Thursday Lecture 7

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Beijing Normal UniversityEnglish Company
Law/Commercial Law

• Thursday - Lecture 7
• Directors Duties
• A. Appointment Power
• B. Common Law Duties
• C. Fiduciary Duties

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Directors

• Lecture Outline
• A. Appointment and Power
• B. Common Law Duties of Skill and Care
• C. Fiduciary Duties

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Directors DutiesA. Appointment Power

• Appointment
• e.g. managing director, Table A arts 72 and 84.
• Power
• Type of directors
• Number of directors
• Public plc at least two directors s.282 (1)
  CA 1985
• Private Ltd at least one director s.282 (3) CA
  1985
• Ineligibility of individuals to be directors

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Directors DutiesA. Appointment Power

• Why have directors
• to manage?
• efficiency?
• Berle Means thesis

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Directors DutiesA. Appointment Power

• Two Types of directors duty
• Fiduciary duties
• (trustee like -protect and preserve)
• Common Law Duties of Skill and Care
• risk taking entrepreneur

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Directors DutiesA. Appointment Power

• Duties owed to
• 1. Company
• 2. Employees
• 3. Shareholders
• 4. Creditors
• !!!!THE COMPANY HAS TO BRING THE ACTION!!!

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Directors DutiesA. Appointment Power

• 1. Company
• Percival v. Wright 1902 2 Ch. 421

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Directors DutiesA. Appointment Power

• 2. Employees
• s.309 CA 1985
• 309 Directors to have regard to interests of
  employees
• The matters to which the directors of a company
  are to have regard in the performance of their
  functions include the interests of the companys
  employees in general, as well as the interests of
  its members.

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Directors DutiesA. Appointment Power

• 3. Shareholders
• not individually - Macaura/Percival

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Directors DutiesA. Appointment Power

• 4. Creditors
• West Mercia Safetywear v. Dodd
• When the company is approaching an insolvent
  liquidation should the directors attention turn
  to the creditors instead of the shareholders?

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B. Common Law Duty of Skill and Care

• First Main Directors Duty
• Common Law Duty of Skill and Care
• because the director is a risk
  taker/entrepreneur
• a duty of competence

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B. Common Law Duty of Skill and Care

• Historically low and highly subjective
• Re City Equitable Fire Insurance Co 1925 Ch.407
• Romer, J
• a director need not exhibit in the performance
  of his duties a greater degree of skill and than
  may reasonably be expected from a person of HIS
  knowledge and experience. At p.427

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B. Common Law Duty of Skill and Care

• non-executives - Re Cardiff Savings
• Bank 1892 2 Ch.100
• (Marquis of Bute)
• Dorchester Finance v. Stebbing
• 1989 BCLC 498

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B. Common Law Duty of Skill and Care

• Present test for common law duty of skill and
  care
• s.214 Insolvency Act 1986

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B. Common Law Duty of Skill and Care

• s.214 Insolvency Act 1986
• (a) the general knowledge, skill and
  experience that may reasonably be expected of a
  person carrying out the same functions as are
  carried out by that director in relation to the
  company, and (OBJECTIVE)
• (b) the general knowledge, skill and experience
  that that director has. (SUBJECTIVE)

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B. Common Law Duty of Skill and Care

• Two cases illustrate this part objective part
  subjective test
• Re DJan of London
• 1993 BCC 646
• Norman v. Theodore Goddard 1992 BCC 14.

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B. Common Law Duty of Skill and Care

• Consequences of breaching common law duty of
  skill and care?
• Service contract (for Executive Directors)
• Remedy
• Ratification
• Insurance/multinational companies?

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B. Common Law Duty of Skill and Care

• Defence - s.727 CA 1985Defence s.727 CA 1985
• 727 Power of court to grant relief in certain
  cases
• (1) If in any proceedings for negligence,
  default, breach of duty or breach of trust
  against an officer of a company or 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 that officer
  or person is or may be liable in respect of the
  negligence, default, breach of duty or breach of
  trust, but that he has 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 for the negligence, default, breach
  of duty or breach of trust, that court may
  relieve him, either wholly or partly, from his
  liability on such terms as it thinks fit.

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B. Common Law Duty of Skill and Care

• Reform?
• Law Commission
• Strategic Framework
• high level statutory restatement
• enlightened or shareholder value basis?

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C. Fiduciary Duties

• Directors as fiduciaries promoting LOYALTY
• a person in a position of trust or confidence
  with respect to someone else and who is therefore
  obliged to act solely for that persons benefit.
• Trustees hold legal title directors do not
• Old Joint Stock companies PARTNERSHIP
  DEEDS/TRUSTEES

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C. Fiduciary Duties

• Whilst taking RISKS (see last hour - Part B!)
  directors must also act
• to preserve the companies assets
• Not to harm the assets
• not detract from the companys business

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C. Fiduciary Duties

• Directors as fiduciaries
• Two parts of the duty -
• (1) to act bona fide in the interests of the
  company and not for a collateral purpose
• (2) no conflict and no profit rules

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C. Fiduciary Duties - bona fide

• (1) bona fide in the interests of the company and
  for a proper purpose -
• Cook v. Deeks 1916 1 AC 554
• Re Smith Fawcett 1942 Ch.304,CA
• Lord Greene directors must act bona fide in
  what they consider, not what a court may consider
  is in the best interests of the company and for a
  proper purpose SUBJECTIVE TEST

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C. Fiduciary Duties - bona fide

• Hogg v. Cramphorn Ltd 1967 Ch.254
• Howard Smith v. Ampol Petroleum Ltd 1974 AC 821

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C. Fiduciary Duties -no profit and no conflict
rules

• (2) no profit and no conflict rules
• Keech v. Sanford (1726) 25 ER 223
• The rule
• Any situation which ostensibly gives rise to a
  conflict between the directors personal
  interests, and his duty to the company, is
  treated as a situation from which the director
  cannot benefit.

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C. Fiduciary Duties -no profit and no conflict
rules Contd

• Regal (Hastings) Ltd v. Gulliver 1967 2 AC 134.
• Industrial Development Consultants v. Cooley
  1972 1 WLR 433.
• Guinness v. Saunders 1990 2 AC 663 (HL)

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C. Fiduciary Duties Contd

• Remedy
• Ratification
• Defence
• Forgive and Excuse?
• Insurance

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C. Directors Duties Contd

• Enforcement of Fair Dealing - Part X of the
  Companies Act 1985