#17434 - Company Law Director's Duties - Company Law I

DUTIES OWED BY DIRECTORS. • • • • Basic position - law recognises the sort of general fiduciary duty that a director owes to the shareholders in the fact they put their confidence in the director's for the day to day management of the business on their behalf. The authorities have used the concept of a constructive trust to encompass this relationship, in the fact that no conventional trust exists but it would be inequitable for a person to retain property for himself, where the company has a claim to it Directors have been required to surrender and return companies benefits which they acquired due to their position as directors. In this context they've been coined fiduciaries - wider classification than the average constructive trustee What's a fiduciary? West building society v Mothew 1996'someone who has undertaken to act for or on behalf of another In a particular manner In circumstances which give rise to a relationship of trust and confidence The distinguishing obligation of a fiduciary is…loyalty The principle is entitled to the single-minded loyalty of his fiduciary' WHO IS IT OWED TO? THE COMPANY ITSELF. • • • The test is subjective - is the director genuinely acting in the best interests of the company as a whole? If so the court won't interfere with their decisions However, case law lays emphasis on the requirement for directors to disclose their conduct to the company if conflicts or potential conflicts of interest arise and/or avoid them from arising. Foss v HarbottleWhere the directors and the shareholders are one and the same, the proper Plaintiff is the company itselfThe 'derivative action' however, is an exception where a minority shareholder can bring an action on behalf of the company, only in the case of 'wrongdoer control' (oppression) Percival v Wright P shareholders sold their shares to 3 directors. Subsequently, they discovered that the directors intended to sell the entire of the company's undertaking to another person at an inflated share price to that received by the Ps. The Ps alleged that the directors were in breach of fiduciary duties as a result. Why? They should have disclosed the fact that they intended to sell the shares at a higher priceNo obligation to tell shareholders of future sale intentions as they owed the shareholders no duty. This would now be insider dealing. Dawson Int. plc v Coats Paton plc 1989 Re-stated the percival rule.Directors of a public company, involved in a take-over battle, may act to the disadvantage of the shareholders wishing to dispose of their shares, if it's in the interest of the company. Lord Cullen"What is in the interests of current shareholders who are sellers of their shares may not necessarily coincide with what is in the interests of the company The creation of parallel duties could lead to conflict. Directors have but one master, the company." Secretary of State for Trade and Industry v Baker and Ors . [1999]'Each individual director owed duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them'(i) "Directors had, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors.(ii) Whilst directors were entitled to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation did not absolve a director form the duty to supervise the discharge of the delegated functions.(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, depended on the facts of each particular case, including the director's role in the management of the company."CREDITORS • • • • Particular application where the company is insolvent. But not stated in the act Statutory provisions rather prescribe certain behaviour by directors The assets are in effect, the creditors assets. DUTY WHEN INSOLVENT: Walker v Wimborne Mason JMust take account of the interests of the shareholders and creditors in discharging their duty TO THE COMPANY. Failure = adverse consequences for the company and directors. Kinsella v Russell Kinsella Property Ltd This was relied upon in subsequent Irish cases - particularly in Fredericks inn 'where the company is insolvent the interest of the creditors intrudes'The judge stated that, In a practical sense, it is their assets and not the shareholders assetsThey become entitled through the process of liquidation, to displace the power of both the shareholders and the directors Presumably this is why they are paid off first. Parkes v Hong Kong & Shanghai Bank Corp. Blayney J accepted the distinction between solvent and insolvent companies and the according principle of directors duties to creditors for the first time Ultra-vires • • Used to have a prominent role in company law, but not anymore Before the act, a company was required to have 2 documents - a memorandum and an article of association, I their constitution, these must have contained: An objects clause:Set out the objectives of the company What has it been set up to actually do? Purpose, aims, objectives. In theory, that was of huge significance because, if you are investing in a company, buying shares for example, you would want to know what is being done with that money. this obviously bcame important for banks - what are their loans going towards. • The difficulty: If a company set out its objectives, and then entered a contract that fell outside of the objectives• • • To avoid this, they began to draw up objects clause that were excessive, to ensure that it fell within their powers. They were exhaustive lists of every conceivable contract/ agreement entered into - every situation. Ultimately, they became pointless as they were far too broad. They'd be drafted so broadly that they'd be rendered ineffective The act says a company does not need an objects clause• • • • the contract was ultra-vires the power of the company. In effect - same capacity as a person. As always, there are exceptions - companies that DO need these - DACs - designated activity company This means, by nature it can only pursue designated activities and so has fixed objectives, and an objects clause Other companies may CHOOSE to have one also, but it is not compulsory post- The Companies Act Frederick Inns Directors of a group of companies were making payments to the revenue commissions. The group of companies in question were in financial difficulty. The funds of one of the companies were not necessarily being paid over, in relation to a revenue debt owed by that company. Instead, they were being paid by another company in the group. Lets say there are 5 companies, company A is paying money to the revenue, but the debt wasn't owed by company A. it's still in the group of companies, but due to the principle of separate legal personality, the group and payments are challenged. Successful in HC and SC. Relevance: If you read the judgments of both courts, they seem to suggest thatthe directors of the company, when in insolvency, owe a duty to the company's creditors. Lardner J"were also misapplications of the respective company's assets because they were made when the companies were insolvent and the payments were in disregard of the rights and interest of the general creditors." Directors owe duties to the company, not necessarily the creditors. Blayney J Cited an authority for the proposition thata company's property is TRUST PROPERTY, and following from this - in a winding up,The company ceases to be the beneficial owner of its assets Which means:Directors no longer have the power to dispose of the assets The control over assets is out of their hands because they don't own them anymore. No beneficial owner anymore so no title in equity to the assets. Once it had to be wound up, the assets have to be distributed - and the rule is that they go to the creditor's first - and an obligation here arises:Director's duty to preserve assets to enable the fair and correct distribution to happen, in discharge of the company's liabilities. SHAREHOLDERS • • The general principle, is that the directors owe a duty to the company as a whole and NOT to the individual shareholders, so at first glance this is inconsistent Generally, following that, this duty will not arise - remember, there could be hundreds or thousands of shareholders. The directors can't owe a personal duty to each and every one of them. Mostly they are simply registered on the register after mere approval but they've never met them or know much about them (in the case of large companies)