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‘The statutory statement of directors’ duties contained in the Companies Act 2006 does little to clarify or simplify the confused state of the case law.’ Discuss.

‘The statutory statement of directors’ duties contained in the Companies Act 2006 does little to clarify or simplify the confused state of the case law.’ Discuss.

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An essay for the 2011 Undergraduate Awards Competition by Edward McCoy. Originally submitted for Company Law at University of Ulster, with lecturer John Keers in the category of Law
An essay for the 2011 Undergraduate Awards Competition by Edward McCoy. Originally submitted for Company Law at University of Ulster, with lecturer John Keers in the category of Law

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Published by: Undergraduate Awards on Aug 29, 2012
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05/13/2014

 
Company Law Assignment1
‘The statutory statement of directors’ duties contained in the Companies Act 2006 does little toclarify or simplify the confused state of the case law.’ Discuss.
 IntroductionThe Law Society (1992) suggested that the
‘law relating to directors’ duties
should be reviewed as
 part of the exercise of raising standards of corporate governance.’ 
1
 
The introduction of theCompanies Act (CA) 2006 signified a step towards raising the standards of corporate governance.The objective of the CA 2006 was to help regulate companies on a statutory basis, referred to as
‘codification
2
’ 
with sections 170
 –
177 relating
specifically to directors’ duties.
3
The concept of 
‘codification was recommended by the Law commissions’ 
4
 
and was implemented to attempt to makethe duties
more ‘accessible’ generally and ‘widely known and understood.’’ 
5
Prior to the
introduction of the CA, the courts policed directors’ duties predominantly through common law and
equitable principles and the lack of statute relating to companies regulation meant judgements
relating to directors’ duties w
ere left to common law judgements and open to a case by caseapproach. There remained a lack of clear and unambiguous fundamental duties and the CA waspassed by Parliament to attempt to address the problem of confusion in relation to what is expectedfrom directors within a company. The effectiveness of the CA in its attempt to clarify the duties hasbeen heavily scrutinized.
6
According to Mayson (2010)
7
two central issues that the CA has attemptedto codify are fiduciary duties
8
and the common law of negligence.
9
The other notable change hasbeen
to attempt to strengthen the director’s duty with regard to the company itself through
advocating the success of the company being paramount as signified in the move from therequirement to act in good faith to acting to promote the success of the company. The final issuethat results from the introduction of the CA is the concept of whether
‘codification’ 
has limitationsand will only ever have the potential of gover
ning directors’ duties on a guideline principle.
10
Theissues outlined provide a brief insight into the problems associated with the codification and thesewill be explored in order to conclude on the effectiveness of the CA in achieving a simpler andclearer set of duties for directors to abide by.
1
 
The Law Society (Mem No 271 July 1992), see also: Vanessa Finch, ‘Company Directors: Who Cares About Skilland Care?’ (1992) Mod. L. Rev –
 
‘the common law operates to give
directors a remarkable freedom to run
companies incompetently.’ 
 
2
Len Sealy & Sarah Worthington,
Cases and Materials in Company Law 
(9
th
edn Oxford University Press,Oxford 2010) 299
3
It must be noted that sections 170
 –
 
177 are not the only sections applicable to directors’ duties. S182 can act
in conjunction with s177.
4
 
Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties
(Law Com no 261,1999), Pt 4
5
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
6
 
Ibid, Robert Godard, ‘Directors and their duties,’ (2010) 34 CSR 6, 46 are two examples of articles addressing
this issue.
7
Derek French, Stephen Mayson & Christopher Ryan,
Mayson, French and Ryan on Company law 
(27
th
ednOxford University Press, Oxford 2010
 –
2011) 471
8
Ibid
9
Ibid
10
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
 
Company Law Assignment2Does the codification justification contain discrepancies?
S170 outlines the government’s reasoning for codification and contains various sub sections. S170
(1) re-states the common law position outlined by Swinfen Eady J (1902)
11
which outlined thatdirectors owed their duties solely to the company. The possible discrepancy within S170 is withinsub sections 170 (3) and (4), as these sections could be suggested to be contradictory in theirobjectives. S170 (3) outlines that the CA codification replaces the common law principles and anyclaim against a director must be based upon the statutory provisions.
12
On the other hand, s170 (4)provides that the court has regard for the previous common law and equitable principles.
13
Therehas been a plethora of opinion regarding these provisions including that of Lord Goldsmith whooutlined the reasoning behind sub-section 4 was to allow the courts to develop the statutoryprinciples in line with the applicable case law in relation to particular issues.
14
This rationale hasbeen heavily scrutinized by academics such as Acton (2008) who outlined that the wording of s170(4) remains
 puzzling.’ 
15
Acton (2008) suggests that the legislature has added to the confusionsurrounding
directors’ duties and
created a situation that has attempted to gain the
‘best of bothworlds.’ 
16
 
