Company Law
Directors’ Duties
Part 2 (2 of 3)
(in exam, Directors’ Duties is a Part 1 examinable topic)
It’s a
bargain
You and I
should buy
it-we can
make a
profit
Dr. Vivienne Bradwell
3. Duty to exercise independent judgment-s 173
o Based on fiduciary relationship between directors and the
company
But principle qualified by section itself and case law
Duty not infringed by a director-
o If acting in accordance with an agreement the company has
entered into that restricts future exercise of discretion by the
directors
OR
Agreements to fetter directors’ discretion see Fulham Football
Club Ltd v Cabra Estates plc [1994] CA
Held
o It was legitimate for directors to agree that they would act in
a particular manner if, at the time of making the agreement
they bona fide considered that it was in the interests of the
company (now s 172)-had in fact conferred substantial
benefits on the company
o There was no scope for implying a term that the d. would be
required to do anything that would be inconsistent with their
fiduciary duties
o But where an agreement requires a director to act in a particular
way regardless of whether it is in the interests of the company to
do so then the courts will not enforce the contract (nb s 172)
o Such an agreement it has been said is illegal and so void on
grounds it is ‘fettering’ a director’s discretion see Lord Denning
MR in Boulting v Association of Cinematograph, Television and
Allied Technicians [1963] CA at 626
‘It seems to me that no one, who has ….fiduciary duties, can
…..bind[..] himself to disregard those duties or act inconsistently
with them’.
4. Duty to exercise reasonable care, skill and diligence
(s 174 CA)
o Based both on tort and equitable principle to exercise
reasonable skill and care
o Pre-CA 2006 courts changed approach from subjective test to
objective test to a combination depending on the
circumstances
o S 174 introduced the objective/subjective test (aka the
objective test with a subjective uplift)
o Objective test-courts apply a minimum test which any
directors must meet-decided by court on evidence
presented to it
o Subjective test-provides an ‘uplift’ enabling the ‘general
knowledge, skill and experience’ that a particular director
has above the objective test, to be taken into account
Aspects of the duty
a) Knowledge of the company’s business
o in the director disqualification case (s 6 CDDA) of Re Barings plc (No 5) v
Baker [2000] CA (dual test also applied ) the question was whether Baker, a
director, had management responsibility for Nick Leeson’s activities and had
failed to monitor and control such activities-he had so failed
o CA agreed with the three points made by Jonathan Parker J at first instance
(para 36 of CA judgment):
‘(i) Directors have, 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 (knowledge of the company’s business)’
b) Reliance on company officials and others and supervision
o this covers not just delegation of powers (permitted under Article 5, Model
Articles), but also permits reliance on employees attending to their
responsibilities and keeping the directors informed but they must be
supervised
in Re Barings plc (No 5) v Baker the Court of Appeal agreed again with
Jonathan Parker J at first instance who further went on to add to (i) above:
‘(ii) Whilst directors are entitled (subject to the articles of association of the
company) to delegate particular functions […] the exercise of the power of
delegation does not absolve a director from 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, must depend on the facts of each particular case, including the
director’s role in the management of the company.’ (my emphasis in italics)
o see the parameters of the duty of a chairman and joint MD (Mr
Bairstow) to question accounts prepared by auditors and the finance
director (a qualified accountant) in Re Queens Moat House plc (No 2)
[2004] Ch
• Court took into account Mr Bairstow’s wide business experience and
knowledge of the c’s affairs having been a director and Chairman of it
for many years
• He had no accounting qualification and preparation of final
statutory accounts was delegated to the finance director and the
auditors
• But was required to inform himself about company’s affairs and
to satisfy himself that the accounts were not misleading
• Was not in breach of duty in respect of items in accounts which
were misleading and required accountancy expertise
• Was in breach of duty in respect of incorrect information in
accounts which ‘he ought to have been aware of from his
business experience and knowledge of the company’s affairs’ eg
wrongful 40 % inflation of turnover
o see also the successful s 6 disqualification proceedings against Mr
Sonn a finance director who ‘asked no questions and sought no advice’
per Lawrence Collins, J at p 561 in Re Bradcrown Ltd [2001] Ch
Facts
