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Discussion of the Director and their Duties

Info: 2412 words (10 pages) Law Essay
Published: 6th Aug 2019

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Jurisdiction(s): UK Law

There are few aspects of company law which do not, in some way, involve a discussion of the director and their duties. The person who executes and run the company on daily basis is the director. As the company is not a natural body itself, therefore director plays the key role of dealing with the matters arising in the company on daily basis. According to CA 2006 S.154, every private company must have at least one director, and the public company must have at least two directors. A company must have at least one director who is natural person. The directors are then divided into two categories of executive and non-executive director performing the duties of running the companies affairs and managing the activities in the company. Directors in practice control the company, and its success or failure largely depends on them. They are fiduciaries and owe duties of good faith. There are potentially a numbers of individuals or bodies to whom directors might owe duties and which are the company, the members, the employees, the creditors and the shareholders. However, the general rule is that the directors owe their duties to the company as a whole (City University, 2008).

The directors have complete and free authority of managing the company in whatever way they see the best as far as they are complying with the boundaries highlighted by the law and the general policy of the company. The directors are not subject to orders. The shareholder can also be the director and if they are not happy with the performance of a particular director, they can remove him from the office. 16 years and over is the age limit to be appointed as the director of the company. There are positive limitations and issues to be dealt with before a person above the age of 70 is appointed as a director of the company. “Directors duty is to act bona fide in the company’s interest, which means directors are under an obligation to act in what they genuinely believe to be the interest of the company (Kelly, Holmes & Hayward, 2005).The duty to act in good faith for the benefit of the company as a whole (Webster, 2005). Directors have a duty to act in good faith what they imagine to be the best interests of the company. As long as there, motives are sincere and they truly believe that, what they are doing truthful for the company, directors are normally safe from claims that they should have done something differently. The relationship between a company and its directors is that of principal and agent and as agents, the directors stand in a fiduciary relationship to their principal the company. In addition, directors owe a duty of care at common law not to act inattentively in managing the company associations (Keenan and Riches, 2005)

A director of a company owes fiduciary duties to the company simply by virtue of being a director, but they are owed to the company only. The directors of the company are said to be in a fiduciary relationship with the company. The fiduciary duties of the directors towards the company was traditionally a duty to act honestly and in good faith in the best interests of the company, and to use the power granted to them for the purposes for which they were coffered. The director of the company must hold their duties in the way to act only in the best favour of the company as a whole instead of their own profit or for the benefit of their associations. In different cases such as if the director of the company have a transaction in which the company is involved then the nature of the case must be disclosed to the other members of the board of directors in the company. So the director must make sure they do not place themselves in a position where the personal profit of the director clashes with the interest of the company and must not use company information or possessions to benefit themselves or a third party. The duty included a duty to take a proper care of the assets of the company; not to make a personal profit to (unless permitted in the articles or approved or ratified by the company); avoid conflicts with the company and not to compete with the company ( Webster, 2005).

The most arduous duties are imposed on trustees. A trustee has the legal title to property which must be dealt with for the benefit of the beneficiaries of the trust, not for the trustees benefit. The directors of the company must deal with the company’s property for the company benefit, not for their own benefit, but they do have the legal title to the property, which belongs to the company as a separate person. Therefore, directors are not trustees but they have trustee-like responsibilities because they have the power and the duty to manage the company’s business in the interest of the company (Mayson, French & Ryan, 2008).

The directors of the company deal with a lot of different matters of the company as in good faith of the company and they should not do it for the collateral reason. The directors must not involve themselves in the transitions which are made using the companies name but was outside the contractual duties or capacity of the company. Thus, duty to stay away from disagreement of interest in another essential fiduciary liability for a director. It is essential to be well-known with the fact that the directors owe their duties to the company rather than shareholders of the company. The case of Re W & M Roith Ltd. (1967) reveals the rule of a violation of the genuine responsibility. As the case explains one of the directors was sick and he occupied himself into a new contract with the permission of the board of directors that his wife would receive a generous pension if the director dies. The board of directors failed to expose to the company the poor health of the director. The director died almost immediately after and after the director’s death his wife claimed for the benefit of the pension but in response to this the court held that the directors intension were not in the good faith of the company but was to advantage his wife and said that the company was not bound by the contract signed by the board of directors of the company as their intensions were not for the good faith of the company.

Along with the performance of good faith to the company the directors must also have a realistic interest for the creditors and for the employees of the company. The directors should take steps as to decrease losses to the company’s creditors in case if the company was to become bankrupt. The directors should also keep in mind the benefit of the current and previous employees of the company and also of the shareholders. The S.247 CA 2006 requires directors to take account of the interest of employees as well as shareholders but the interest of the shareholders should be considered before the interest of the employees.

