English Law Standards for Limited Liability Company

Critically discuss whether English law requires directors in English limited liability companies to behave to a sufficiently high standard in their conduct of the affairs of such companies. Illustrate your answers by reference to case law post Companies Act 2006 if relevant.

The Companies Act 2006 sets out the specific
duties that directors owe to the companies which they manage. It is to the
benefit of directors that they understand and observe the importance of these
duties. The legislation and other associated statuses cover general business
functions such as tax, employment, health and safety to specific duties which
individual companies carry out in the delivery of their services. The Act
addresses the exposure and the extent to which directors could become
personally liable. This requires that directors are expected to behave to a
standard as they manage the affairs of their companies.

The CA
2006 supersedes and codified the accepted common law and equitable duties of
directors, however, this may not be termed as an exhaustive classification of
the duties of directors as the view is that common law duties do continue to operate
within a limited scope.

The directors of a company form the board of
the company and are empowered to make decisions and take actions within defined
limits on behalf of the company as set out in the company’s articles. Chapter 2 of Part 10 of the
Companies Act centers on the general duties of directors.

The Scope and
Nature of General Duties

The general duties are based on certain common law rules and
equitable principles as they apply in relation to directors and have effect in
place of those rules and principles as regards to the duties owed to a company
by a director. Also, the general duties shall be interpreted and applied in the
same way as common law rules or equitable principles, and regard shall be had
to the corresponding common law rules and equitable principles in interpreting
and applying the general duties. Chapter 2;170(3,4) Part 10 Companies Act 2006¹. Chapter 1 of Part 11 Companies Act 2006² deals with derivative claims instituted due to breach of duty by
directors. The general duties, 171 to 177 of Chapter 2 of Part 10 of the Companies
Act 2006¹ include;

171
Duty to act within powers

The actions taken by a director should be in
line with the company’s constitution, and only exercise powers for the purposes
for which they are conferred. The company’s constitution in this case refers to
the company’s articles, the decision taken based on the articles and the
decisions of the shareholders which are binding on the company.

In West Coast Capital(Lios) Limited [(2008) CSOH
72] ³, Tesco Holdings Ltd failed in its attempt to gain
complete control of Dobbies Garden Centres Plc because West Cost owned part of
the shares and were not willing to sell on to Tesco. Tesco eventually succeeded
in gaining 65% control of the company while WCC held on to their 35%. The new
board of directors of Dobbies decided against paying dividends but proposed to
raise further capital,

£150 million via a new shares issue. WCC
opposed this and sought to block the move because Tesco wanted to force them
out of the business unfairly. Lord Glennie, in the Court of Session; the
directors had exercised their powers under S 171 and the consideration was the
purpose for doing this which was raising further investment. It was only where
improper motivation could be established that this could be the basis for
unfair prejudicial conduct and a possible breach of duty under S171. He
therefore found in favour of Tesco.

172 Duty to promote the
success of the company

Directors should only engage in actions that
will drive the success of the company and should be in good faith bearing in
mind that this will be beneficial to the members. They should consider the
possible consequences of any decision in the long term on the stability of the
company, the impact on the employees ensuring that they are not deprived and
can continue to deliver their best services for the company, develop and
improve on business relationships with customers and suppliers, contribution to
the community and environment, ensuring that the company maintains a reputation
for high standards and conduct and also upholding fairness amongst members

The duty imposed by this section will depend
on any enactment or rule of law requiring directors, in certain circumstances,
to consider or act in the interests of creditors of the company. Success for a
business is viewed in the Act as an increase gained in value over a
considerable period. A director should act or make his or her judgment in good
faith having considered the impact of any decision or action on the company,
its owners (shareholders), staff, external parties such as suppliers and
customers, the community and the environment.  

In Franbar
Holdings Ltd v Patel & others [2008]
EWHC 1534 (Ch)⁴; Franbar, a shareholder had a 25% stake in the company
and Casualty Plus held the remaining shares. Differences arose over the
management of the company as Franbar alleged that the directors of the company,
appointed by Casualty Plus had diverted business opportunities away from the
company to Casualty Plus, suspended one of Franbar’s nominated directors and
did not make available required financial information.

