According to the law, the directors of a Company have certain legitimate duties. First, the common law imposes a general fiduciary duty on the directors, which is termed as equity. Second, directors are under a duty to exert utmost care in their activities under the premise of common law of negligence. The Companies Acts, the Insolvency Act 1986 and other related acts impose several duties on directors. In addition to these duties, the constitution company for which they act as directors also imposes various duties on them. Moreover, other legislation and the provisions of common law impose additional duties (What legal liabilities could directors incur?).
Directors have to protect the assets and moneys of their company, since they are its custodians. They are required to exercise their discretion in safeguarding the assets of the company. Directors cannot claim immunity on the grounds that they were regarded as nominees, and that they had acted at the behest of some other person. These claims are unlawful and the courts have rejected them in several instances (Selangor United Rubber Estates v. Cradock, 1968).
Directors cannot derive unauthorised profits in the course of their duty towards the company. In Boston Deep Sea Fishing Co v Ansell, the suppliers had paid certain amounts to a director at the time of his placing orders in the name of the company. It was held by the court that the director had to disclose the particulars of these amounts to the company (Boston Deep Sea Fishing Co v. Ansell).
Directors are required to exercise their powers, only for the benefit of the company and for the intended purpose for which those powers had been bestowed on them by the company. The case of Hogg v. Cramphorn establishes the abuse of powers by directors. There had been a take – over bid of the company, and it was apprehended that the shareholders would ratify that bid. The directors of the company, were not in favour of this takeover, hence they formed a trust to benefit the company’s employees.
These directors acted as the trustees. The company made a loan to the trust, which enabled it to purchase newly issued shares of the company. In this manner, the directors acquired sufficient shares to defeat the take – over bid (Hogg v. Cramphorn, 1967).
The whole operation of forming the trust and acquiring shares was aimed at defeating the takeover bid. The court annulled the entire process, because it considered the aim of the directors in forming the trust was to defeat the takeover bid. The court also held that the directors had abused their powers by allotting shares to the trust. The company had granted them power to raise finance for the company (Hogg v. Cramphorn, 1967).
As such , Company directors have two types of duties, namely, those that fall under a duty of care and fiduciary duties. The former requires the directors to employ the care that a prudent and attentive individual would under similar circumstances. The fiduciary duty emanates from the trust and good faith entrusted to the directors by the company. Directors are duty bound to safeguard the best interests of the company in all situations and in all matters. They should not use this power for their personal benefit.
Directors are the custodians of the company’s assets. In general, the courts do not intervene with the activities of the directors unless there is a fraudulent motive or illegality in their decisions or the best interests of the company are under threat (Company Law: company formation and management).
A person cannot act as the director of two competing companies. However, there is no legal restriction on the same person being a director in more than one company. Directors must act in good faith and in the best interests of the company, and they should not act for any personal benefit or collateral purposes. They also have a fiduciary duty to act in the best interests of the creditors of the company. The Insolvency Act 2003 provides the standards of the care and skill to be exercised by directors (Birmingham, 2005).
The directors of a company must take decisions, which an ordinarily prudent and diligent individual would take. Similarly, the conclusions reached by should be what a diligent individual would arrive at under similar circumstances. There should be reasonableness in the decisions and conclusions of the directors. They must employ general knowledge, skill and experience while taking decisions. More importantly, those decisions and conclusions should be in the best interests of the company. These standards are both objective and subjective. (Birmingham, 2005).
In Re Macadam, the articles of association of the company had empowered the trustees to appoint two directors in the company. The trustees appointed themselves as directors. The court held that the self – appointment of the trustees had been done in the absence of a restrictive clause in the trust’s constitution, and directed them to repay the amount received by them as directors, from the company (Re Macadam, 1946).
The fiduciary duties and the common law duty of care and skill have been categorized by the 2006 Companies Act. From this classification several general duties have emerged, which are described in the sequel. The duty to act within their powers, which mandates that directors have to discharge their duties in accordance with the provisions of the company’s articles of association and memorandum.
Further, section 172 of the Companies Act enjoins a duty upon directors to act in the best interests of the company. This duty requires the directors to act in a manner that would be most likely to further the progress of the company (Anderson, 2007).
In addition, section 173 of this Act requires a director to practice independent judgement. Moreover, directors of a company have to discharge their duties with adequate care, diligence and skill, and this is specified in section 174 of the Act. Hither to fore, legislation relating to situations leading to a conflict of interests for a director was complex and daunting. The 2006 Companies Act has wrought vast changes, whereby situations entailing such conflict of interest have become easier to resolve.
Furthermore, subsequent to this Act, transactions between directors and a third party have been rendered easier to conduct. Hitherto, the endorsement of the shareholders’ had been essential for such transactions. However, presently, approval for such transactions can be granted by directors on the board who are non – conflicted, subject to the stipulations enumerated in section 175 (5) (6) of the Companies Act 2006 (Anderson, 2007).
Section 177 of the 2006 Act necessitates a director to declare the nature and extent of interest in a transaction or understanding with the company to the board of directors of the company. Furthermore, such admission is also applicable to any person related to a director, for instance a spouse or child. In the event of such interest being known or reasonably expected to be known to the other directors, or if such interest cannot plausibly result in a conflict of interests, disclosure is exempted (Anderson, 2007).