According to the S.175 CA 2006, the directors should not involve the company in any transactions, which they need to consider for their personal benefit. The general duties are based on certain law rules and reasonable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. As in S.171 CA 2006 that “directors must act in accordance with their company’s constitution and must exercise the powers for the purpose for which they were conferred” Directors must exercise their powers for proper purposes. The director must decide how to exercises but may only do so for he purposes which the powers were given. Thus, they must exercise their powers to achieve the objects of the company. As the case, Howard Smith v. Ampol Petroleum (1974) it was exposed that some directors help in the takeover bid to destroy the majority control of the tow directors but the allotment was voided as it was not in the good faith of the company but for a collateral purpose.

According to the S.172 CA 2006 that “the directors owe a fiduciary duty to promote the company success” A director of the company must act in the way he considers in good faith would be moist likely to promote the success of the company for the benefit of its whole. In exercising this duty, the directors must need to act fairly as between the members of the company and also interest of the company’s employees. The director must need to foster the company’s business relationship with suppliers, customers and others. Directors must needs to consider on the desirability for the company maintaining a reputation for high standards of business conduct. As stated in case of Shuttleworth v. Cox Bros& Co. (Maidenhead) Ltd [1927] 2 KB 9, the company appointed its director for life. According to the company constitution any member of board of directors should leave the company if his fellow directors requested him in writing that he should resign from his position in the benefits of the company. Similar case was Re Smith & Fawcett Ltd (1942), Smith and Fawcett of the director and the sole shareholders of the company. Fawcett died and the newly appointed director refused to register Fawcett’s shares in the name of executer unless he was willing to sell half of them to Smith, but the company article stated that “the directors may at any time and in their absolute and uncontrolled discretion refuse to register any transfer of shares.” The applicant claimed to be registered as the holder of the shares. The court said that the discretion was only subject to restriction that it should only be exercised bona fide in the success of the company. Another fiduciary duty of the director is duty to exercise independent judgement. A director of the company must exercise independent judgement (within the limits of his authority as conferred by the company’s constitution) S.173 CA 2006. This will not avoid a director from exercising a power to delegate, provided that this is permitted by the company’s constitution (Ottley, 2002).

The directors of the company also have a fiduciary duty to exercise reasonable care, skills and diligence according to the S.174 CA 2006. A director need not exhibit in the performance of his or her duties a greater degree of skills than may reasonably be expected form a person his or her knowledge and experience. In the case of Re Equitable fire Insurance Ltd (1925) when the court held that the director should only put into practice the knowledge which is expected of his knowledge and experience. Then later the rules were made tight under the S. 174 CA 2006 where the director has to be experienced enough and quite enough knowledge and skills as of the same person in the same position should have. Directors were not liable for mere errors of judgement. However the employed director had the implied duty to exercise reasonable care and skills (City University, 2008).

As in S.175 CA 2006 that “Director’s duty to avoid conflicts of interest and duty to arise and this equitable rule is strictly applied by the court and effects of its operations”, the directors of a company must not put themselves in a position where their personal interests conflict with their duty to the company. There is substantial case law on this. In such cases as Aberdeen Railway Co v. Blaikie Bros (1854), Transvaal Lands Co. v New Belgium (Transvaal) Land and Development Co. (1914) and Movitex Ltd v. Bulfield (1986). It was held that the directors must not involve themselves where the duty and the interest conflicts. In Regal Hastings v. Gulliver (1942), it was stated that directors could have protected themselves by obtaining a resolution in general meeting. In this case the directors of the company owned one cinema provided money for the creation of the subsidiary company to purchase two other cinemas. After the parent and subsidiary companies had been sold at a later date, the directors were required to repay the profit they had made on the sale of their shares in the subsidiary company on the ground that they had only been in the situation to make the profit because of their positions as director of the parent company. One obvious are where director place themselves in the position involving a conflict of interest is where they have an interest in a contract with the company.

Another fiduciary duty of the director must not accept benefit from third parties conferred by his being a director S.176 CA 2006. Unless the acceptance of the benefit could not reasonably be regarded as likely to give rise to a conflict of interest. A “third party” means the person other than the company, an associated body corporate or a person acting on behalf of the company. According to the S.177 CA 2006 that “the directors owe a fiduciary duty to declare interest in proposed transaction and arrangement” if a director of a company is in any way, directly or indirectly interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors. A director need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest. The director must reveal formally or informally to the other directors if he/she has an interest in a proposed transaction directly or indirectly. No disclosure is needed if the other directors already know or where the matter engage a director’s contract as in the case Runciman v. Walter Runciman Plc. (1992) where it was held that as it was open to everyone in the management that the claimant had an interest in his own service contract so there was no need of a formal declaration to the board of directors’ of the company. The director must also disclose any interest in any of the existing contract along with the nature and extent of the interest as soon as possible but in the case where the board of directors already know abut the interest the disclosure is not necessary as explained in the S. 182 CA 2006 and according to the S. 183 CA 2006 if the director fail to obey with the disclosure he/she will be committing a crime and could be fined for this.

Duties & Accountability

Shareholder s309 Insolvency

Remedies procedures

Shareholders Employees Creditors

Director’s Duties

(Fiduciary, care, & skill, self-dealing)

Source: Ridley, 2007

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