Franbar launched a
claim for breach of the shareholders’ agreement, an unfair prejudice petition and a derivative claim. The court refused permission to
continue a derivative claim in this case having concurred that a notional
director would not grant importance to the derivative claim and the claimant
was already pursuing the other claims. His demands were best served this way.

In Mission Capital Plc
v Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)⁵ ; the company had terminated
the employment and directorships of two executive directors for failing to
provide financial information and achieve the set financial forecast. Mission
Capital subsequently started proceedings against the former directors who also
started a counterclaim seeking to be reinstated on the grounds of unfair
prejudice and breach of shareholders agreement and also issued a derivative
claim against the continuing directors. The court refused permission for a
derivative claim to continue having adjudged that the claimant’s request could
be addressed through the other claims.

Furthermore, Mission Capital could also decide to remove the
directors who the derivative claim had been issued against as they would not
attach importance to this.

In Iesini v Westrip
Holdings Ltd [2009] EWHC
2526 (Ch); [2010] B.C.C. [2011]
1 BCLC 498, [2010] BCC 420 ⁶, the
claimants; shareholders in Westrip, accused the defendant directors of engaging
in unacceptable conduct amounting to breaches of duty by the defendants and
this had led to the company losing ownership and control of an asset. This was
a valuable mining license and that, but for their intervention, the company
could have lost almost all the remaining assets.

The claim was refused as the court held that a derivative
claim instituted for the benefit of the company by a claimant may be allowed
provided there were other benefits that he or she could derive from the claim
however, in a case where the person making the claim had participated in the
alleged conduct, the claim may be refused. The strength of the claims against
the directors was weak and lacked the merit to grant permission.

173 Duty to exercise
independent judgment

Directors should be objective in their decisions. This
duty is not breached by their acting in accordance with an arrangement duly entered into
by the company that constrains the future exercise of moderation by its
directors, or in a way authorised by the company’s
constitution. It is may be advisable for a director to seek and rely on the
advice of others however, the fundamental decision lies with him or her. A
director should be in a position able to make decisions independently and not
have others enforce their decisions and preferences on him.

174 Duty to exercise reasonable care, skill
and diligence

Directors should exercise sufficient care, skill and expertise in their
operations. This will
mean that a director should have or strive to acquire the care, skill and
diligence that is required to function effectively in his/her role. The
requisite operational knowledge, expertise and proficiency that may reasonably
be expected of a person carrying out the functions carried out by the director
in relation to the company

Reasonable care and expertise will imply that the director promptly
addresses issues that could impact on the stability of the business. The
director may also delegate to capable employees or professionals where
applicable. 

In Gregson v. HAE Trustees Ltd [2008] 2 BCLC 542⁷, the corporate trustee and its directors were sued for
alleged breach of trust and failure in their duty by not fully considering the
implications of decisions made in the management of funds in the trust. They
had kept back investments in a family company that had been previously put into
the trust and the company had now become insolvent. The claim was on the basis
that the directors were in breach of their duty to the corporate trustee and
the claim against them was part of the trust property, therefore a claim
against them could be made obligatory by her as a beneficiary. The directors
opposed this. The High Court held that the dog-leg principle could not hold as
the directors’ duties were owed to the corporate trustee in its own right
therefore a claim for breach of duty would not succeed.

In Brannigan v Danes – [2016] All
ER (D) 276⁸ ;
the claimant, B was a minority shareholder of a company,
Portobello Estates Ltd (PEL). PEL had been incorporated as a special purpose
vehicle in relation to certain development projects. B brought a derivative
claim against the other directors and shareholders alleging that the first
defendant, S, had been negligent and/or had acted in breach of duty in failing
properly to progress a development project, which led to loss of profit of
£22m. B contended that the defendants were brothers and had close business
connections that and the breach could have been avoided. Furthermore, an
alternative planning permission was discovered by B which demonstrated bad
faith on the part of the defendants. The court refused permission to progress
the claim. It was not unusual to have multiple planning applications as they
could be made in stages hence would not amount to bad faith. Furthermore, PEL
had decided against proceeding with the claim having sought legal advice on the
matter, extreme cost involved and the fact this may be unaffordable.