There are several general duties, under equity, which have to be carried out by the directors of a company. There is a fiduciary relationship between the company and its directors, and this relationship requires the latter to act in good faith and with loyalty towards the company. As such, they are obliged to protect the best interests of the company (What legal liabilities could directors incur?).
Directors have to perform certain duties in a company; and they are not relieved of these duties, immediately upon leaving it. They owe to the company, the fundamental duty of acting in its best interests, even if they resign from it. This duty particularly applies when a director resigns from the company to make use of the opportunities that were available to the company.
Directors should not exceed the powers bestowed upon them by the company, and they should function within the limits imposed by the constitution of the company. As such, a director should not exceed his brief, under any circumstances. Moreover, directors are prohibited from entering into contracts or transactions that are not in accordance with the provisions of common law or other legislation (Birmingham, 2005).
Directors are duty bound to safeguard the best interests of the company in all situations and in all matters. They should not use this power for their personal benefit. Directors are the custodians of the company’s assets. In general, the courts do not intervene with the activities of the directors unless there is a fraudulent motive or illegality in their decisions or the best interests of the company are under threat (Company Law: company formation and management)
In Regal (Hastings) v. Gulliver, the company had owned a cinema. There were plans to purchase two more cinemas by the company. However, due to insufficient funding these plans were unsuccessful. In order to acquire those two cinemas, another company was formed. The plaintiff Regal bought most of the shares in the new company. The remaining shares were purchased by the directors of the plaintiff company and its solicitor. The new company acquired the two cinemas and subsequently both these two companies were taken over by another company. This company replaced all the directors.
Subsequently, Regal brought a legal action against the directors, in order to compel them to account for the profits made them while selling their shares in the former. The court held that the directors were not authorised by the company to make profits on the sale of the shares. They had worked for Regal in their capacity as directors and in that capacity they had made profits. They were the directors of Regal and they were consequently under a duty to account for the profits they had made to Regal. This ruling clearly established that directors should not make unauthorised profits (Regal (Hastings) v. Gulliver, 1942).
The directors of a company are under a duty to act in the best interests of the company. Therefore, they are not allowed to utilise any resources of the company for furthering their interests (IDC v. Cooley, 1972).
In Regal (Hastings) v. Gulliver the court held that the directors were liable to account for their profit even though they had acted bona fide throughout. Indeed it was said that liability ‘in no way depends on fraud, or absence of bona fide.’ So following this decision it was transparent that a company director or indeed any other fiduciary could be held liable to account for a profit even in situations where there is no suggestion of fraud, dishonesty or even negligence, instead they would seemingly be held liable for any profit made as the result of their fiduciary capacity.
If the company incurs losses by the activities of the directors then they are liable to make good the loss to the company. The opportunities that are open to the company must be exploited for the benefit of the company; and its directors should not make use of these opportunities for their personal benefit. They should not form another company and exploit the opportunities that were legitimately open to the original company.
Directors should not divert business to the new company, and they should account to the company any profits made by them.. As such, a person under a fiduciary duty is precluded from making a profit by using his capacity of trust. This is encompassed by the wider requirement that a trustee should not be in a position where there is a conflict between his duty and his personal interests.
A director should not act for an improper purpose, because such acts would be in conflict with his original and legitimate duty to safeguard the interests of the company. Moreover, directors should not exceed or abuse the powers bestowed upon them by the company.Although directors do not constitute trustees, nevertheless, they are in a fiduciary position in respect of the company, whose board they constitute.
A director’s liability is independent of breach of duty, and is related to the tenet that there should be no profit made on account of property acquired, as a consequence of the relationship that exists between him and the company, on whose board he serves. Any profit made by a director belongs to the company, even if the property utilized for that purpose had not been or could not have been obtained for the company.
List of References
Anderson, S. (2007, January 19). Companies Act 2006 and Directors Duties. Retrieved August 19, 2008, from Bytestart Limited : http://www.bytestart.co.uk/content/legal/35_2/companies-act-directors-duties.shtml
Birmingham, L. A. (2005). Takeovers and director’s duties. Retrieved August 19, 2008, from http://www.harneys.com/files/articles/Takeovers%20and%20directors.pdf
Boston Deep Sea Fishing Co v. Ansell, (1888) 39 Ch D 339.
Company Law: company formation and management. (n.d.). Retrieved August 19, 2008, from http://www.cambridge.org/elt/legalenglish/pdfs/International%20Legal%20English%20Unit%202.pdf
Hogg v. Cramphorn, Ch 254 (1967).
IDC v. Cooley, 2 All ER 162 (1972).
Re Macadam, Ch 73 (1946).
Regal (Hastings) v. Gulliver, 1 All ER 378 (1942).
Selangor United Rubber Estates v. Cradock, 1WLR 1555 (1968).
What legal liabilities could directors incur? (n.d.). Retrieved August 19, 2008, from Company Law Club: http://www.companylawclub.co.uk/topics/faq094.htm