o Mr Sonn, finance director of a company whose assets were
transferred for no consideration or no proper consideration
o Company went into insolvent liquidation-OR bought action for
disqualification
o In defence Mr Sonn stated had relied on advice from company’s
solicitors
Held
o Reasonable reliance on what turned out to be wrong
professional advice might mean that there has been no
breach of duty
o But it was a matter of degree/facts. Mr Sonn ‘had asked no
questions and simply did what he was told, abdicating all
responsibility’ (the Chairman and MD was a very dominating
individual)
o Note also: Failure to make enquiries about a company’s
activities can amount to a culpable failure leading to breach
of duty and a disqualification order under CDDA 1986 see Re
Park House Properties Ltd [1997] Ch per Neuberger, J p 556-7
Directors have duties and if ‘does nothing’ is likely to be in
breach of duties
Court must enquire whether in the circumstances the failure
to discover what was going on was attributable to ‘culpable
failure’ to make enquiries or to appreciate their results
c) Attendance to the company’s affairs
o It depends on whether or not a director has a service contract
with a company and the terms of that service contract
o If a director does not have a service contract, which would be very
unlikely nowadays. ‘A director is not bound to give continuous
attention to the affairs of his company. His duties are of an
intermittent nature to be performed at periodical board meetings;
and at meetings of any committee of the board upon which he
happens to be placed. He is not, however, bound to attend all such
meetings, though he ought to attend whenever in the
circumstances he is reasonably able to do so.’ Re City Equitable Fire
Insurance Co [1925] Ch 407 (Ch D) Romer J at p 429. From this you
can see that directors are required to attend some only Board
Meetings. It would be most usual then to have a Managing Director
running the day to day matters of the company
o An executive director with a service contract -‘executive’ has no legal meaning
but is used to indicate that a director is a full-time director and his service
contract will set out not only his responsibilities but also the fact that he is
employed full time
o A non-executive director with a service contract -‘non-executive’ has no legal
meaning but is used to indicate that the director works part-time for the
company and his contract will indicate for example, how many days a week he
must devote to the business of the company. Note that even if a non-
executive director, that person is as a director subject to all the general duties
and the statutory duties
o Note: constitution may state absence from Board meetings for certain
period of time results in automatic vacation of Office
5. Duty to avoid conflicts of interest-s 175 (a continuing duty)
o based on two equitable principles of ‘no-conflict’ and ‘no
profit’ rules, treating ‘no profit’ rule as part of the former
o see Lord Herschell’s statement on this fundamental principle
in Bray v Ford [1896] HL at p 52 when discussing a trustee’s
fiduciary duties and the no conflict and no profit rule
-‘ It is an inflexible rule of [….]Equity that a person in a fiduciary
position [….] is not, unless otherwise provided, entitled to make a
profit; he is not allowed to put himself in a position where his
interest and duty conflict’.
-‘…human nature being what it is, there is a danger [in such a
o this section states that a director ‘must avoid a situation in which
he has, or can have, a direct or indirect interest that conflicts, or
possibly may conflict, with the interests of the company’
o applies to exploitation of any property, information or
opportunity (immaterial whether company could take advantage
of it)
o does not apply to a transaction or arrangement with the
company since these are covered by other specific statutory
provisions which will be covered in Part 3 of Directors’ Duties
o Qualifications-not infringed if situation cannot reasonably be
regarded as likely to give rise to a conflict of interest or if
matter has been authorised by directors (subject to
constitution and also quorum and voting provisions in s 175-
excludes interested directors)
o an illustration of the courts’ strict enforcement is the decision
in Premier Waste Management Ltd v Towers [2011] CA
Facts
o Mr Towers, a director of Premier borrowed building
equipment for his personal use from a customer of Premier’s-
a free, undisclosed and unapproved borrowing
o The equipment needed repairs one repair of which was invoiced to
Premier who paid but later was re-imbursed by owner
o Equipment not returned who invoiced Premier for alleged hire and
loss but later returned by Mr Towers
o Premier claimed Mr Towers was in breach of s 175 and liable to
account for profit received by him
Held
o Found for Premier
