Although A Company Director May Manage The Company As He Sees Fit, He Is A Fiduciary In Relation To The Company And Must Reflect This Relationship In All He Does
The directors of the company are entrusted with lots of powers in order to take major decisions on behalf of the company. But at the same time directors are under the obligation to perform various duties in the interest of the company. So it is understandable that the powers and the duties of the directors of the company go hand in hand for the overall benefit of the company. “As such directors are under the obligation to manage Companies business and exercise all the powers of the company”. The division of power within a company is between the board of directors who manage the business on a day-to-day basis and the members who make major decisions about the running of the company’s business in a general meeting. Directors are required to exercise their powers in accordance with the company’s constitution i.e. the articles of association, which gives the essential authority needed by directors ‘to manage the company’s business’ and to ‘exercise all the powers of the company for any purpose connected with the company’s business’. The power to manage the business of the company is given to the board as a whole, not to the individual directors. Where a company’s articles delegate the management of the company’s business to the board, the members have no right to interfere in decisions made by the board. Directors are not agents of the members and are not subject to their instruction as to how to act.
Fiduciary as a word itself means simple, to be trusted or trustworthy but the meaning can be discussed at a broader level in legal terms. A fiduciary relationship arises when one party (the company) is entitled to expect that the other party (the director) will act in the first party’s interests to the exclusion of the second party’s separate interests. Out of all the duties of a director, his fiduciary duty is mainly the most demanding. Therefore fiduciary duty is recognized as the highest level of care at either equity or law. Generally the duties of the director fall into mainly two parts, the fiduciary duties which are developed from the equitable principles and laid down by the courts that is duty to act in good faith and honesty in the best interest of the company and secondly the duty of skill and care which has its base from common law. The Companies Act 2006 (“the Act”) codifies the duties of the company directors.
“There are mainly four principles guiding the fiduciary duties of the directors under the Companies Act which are rules towards the company and not to anyone else that is shareholders etc. These are duty to act in good faith in the best interests of the company, to act for proper purposes, to avoid conflicts of interest; and duty not to make secret profits”.Prior to the Companies Act 2006, common law rules and ‘equitable principles’ made up the law on directors’ duties. These have now been replaced by the specific statutory duties provided in the Companies Act 2006.
The new statutory duties are as follows:
‘(Section 171) To Act In Accordance With The Company’s Constitution And Only Exercise Powers For The Purpose For Which They Are Conferred;’
A director must act in accordance with the company’s constitution (i.e. its memorandum and articles of association) and should exercise his/her powers for the purpose which they were given. If the rule concerned is not practised to the transaction it will be considered void, unless it is approved by the shareholders.
‘(Section 172) Duty To Promote The Overall Success Of The Company;’
A director must act in good faith, in a way which promotes the success of the company and for the benefit of the members as a whole.
‘(Section 173) Duty To Exercise Independent Judgement;’
A director of a company must try to perform independent decision making and judgment. This duty is not infringed by a director who is acting:
- in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
- in a way authorised by the company’s constitution.
‘(Section 174) Duty To Exercise Reasonable Care, Skill And Diligence;’
‘The sole criteria here expected of a director are that of a reasonably diligent person with:
- the general knowledge, skills and experience should be of a nature that could reasonably be expected of a director, and
- the actual knowledge, skill and experience held by the director.’
In the case of Dorchester Finance Co Ltd v Stebbing (1989), the concept established was that if a director has a special skill (e.g. as an accountant) he is expected to use it for the benefit of the company
(Section 175) Duty To Avoid Conflicts Of Interest;’
A director must try to avoid any situation which places him/her in a direct conflict with the interests of the company or the performance of any other duty. The case related to this is of Industrial Development Consultants Ltd v Cooley (1972), in which Cooley, the managing director of IDC, had been negotiating a contract on behalf of the company, but the third party wished to offer the contract to him personally and not to the company. Without disclosing his reason to the company (or its board) he resigned in order to take the contract personally. It was held that He was in direct breach of his fiduciary duty as he had profited personally by use of an opportunity which came to him through his directorship: it made no difference that the company itself would not have obtained the contract. He was therefore accountable to the company for the benefits gained from the contract.
The IDC case also shows that an individual may still be subject to the duties even after he ceases to be a director.
(Section 176) Not To Accept Benefits From Third Parties;’
A director of the company must never accept any sort of benefit, such as bribe, from a third party which is solely is for a reason of him/her being a director or performing/not performing an act as a director, unless the acceptance cannot rationally be considered as likely to give rise to a conflict of interests. The case that can be discussed in relation to this duty is of Boston Deep Sea Fishing & Ice Co v Ansell (1888). Ansell was managing director of the claimant company. He accepted a ‘commission’ (bribe) from a supplier to order goods from that supplier, on behalf of the company. When the company found out, he was dismissed. It was held that the defendant was in breach of his fiduciary duty as the agent of the company. Therefore the company could recover the commissions paid to him.
(Section 177) To Declare Any Personal Interest On A Proposed Transaction With The Company.’
A director is required to declare the nature and extent of any interest, either direct or indirect, that they have in relation to a proposed transaction or arrangement with the company. Even if the director is not a party to a transaction, the duty may apply if they are aware or ought reasonably to have been aware, of the interest. Disclosure also extends to a person connected with the director, for example, his wife and children. A disclosure is not necessary where the interest of the director is not likely to give rise to a conflict of interests.
The Companies Act 2006 has introduced new duties and amongst them the second duty stated above (s. 172) that is, “to promote the success of the company” is substituted by the law duty on directors to act “bona fide in the best interests of the company”. The Companies Act 2006 provides a list of factors under the Section 172 to which a director should keep in mind before discharging his/her duties.
- the likely future consequences of any decision in the long term;
- the interest of the Company’s employees and its workers;
- the need to encourage the Company’s business relationships with suppliers, customers and others;
- the direct consequences of the Company’s operations on the community and the environment;
- the desire and aim of the company to maintain a good reputation for exceptional standards of business conduct; and
- the need to have a fair approach towards the members of the company.
Directors of the company must exercise the powers invested in them collectively as a board and not individually. If a director is found negligent or fraudulent and is in breach of his duties discussed above, can lead to the following consequences:
The director may be required to compensate for any loss suffered by the company. Shareholders can not claim against a director for any loss which they believe they may have suffered as a result of breach of duty. The direct owes his/her duties directly to the company.
- Contracts such as employment, entered into between the company and the director may be rendered voidable. Shareholders have the powers in accordance to the Companies Act to remove a director by an ordinary resolution.
- Any property taken by the director from the company can be recovered from him if it is still in his possession.
- Property may be recovered directly from a third party, unless that third party acquired it for value and in good faith.
- An injunction may be an appropriate remedy where the breach has not yet occurred.
- Company can ratify a breach of duty passing an ordinary resolution. (Section 239, Companies Act ’06)
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