In Stainer v Lee and others [2010] EWHC 1539 (Ch)⁹, the minority shareholder sought a representative action
against the other two directors who were majority shareholders of the
company.  One of the directors had loaned
company funds to other director’s company the company was owned and controlled
by the first director. The other director failed to pay any interest on the
loan and the minority shareholder decided to apply for permission to continue
derivative claim seeking relief on behalf of the company against the other
directors. The Chancery Division of the High Court granted the application,
subject to some control, namely that permission would be limited to the
conclusion of disclosure and terms as to costs pursuant to s 261(4) of the Act.

Similarly, Cullen Investments Ltd
and another v Brown and others – [2015] All ER (D) 81¹⁰, courts granted the permission sought having proven that he will be
disadvantaged

175
Duty to avoid conflicts of interest

Directors should stay clear of situations in which he/she
has, or can have interests that are at variance, or possibly may create
disputes, with the interests of the company.

One should consider the exploitation of any property,
information or opportunity (and it is irrelevant whether the company could take
advantage of the property, information or opportunity). This duty does not
refer to a conflict of interest due to a transaction or arrangement with the
company. It is also not contravened if the situation is not expected to lead to
a conflict of interest or if the matter has already gained the prior agreement
of other directors

In a private company, where a transaction has been
proposed and agreed by the directors or in a public company where the
constitution enables the directors to authorise a transaction once it is
proposed and reviewed by them in line with the constitution, there is no
breach. The concerned directors will usually have no voting rights on the
matter and the minimum number required by constitution to agree the decision
must be met

Differences of interest also includes a clash of interest
and duty and a variance of duties.

Towers v Premier Waste Management Limited [2011] EWCA Civ 923¹¹; Mr. Towers had been a
Director of Premier Waste Management Limited, a specialist waste disposal and
treatment company. Towers fell out with the board and left the company in
December of 2003 and afterwards, it became clear that Towers had accepted a
personal loan without payment from Mr Colin Ford, a customer of the company
without notifying the board. The loaned items were returned in 2008 after Mr
Ford had invoiced the company for the cost of hiring the equipment.

The company made a claim against Ford,
refusing liability for the hire charges and a further claim against Mr. Towers
for the profits received. Ford made a counterclaim for the cost if hire of his
equipment. The High Court ruled that Towers should pay the company the sum of
£7,997.31 which included cost and interest of the hiring the equipment. He was
also to pay the cost of the action. The decision was upheld by the Court of
Appeal who concluded that by failing to disclose the loan of the equipment,
Towers had breached his duties to the company which included the no conflict
principle and duty not to make a secret profit. By his concealment of the loan,
he did not act honestly and reasonably.

On the contrary, in the case of Foster Bryant
Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200¹²
; the Court of Appeal found that there was no breach of fiduciary upholding the
decision of the High Court. Foster and Bryant were directors of the company and
the large part of their work came from Alliance. On being notified that he
would be made redundant, Bryant resigned however Alliance decided to keep his
services and funded him to set up his own practice. Foster had sought for
Bryant to contract his services through his company, FBS but the idea was
rejected.

The company sued Bryant on the grounds of having
breached his fiduciary duties of loyalty and diverting corporate opportunities
to himself. This was rejected in High Court and the
decision was further upheld in the Court of Appeal. Rix LJ delivering the lead
judgment identified the challenge in addressing the situation in which a
departing director may or may not be held to have breached their fiduciary
duties and given that this was facts based it could be held that Bryant’s
resignation was innocent of any disloyalty or conflict of interest.

In, O’Donnell v. Shanahan
[2009] 1 BCLC 328¹³,
Allied Business & Financial Consultants Ltd’s business consisted of
providing clients with financial advice & assistance. A director came
across an opportunity to secure interest in an investment property whilst in a
business transaction and he proceeded with the opportunity. The other director
filed a derivative claim alleging conflict of interest & breach of the duty
not to make a profit.  The claim was dismissed on grounds that, although
the opportunity came to the director’s attention in course of acting in his
capacity as such, it was not an opportunity in the company’s line of business.

Also in Helmet Integrated
Systems Ltd v. Tunnard [2007] IRLR 126¹⁴the court held that it was not a breach of contract or fiduciary duty
where a senior employee takes steps to start his own company which rivalled his
current employers while he is yet to end his existing contract but the company
was yet to commence operation.

