Where the Directors are the owners they may lose sight of
the fact that they do not have an auto right to the company assets. This was
seen in AG v. Jameson
The common law imposes a wide range of duties upon
directors. These are set to be codified in the Companies Act 2014. In law, a
director stands in a fiduciary position to the company of which they are an
officer. Directors duties’ are owed to three groups
1.
The Company
2.
The Creditors
3.
The Employees
The fiduciary duties of directors are owed to the company as
a whole and not to the individual
shareholders. The Leading case on this matter is Percival v Wright. In this
case, the plaintiff shareholders sold their shares to three directors of the
company. They later discovered that the directors intended to sell on the
shares at a much higher price. While the sale never proceeded, had it done so,
the directors would have made a large profit, and it was claimed that they were
in breach of their duty. The Court stated that directors hold no fiduciary duties
to individual shareholders, and instead must act in the best interests of the
company.
A Director must attend Board meetings with reasonable
regularity but is not obliged to attend every meeting as per Perrys case. In Jackson v. Munster
Bank a Director was found negligent where he failed to attend but there
were circumstances which should have aroused his suspicion.
Directors duties are owed to creditors under the
circumstances where the company becomes insolvent. The reason for this is that
when the companies becomes insolvent, the assets of the company become held on
trust fir the creditors
Section 52 of the 1990 Company Act imposes a duty on
directors to have regard to the interests of the employees when considering the
interests of the company.
Directors have 3 main duties at common law
1.
Must exercise their power in good faith and in
the interests of the company
2.
Directors are not allowed to make an undisclosed
personal profit from their position
3.
Directors are required to carry out their
functions with due skill, care and diligence.
Directors must exercise their powers in good faith and in
the interests of the company. As seen in Smith
& Fawcett Ltd, this test is a subjective one. The court will not substitute
its own view for that of the directors. As stated in Regentcrest v Cohen and another, the question is whether the director
honestly believed that his act or omission was in the interests of the company.
The onus of proof is on the plaintiff to prove that there has been mala fides of a director in making a decision. If a
director acts beyond their powers and therefore in breach of their duties the members
of the company can ratify this decision in a general meeting.
Where Directors act in breach of their duties, the “proper
plaintiff” is the company. This was seen in the famous case of Foss v
Harbottle
In RE Hafner the
plaintiff claimed that the directors had acted in bad faith when they did not
approve a transfer of shares. They had
done so in order to keep their salaries at a very high level. The court held
that by acting in such a way the decision wa made in bad faith and not in the
interests of the company.
In Clark v Workman
the court held that a director who had the casting vote on a decision as to
whether to transfer shares had acted in bad faith towards the company by
telling an outsider that he would vote in a particular way. As a result the
voting of the board of directors had been tarnished by the act of the director,
who was in breach of his duty.
In the context of private companies, often times directors
and shareholders are the same people. The power to issue new shares is that
which has given the rise to most litigation. This i8s illustrated in G&S Doherty Ltd v Doherty. The
plaintiff claimed that the issue of new shares was an improper use of the
directors fiduciary duty as the sole purpose of the allotment was to remove the
plaintiff from the company, and therefore was not made in good faith. The court
agreed with this reasoning
In Nash v Lancegaye
Safety Glass an allotment of shares
was made in favour of one shareholder who as a result, obtained a controlling
stake in the company. While it was plausible that the allotment could have been
made for the benefit of the company by increasing capital, the court held that
this was an abuse of the directors fiduciary powers.
In Howard Smith v
Ampol Petroleum the directors honestly believed that a proposed takeover
was in the best interests of the company because the bidder was expected to
inject additional capital into the firm. The directors allotted new shares to
the bidder, which had the result of diluting the existing minority’s stake and
ensuring that a takeover could succeed. While the directors were not motivated
by self-interest, the court held that its primary purpose was to reduce the
majority to a minority position, which was found to be an improper use of their
fiduciary position
In Charitable Corp. V
Sutton [1742] the court held that a director must carry out his duties and
hold his position “with fidelity and reasonable diligence
However, in Jermyn
Turkish Baths Ltd where a similar situation occurred, the court upheld an
allotment of shares which gave a person a majority stake. This was because it
formed part of a rescue proposal for a failing company, and so therefore was in
the best interests of the company.
Often times the rules governing minority shareholders
overlap with cases concerning directors abuse of power. In Clemens v Clemens Bros it was held that the allotment of shares for
the purpose of reducing a member’s stake might constitute oppression, and would
entitle them to bring an action under section 205 of the company act 1963.
The directors also have a duty to disclose any personal interest
or profit they make from their position as a director. The reasoning behind
this is that the directors cannot be allowed to receive benefit and profit as a
result of their position as a director of the company. Case law has confirmed
that any such profit made is in fact held on trust for the company. The general
ruling is that a director cannot be allowed to gain or profit from his fiduciary
position.
This was seen in Regal
v Gulliver. In this case, the plaintiff company owned one cinema, which the
directors decided to sell. They decided that it would be best to sell this
cinema as part of a chain and so purchased a number of other cinemas in order
to sell them together. A subsidiary company was formed having a share capital
of 5,000, divided into £1 shares. The landlord of the two other cinemas would
only offer leases to the new company if the new company had a paid up share
capital of £5000, or alternatively if the directors provided personal guarantees,
neither of which were desirable. The plaintiff company subscribed for £2,000
worth of shares in the new company while the directors personally subscribed for
£3,000. Upon the sale of the shares of the new company, a large amount of the
profit went to the directors, which the court found was in breach of their
duties.
The motives of the directors are immaterial to the outcome.
Had the directors formally notified the company of the proposal, the members of
the company may have ratified this action by passing a resolution.
In Industrial
Development v Cooley, the managing director of a construction company while
proposals for a particular project were rejected by the prospective customer,
took sick leave from work and then took on the contrast in a personal capacity.
The court held that a director cannot divert to himself a business opportunity
which would otherwise have been an opportunity of the company he is a director
of.
Directors are obliged to carry out their functions with due
skill, care and diligence. While they are not required to have any special
qualifications or skills, if they have such qualifications, they will be
expected to act in a manner according. In Re
City Equitable Fire Insurance Company it was stated that 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. The test
is therefore both subjective and objective.
In Dorchester Finance
v Stebbing the court held that the
directors breached their duty of skill care and diligence because they had not
used their professional accounting skills to avert the losses which were
sustained by the company.
Contracts between the directors and the company are voidable
unless the members have approved them in a general; meeting. If a director is
directly or indirectly interested in a contract which the company proposes to
enter, he has a duty to declare this to the board.
Directors also have duties under Statue. S 194 places a
statutory duty of disclosure on directors. S. 53 requires that a director
notify the company of his/her interests in the company shares and the amount of
his shares. S. 202 of the 1990 act places a statutory duty on directors to keep
proper books of account and S203 imposes penalites on directors who fail to do
this. S.204 of the act makes the
directors personally liable for the losses of the company if they were caused
by a failure to keep proper books of account. S 56 of the Act sanctions
professional indemnity policies to be taken out by directors of companies.
Section 45 of the Companies Amendment (No. 2) Act 1999
prohibits a person from having more than 25 Directorships.
Section 31 of the Company’s Act 1990 prevents a company from
giving a loan or quasi loan to its Director, shadow Director, or a Director of
its holding company, or to persons connected with any of the above. A Quasi
loan occurs where a Person pays money or reimburses expenses incurred by a Director
on the understanding that the company will reimburse them
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