Legal limits on remuneration and other financial benefits

As indicated earlier, the relationship existing between the directors and the company as a whole is intrinsically fiduciary in character. Although granted its own separate legal personality, the company could not act on its own, rather through its various officers and directors. The board of directors, therefore, is a repository of the common will of the entire company. In Boardman v Phipps (1966) 3 All ER 721, the House of Lords opined that the fiduciary character binding the directors to the company should be upheld strictly.

The law frowns upon directors exploiting their positions of trust to gain benefits for themselves at the expense of the interests of the company. This ruling extends to the establishment of financial benefits extended to directors, including the managing director, that do not necessarily accrue to the best interests of the company or whose functions are not directly related to the discharge of their official functions. Citing Re Smith and Fawcett Ltd (1942) 1 All ER 542 and Re Lee Behrens & Co Ltd (1932) 2 Ch 46, company officers are expected to execute their functions in good faith and for good purpose, respectively.

Aberdeen Railway Co Ltd v Blaikie Bros (1854) 1 Macq 461 even went to the extent of requiring directors of making full and transparent disclosures of any financial interest in any contract involving the company. This has been construed to extend to future contracts where the liability eventually rests with the company. Furs Ltd v Tomkies (1936) 54 CLR 583 even states that the said disclosure should be made even to the shareholders of the company in a general meeting, and not just to the board.

Legal remedies available to a minority shareholder against illegal actions of the directors There are basically two sets of remedies accorded by law even to a minority shareholder against what he perceives as an illegal action of the board of directors or members therefore. This is notwithstanding the abolition of the ultra vires doctrine. Corporation Act 2001 (s202B1) provides that the members of the company may compel the board of directors to make full disclosure of the remuneration of its members in a general meeting.

At least 5% votes or 100 members with voting powers may do so in a resolution petitioning the board to make the said disclosure. CA s 182 also provides the various mechanisms to counterbalance actions of the board of directors detrimental to the best interest of the company. Civil obligations may arise from actions by officers of the company using their position to gain advantage and benefits for themselves, as in the case of increasing remuneration or expanding the same what do not serve for the best purpose.

CA s184 further provides criminal liability for reckless and dishonest actions of the directors and officers by defining those actions as criminal offenses. Directors owe their fiduciary duties to the company as a whole. Under the “proper plaintiff rule”, any aggrieved member of the company, even those with minor shares may apply for a court injunction or interim injunction, as provided in CA s1324 (1). CA ss1324 (1) and (2) even extends the applicability of the remedial rule to past, present and proposed violations of the fiduciary relationships.