o The no conflict duty extended to disloyally depriving a company of
the ability to consider whether or not it would have objected to the
diversion of an opportunity offered by one of its customers away
o Is a strict duty and the lack of evidence that the company
would have taken up the opportunity and the fact that
Premier had not suffered any loss and that the value to the
director had been small was all irrelevant
NB: take note of possible conflicts of interest of nominee
directors though this area is outside the course
Aspects of this duty includes
o where a director pursues for own benefit an opportunity
regarded in equity as belonging to the company see Industrial
Development Consultants Ltd v Cooley [1972] 2 All ER 162
Birmingham Assizes, Roskill, J-example of ‘line of business test-
wider than previous ‘maturing business opportunity
Facts
o IDC supplied construction services and Cooley was MD
o Cooley started negotiations for IDC with Eastern Gas Board to
construction of four new depots
o Evident that Gas Board disliked IDC and were not prepared to
deal with them at all-negotiations ceased following Board’s
meeting of directors
o But later Gas Board contacted Cooley at home and made it
clear that they were willing to employ him privately-he
submitted a tender
o Cooley met with his Chairman of Board on 16th June and said
he wished to resign immediately on the grounds of poor
health-chairmen given impression Cooley was on the edge of
a nervous breakdown so agreed-Cooley left on 1st August
o On 6th August Gas Board formally offered him the design and
supervision of all four new depots-Cooley started new job
o IDC sued Cooley for breach of duty but Cooley raised defence
that there was no remedy since IDC had not suffered
damages-they would not have been given the contract for the
depots
Held
o The fiduciary relationship between Cooley and IDC required
him to disclose to IDC information which came to him as MD
and ‘was of concern to [IDC]’ therefor under a duty to
disclose all information received in course of dealing with Gas
Board
o Cooley liable to account for all the benefit he had received
and would receive under the contract with the Gas Board
o It was irrelevant that IDC would not have in any event have
received the contract for the depots and irrelevant that IDC
would consequently receive a benefit they would not
otherwise have received
o it is the existence of the opportunity (in equity belongs to the company)
that is information which directors are under a duty to communicate to
the company see Bhullar v Bhullar [2003] EWCA Civ 424 and Jonathan
Parker LJ,’s judgement delivered on behalf of all the judges (transcript
essential reading), in particular para 41-further revised test
Facts
o Bhullar Bros Ltd-Bhuller had carried on business of propery development
but by a Board resolution had decided not to acquire any further property
o A director went bowling one evening (alley on Bhullar’s property) and saw
a ‘For Sale’ sign up on property adjacent to it part of which was being used
by the alley as a car park
o Director and brother, also a director, created a company ‘Silvercrest’ which
bought the property
o Directors were sued for breach of breach of duty
Held
o Defendants were directors of Bhullar at the material time-on own time is
irrelevant
o Would have been commercially attractive for Bhullar to acquire the
property given its proximity to the bowling alley was ‘a relevant
opportunity’
o The existence of the opportunity was information which it was relevant
for Bhullar to know and should have been communicated to Bhullar
o The test for conflict is ‘whether reasonable men looking at the facts
would think there was a real possibility of conflict’
o Breach of duty and Silvercrest to hold the property on trust for Bhullar
pending the transfer of the property, at the expense of the two directors
to Bhullar at the price paid for it
o An account of profits also ordered
NB read Prentice, D and Payne, J ‘The Corporate Opportunity Doctrine’
Problem-when can directors avoid breach of this duty after
leaving the company? Their knowledge is part of their expertise
See Foster Bryant Surveying Ltd v Bryant [2007] CA
Rix, LJ delivered the court’s unanimous judgment giving
practical guidance in paras 76 and 77
para 76-case law has shown that the principles have remained
the same but their application in different circumstances has
required care and sensitivity to, inter alia, personal freedom to
compete where that does not intrude on the misuse of the
company’s property, whether in the form of business
opportunities or trade secrets
-Case law also shows that ‘the courts have adopted pragmatic
solutions, based on a common-sense and merits based
approach’
para 77- ‘That is a sound approach which reflects the equitable
principles at the root of these issues’
-Where directors leave a company the circumstances are varied.