 176 Duty not to accept benefits from third
parties

Directors should avoid accepting third party benefits which is offered
to them due to their position as a director or doing anything as director. The “third
party” here refers to a person other than the company,
and this could be corporate or a person acting on behalf of a corporate
organisation.

Where the benefit in question does not affect the duty of the director,
this should not give rise to a conflict of interests and whilst this is not a
basis for the receiving benefit to be authorised
by the directors, the acceptance could be agreed by the company’s shareholders.
The company’s articles may also allow that directors may legitimately receive
third party benefits up to a certain value, provided they do not breach the
relevant provisions of the company’s constitution.

177 Duty to declare interest in proposed
transaction or arrangement

Where a director in any way, directly or indirectly has an interest in a
proposed transaction or arrangement with the company, he is required to declare
the nature and extent of that interest to the other directors. This could be
made at a meeting of the
directors, by notifying the other directors in writing or a general update. If
the position changes, it is best that further declaration should be made and
such declaration must be made before the company commits to the affected
transaction. Where there is no variance or divergence that could lead to a
conflict, a director may not be required to declare his/her interests in the
transaction. This is also applicable if the other directors are already aware.

Conclusion

The success of a company rest is dependent on the directors who also ensure that the interests of the company as well as shareholders is protected. Directors are appointed agents and they owe duties to the company, the standard demanded of them is high and the Companies Act 2006 has helped in clarifying this with restrictions and guidelines on what is expected of directors. Directors’ are appointed by shareholders to manage the company’s affairs for the benefits of the shareholders. The success of any company depends on having good, dedicated, knowledgeable and honest directors. Therefore, success can only be achieved, if the directors and are supported by the shareholders in carrying out their functions. From the reference cases, the courts pay due attention to director’s duties and how these duties are performed.  The courts however do not seek to encourage unnecessary litigation being aware that the burden of expectation placed on directors is high and that many shareholders may seek to raise challenges where possible. The cost of litigation and proceedings is high and many companies are unable sustain endless litigation on matters on limited consequence.

Directors play important parts in a corporate governance
system and fulfilling their duties is primary to sustenance of the operational
system in which the organization exists. Directors can also play multiple roles
in organisations depending on the size of the organisation and often, their
powers and responsibilities could be extensive.

1. Chapter 2;(177 -177) Part 10 Companies Act 2006
2. Chapter 1; Part 11, Companies Act 2006
3. West Coast Capital(Lios) Limited [(2008) CSOH 72]
4. Franbar Holdings Ltd v Patel & others [2008] EWHC 1534 (Ch)
5. Mission Capital Plc v Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)
6. Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2010] B.C.C. [2011] 1 BCLC 498, [2010] BCC 420 
7. Gregson v. HAE Trustees Ltd [2008] 2 BCLC 542
8. Brannigan v Danes – [2016] All ER (D) 276
9. Stainer v Lee and others [2010] EWHC 1539 (Ch)
10. Cullen Investments Ltd and another v Brown and others – [2015] All ER (D) 81
11. Towers v Premier Waste Management Limited [2011] EWCA Civ 923
12. Foster Bryant Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200
13. O’Donnell v. Shanahan [2009] 1 BCLC 328
14. Helmet Integrated Systems Ltd v. Tunnard [2007] IRLR 126

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Bibliography and Case Law References:

1. Chapter 2;(177 -177) Part 10 Companies Act 2006
2. Chapter 1; Part 11, Companies Act 2006
3. West Coast Capital(Lios) Limited [(2008) CSOH 72]
4. Franbar Holdings Ltd v Patel & others [2008] EWHC 1534 (Ch)
5. Mission Capital Plc v Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)
6. Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2010] B.C.C. [2011] 1 BCLC 498, [2010] BCC 420 
7. Gregson v. HAE Trustees Ltd [2008] 2 BCLC 542
8. Brannigan v Danes – [2016] All ER (D) 276
9. Stainer v Lee and others [2010] EWHC 1539 (Ch)
10. Cullen Investments Ltd and another v Brown and others – [2015] All ER (D) 81
11. Towers v Premier Waste Management Limited [2011] EWCA Civ 923
12. Foster Bryant Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200
13. O’Donnell v. Shanahan [2009] 1 BCLC 328
14. Helmet Integrated Systems Ltd v. Tunnard [2007] IRLR 126