This conflicting analysis of the effect of s170 leads to questioning whether the CA will haveclarified the applicable issues (the directors overall aim, fiduciary duties and negligence) any further.These issues will be explored in the following sections.Section 172
 –
The overall target of codification?Despite section 172 not being the first duty outlined within the part 10 element (applicable to
directors’
duties) of the CA 2006 there remains a need to examine this element first because otherduties appear to have been designed to work in conjunction with it.
17
The link between s172 and
other sections of the CA is further evidenced in Davidson’s (2007)
18
assertion that the judgement of 
a company’s success remains closely linked to
‘the director's good faith judgment 
(s173) and inhaving regard to the (other) factors listed and the duty to exercise reasonable care, skill and diligence(s174)
.’ 
19
 
S172 states tha
t it is a director’s
‘duty to promote the success of the company.’ 
20
 
This concept of 
promoting the company’s success is new and has been described as much wider than any of the
11
Percival v Wright [1902] 2 Ch 421, Multinational Gas and Petrochemical Co v Multinational Gas and ServicesLtd [1983] 2 All ER 563
12
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
13
Derek French, Stephen Mayson & Christopher Ryan,
Mayson, French and Ryan on Company law 
(27
th
ednOxford University Press, Oxford 2010
 –
2011) 470 
14
Len Sealy & Sarah Worthington,
Cases and Materials in Company Law 
(9
th
edn Oxford University Press,Oxford 2010) 310
15
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
16
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
17
 
Robert Godard, ‘Directors and their duties,’ (2010) 3
4 CSR 6, 46
18
 
Robert Davidson, ‘The Companies Act 2006: directors duties and promoting the company’s success,’ (2007)
11 JIBFL 631
19
Ibid
20
Derek French, Stephen Mayson & Christopher Ryan,
Mayson, French and Ryan on Company law 
(27
th
ednOxford University Press, Oxford 2010
 –
2011) 478
 
Company Law Assignment3
common law approaches to regulating directors’ duties
.
21
Margaret Hodge (2007) outlined that thepurpose of s172 was to create
‘ 
a radical departure in articulating the connection between what isgood for a company and what is good for society at large
.’ 
22
 
On the basis that s172 is supposedly thesection which se
ts out the aim for codifying directors’ duties this must be the standard used to
explore whether the CA has resulted in a clearer view of what is expected from directors. In this areaof company law t
he pre CA approach entailed a stance where directors’ du
ties were regarded as
sui generis
23
 
to the company
 
and resembled the duties of a trustee in equity.
24
Lord Greene MR (1942)established a test to support this view which demonstrated that directors owed their duty to thecompany and not to shareholders or creditors within the context of bona fide.
25
It could be
suggested that Lord Greene’s test has been substantively changed with the introduction of the CA
and in particular s172 which now provides the judges with a subjective standard to assess thecompany against.
26
Lord Goldsmith (2006) supports the view that s172 will provide a means for
assessing directors’ actions and advocates that it is important for a company to have a mission
statement or an objective to strive towards.
27
The concept of a mission statement could be
suggested to stem from the concept of ‘enlightened shareholder value.’
28
This concept providesdirectors with an aim and therefore their
‘success’ 
 
can be subjectively tested against the company’s
target. This section could therefore provide
 prima face
evidence that any practice should be in thebest interest of the company.
S172 of the CA has also been subject to heavy criticism with judges suggesting Hodge’s andGoldsmith’s ideal is perhaps delusional
and that the CA makes little difference to practical decision-making.
29
An example of the CA doing little to clarify the pre CA position can be evidenced by LordGlennie (2008)
30
who concludes in a judgement that section 172
‘appears to little more than set out 
the pre-existing law on the su
bject.’ 
31
 
Glennie’s contention shows there is a tension between the
legislators (government and Hodge in particular) and the judiciary (Glennie). The tension betweenthe government and the judiciary could suggest that the assertion that the CA has done
‘ 
little to
clarify or simplify the confused state of the case law’ 
has a grounding.
Glennie’s position
 demonstrates that the aims of the Companies Act to address some of the confusion within thecommon law may be flawed as it could be argued the CA has simply re
 –
stated various common lawprinciples in the legislation instead of refining them.
21
Ibid
22
 
Robert Godard, ‘Directors and their duties,’ (2010) 34 CSR 6, 46
 
23
 
Directors’ duties being described as
sui generis
means it is a concept that is ‘unique’ or ‘one of a kind;’
Oxford Dictionary of Law (6
th
edn Oxford University Press, Oxford, 2006) 520
24
 
Stephen Acton, ‘A new direction?’ (2008) 158 NLJ 606
 
25
Re Smith & Fawcett Ltd [1942] Ch 304, Derek French, Stephen Mayson & Christopher Ryan,
Mayson, Frenchand Ryan on Company law 
(27
th
edn Oxford University Press, Oxford 2010
 –
2011) 478
26
Lord Goldsmith, Lords Grand Committee, 6 February 2006
27
Ibid, column 255, 258
28
Len Sealy & Sarah Worthington,
Cases and Materials in Company Law 
(9
th
edn Oxford University Press,Oxford 2010) 319
 –
The concept is described as a
‘yardstick’ 
for directors duties rather than a mission
statement but in essence these promote the same goal; the ‘success of the company.’
 
29
 
Robert Godard, ‘Directors and their duties,’ (2010) 34 CSR 6, 46
 
30
Re West Coast Capital (LIOS) Limited [2008] CSOH 72
31
Ibid

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