.
C resigned from IDC and accept the post.
H: C liable to account the profit made to IDC. He is guilty of putting
himself in a position in which his duty to the company and his self
interest in conflict
Canadian Aero Service Ltd v O’Malley
F: Defendants negotiated on behalf of Canadian Aero certain contracts
for a project in Guyana. While the negotiation was still in progress,
the defendant formed a company, “Terra” and later resigned from
Canadian Aero. Terra then bid the said project and successfully
obtained it.
SC of Canada:
Defendants liable to pay damages to Canadian Aero as they had
breached their fiduciary duty by allowing a conflict of interest.Their
resignation had been prompted by the wish to take the contract for
themselves.
Furs Ltd v Tomkies
H: The director who took a bribe or commission in relation to a
transaction that he was negotiating on behalf of the company was in
breach of his fiduciary duty.
Exceptions

• When the company has considered the proposal and has

decided against it.

Peso Silver Mines Ltd v Cropper

F: Plf company was offered by a prospector to buy some
mining claims. BOD of Plf rejected the offer. At that time the
def was a member of the board. The def was later
approached by the prospector to buy the claims. He formed
a syndicate for that purpose. Later he was dismissed from
the board.
H: The defendant was not in breach of his duty. Plf had for good
reasons rejected the offer
• When the company has known at all times that the director’s
interest to take up the opportunity rejected by the company
Refer: Queensland Mines Ltd v Hudson

• A company by agreement release the directors from the fiduciary

duty
Refer : New Zealand Netherlands Society ‘Oranje’ Inc v Kuys
No conflict rule

Directors have a duty not to place themselves in a position where

their duties and their personal interests conflict

i) Transaction with the company

- A director of a company cannot enter into a transaction with the
company without disclosing the fact that he has interest in the
transaction directly or indirectly
• Failure to disclose, the transaction becomes voidable at the instance
of the company
• He will be in breach of fiduciary duty and accountable for any profit
made.
• Disclosure of interest has been imposed by Secs 132A and 131 –
criminal penalty for non-compliance
• Compliance to the statutory duty has no effect on the validity of the
contract
Aberdeen Railway Co v Blaikie Bros
F: ARC entered into a contract to purchase equipment from a firm of
partnership (BB). A director of ARC did not disclose to other directors
that he is a partner in BB.

H: The director had breached his duty by placing himself in a position

where his personal interest conflicted with his duty to the company
ii) Competition with the company
• Being a director to two or more competing companies
• Where a director himself set up a company competing with his
present company for the purpose of obtaining the opportunities of
the latter.
Case: Cook v Deeks
Cooks v Deeks

F: A company had four directors (Defendant & Plaintiff) who were also
the only shareholders. There were negotiations by the defendants
for a lucrative contract with Canadian Pacific Railway. When the
contract was awarded to the company, the defendants formed
Dominion Construction Company to carry the work. Plaintiff on
behalf of the company sued the Defendants.
H: The Defendants were in breach of their fiduciary duty as directors
and the company may recover the profit.
Duty of Skill, Care & Diligence
i) Reasonable man test
Re City Equitable Fire Insurance Co Ltd
‘ A director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a
person of his knowledge and experience’
- If a director has no qualification, as long as he acts honestly
within his power, not liable for mere errors of judgment
Basic skill test

Daniels v AWA Ltd

• A director must acquire a basic understanding of the business
• Directors are under a continuing obligation to keep informed about
the activities of the company
• General monitoring of the company’s business affairs; should attend
board meetings regularly
ii) Duty of care
Neville J in Re Brazilian Rubber Plantations and Estates Ltd:
A director must use reasonable care in discharging his duty and such
reasonable care is to be measured by the care an ordinary man
might be expected to take in the same circumstances on his own
behalf
Re City Equitable
A director is required to display that degree of care that would be
reasonable for a person of his experiences and qualifications
iii) Duty to be diligent
Re City Equitable
A director is not bound to give continuous attention to the affairs of
the company, his duty arises intermittently

- Exercise reasonable diligence in the performance of his duties

Statutory Duties

• The are four main agenda in the statutory regulation:

• Disclosure of interests by directors
• Improper use of information
• Prohibited transaction between company and its directors/persons connected to
directors
• Shareholders’ approval for substantial property transaction.
Statutory Duty

• Imposed by the Companies Act- sec 213- 221

• Scope – Sec 210
• Effect – sec 222
Disposal by Directors Company’s
Undertakings or Property
• Sec 223
Loans to directors

• Sec 224, 225

Transaction with Directors

• Section 228
• Exceptions – sec 229