Company Law directors

It is difficult to see how the law can be consistent and fair when the decision of a case could come down to some mystery consideration that a director should have taken into account, according to a court (who would, presumably, have final say on what 'other matters' the director must take into account), despite it not appearing in the statute. Hopefully a common sense approach will be adopted, but even so this part of the legislation is entirely unhelpful in providing specific framework for holding directors accountable.

With regards to the weight of the factors which are listed, it is easy to assume that they should all be given equal weighting. But it would be dangerously presumptive to presuppose the court's (and parliament's) thinking on this. As the only factor which existed in legislation previously3, could it be the case that s. 172(1)(b) – the interests of the company's employees – is to be given more weight than the others? Furthermore, there is an apparent link between some of the factors.

Paragraph (a) – the likely consequences of any decision in the long-term – effectively covers all the following paragraphs, so should directors be required to pay particular regard to this paragraph? On the other hand, paragraph (d) – the impact of the company's operations on the community and environment – seems quite specific4, so should less regard be paid to it? Along similar lines is the question of how much weight is to be applied to factors which are not listed? Are they to be equal? Are they less important because they are not listed and thus are "secondary" considerations?

Or is each matter to be dealt with on a case-by-case basis? The answer is entirely unclear. Finally, and most importantly: how much regard must the director give, and how are his considerations to be evidenced? Is there some clear minimum level of consideration? Going on the statute alone, it would seem that a director could get away with a very low level of consideration for these matters. But on the other hand, this is not certain and directors may be wary of inadvertently failing on one of the grounds.

Setting the level too low seems almost pointless on the part of the legislators, as in reality it will have no effect whatsoever if directors are simply made to 'check boxes' as an extra administrative task. With this in mind, is it sufficient to simply note in the minutes of a meeting: "factors in Section 172 of the Companies Act 2006 were considered"? Or is further evidence of consideration required? Unfortunately this simply raises further questions such as what extra evidence is required. All of this has a significant impact on the framework for the accountability of directors.

Whilst there surely will be cases for holding directors accountable if they blatantly disregard some factors, the ambiguity of the section would make such litigation a minefield. No doubt subsequent case law will clear things up to an extent, but it seems inevitable that there will be some injustices along the way. Subsections 2 and 3 provide for specific circumstances for which subsection 1 does not have regard. Insofar as accountability of directors is concerned, these subsections should cause much less of a problem that was seen in paragraphs (a)-(f) as they are both self-contained and apply in specific situations.

Nevertheless, subsection 3 is not entirely clear as it simply states that directors should act in the interests of creditors 'in certain circumstances'. What these circumstances are is not certain, but the Australian case of Kinsela v Russell Kinsela Pty Ltd (1986) 10 ACLR 395 (subsequently picked up on in English law by Lord Templeman in Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512) helps by saying that in a solvent company the director should have regard to the shareholders, whilst in an insolvent company he should have regard to the creditors.

However, at what point a solvent company becomes insolvent, and to whose interests the directors should have regard during such a transitional period is not clear. It could be a crucial decision for a director to make: whether to effect a decision that benefits the shareholders or one which benefits the creditors, and so this is an ambiguity which needs to be addressed as soon as possible. In conclusion, Section 172 provides some clear framework for accountability in that terms such as 'good faith' and 'success' may be defined from pre-existing case law.

However, as we have seen, the latter part of subsection one provides an unfortunately unclear and non-exhaustive list of factors into which directors must take account. Until there is new case law on the matter it is very difficult to determine how much accountability there is for directors and their decision-making process.

Bibliography

"Company Law" 2nd Edn. Ben Pettet, Pearson Longman (with online updates by Professor John Lowry and Dr. Arad Reisberg)