At one extreme a director may leave to exploit a company’s
opportunity (IDC v Cooley) but ‘in the middle are more nuanced
cases’ where the facts could result in a director being in breach
of duty but in others a resignation might be unaccompanied by
disloyalty so there would be no liability
Held
o Mr Bryant’s resignation was forced upon him by the MD’s
behaviour and when asked later by a client agreed to a
retainer
o Resignation had no ulterior motive and was innocent of any
disloyalty or conflict of interests and retainer was not sought
and acceptance of employment was ‘innocent’.
o Also no finding of any property or maturing business
opportunity taken or exploited
o Consequently no claim against Mr Bryant
6. Duty not to accept benefits from third parties-s 176
o The second duty that continues after a person ceases to be a
director
o a director of a company must not accept a benefit from a
third party conferred by reason of his being a director, or his
doing (or not doing) anything as director
o a ‘third party’ means a person other than the company, an
associated body corporate or a person acting on behalf of
the company or an associated body corporate (‘associated
body corporate’ defined in s 256)
S 176 does not apply
o when benefits received by a director from a person by whom
his services (as a director or otherwise) are provided to
company (eg provision of services through a company)
o if the benefit cannot reasonably be regarded as likely to give
rise to conflict of interest
7. Duty to declare interest in proposed transaction or arrangement-s
177
o based on equitable principle of directors’ fiduciary obligation of
disclosure see Item Software (UK) v Fassihi [2004] EWCA Civ 1244
Arden LJ at para 41
o a duty to ensure that if a director is interested directly or
indirectly, in a proposed transaction he makes the company aware
of that interest in detail (the nature and extent) may do this orally
in directors’ meeting or by notice in writing (specific or general)
o declaration only required if director aware of interest or
arrangement or transaction but includes matters of which a
director ‘ought reasonably to be aware’ of
o see ss (6) for specific circumstances where directors do not
need to declare an interest which inter alia includes ‘cannot
be reasonably be regarded as likely to give rise to a conflict of
interest.’ or is a matter other directors are aware of or ought
to be reasonably aware of
o this general duty is also reflected in the statutory duty in
s182 which contains very similar provisions for existing
arrangements or transactions breach of which leads to the
imposition of a fine (s 183)
Prohibition on voting and being counted in quorum
o In the Model Articles for a private company limited by shares
Article 14 prohibits an ‘interested director’ from voting on
the transaction in a Board meeting, unless interest cannot
reasonably be regarded as likely to give rise to a conflict
o Article 14 also prohibits such directors from being counted
towards the quorum in the Board meeting. The shareholders
in a general meeting (the company) may by an ordinary
resolution disapply such an article
II. Supplementary provisions to all the general duties
i) Cases may fall within one or more duties- s 179 CA
o ‘Except as otherwise provided, more than one of the general
duties may apply in any given case.’
ii) Civil consequences of a breach-s 178 CA
o Are same as the pre-CA 2006 law
iii) Consent, approval or authorisation by members-s 180 CA
o S 180 (1)-provisions of s 175 (conflicts of interest) and s 177
(declaration in proposed transaction) override common law
or equitable principle requiring consent of members
But subject to any enactment or provision of constitution
requiring consent or approval of members
o subsection (2): if situation falls under a general duty and is also
within Chapter 4 (statutory duties requiring transactions
approval by members)-to be discussed in next week’s lecture-
and approval given, or approval not needed, s 175 or s 176 need
not be complied with
o subsection (4): general duties have effect subject to:
-rule of law enabling company to give authority for anything to be
done (or omitted) by directors that would otherwise be breach of
duty, and
-company’s constitution’s provisions for dealing with conflicts of
iv) Provisions exempting directors’ from liability for
negligence, default, breach of duty or breach of trust-s 232
o such provisions are void
o but subject to exceptions which includes a qualifying third
party indemnity or the payment by the company of insurance
cover for directors
Note
o Parts 1, 2 and 3 of Directors’ Duties constitute one
examinable topic
o Substantively it is the largest topic on the course and is also
central to company law
o Directors’ Duties is for the purposes of the exam, a Part 1
topic (see Course Information document on Moodle for
Parts 1 and 2 examinable topics)
Reading
Mayson, French & Ryan
Cases-read judgments or parts of judgments as detailed
Read Prentice and Payne article
THE END
