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By analysing Directors Duties evaluate whether judges have adopted an interventionist role in corporate affairs?

By analysing Directors Duties evaluate whether judges have adopted an interventionist role in corporate affairs?

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An essay for the 2011 Undergraduate Awards (Ireland) Competition by Kelly Hardman. Originally submitted for Law with Criminology at University of Ulster, with lecturer Amanda Zacharopoulou in the category of Law
An essay for the 2011 Undergraduate Awards (Ireland) Competition by Kelly Hardman. Originally submitted for Law with Criminology at University of Ulster, with lecturer Amanda Zacharopoulou in the category of Law

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Published by: Undergraduate Awards on Aug 31, 2012
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10/27/2013

 
‘Judges until the 1970s were generally tame and on a tight lead. They may now befound barking - on occasion perhaps biting at the ankles of advocates. The aim of the judge is by judicial intervention to promote justice by saving time and costs andconcentrating on essential issues without any sacrifice of the legal principles. Notevery intervention is of this character or achieves this goal and not everyone hasadapted to this change or approves of it. But my understanding is that the appreciationof its value is growing and that the aim of judicial intervention in corporate affairs isto a considerable degree being achieved’
1
.The attributes overriding the intervention of judges in corporate affairs have been subject todebate from ‘primeval’ times. Embedded within the Book of Genesis are a plethora of  principles governing judicial conduct which has retained an eternal stance witnessed in LordJustice Lightman’s above analytical focus purporting one to examine whether proactiveinterference by the judiciary has occurred in the UK company law and to what degree.Through pin-tailing the intricate and multifaceted role of directors duties and in the course of examining an array of case law one hopes to answer the vexed question as to how judgeshave swung from strictly sticking to the precedents of the arguably woolly case law to takinga more interventionist approach in the amassing case law post execution of the reinventeddirectors duties
2
 in the Companies Act 2006.Since the birth of the UK’s modern system of Company Law 150 years ago, judges have beeninundated with a seemingly unavoidable legacy, that of the impending wrath of addressingcase law stimulated by the area of directors duties and;‘Now that the work of the Company Law Steering Group is implemented the courtsare expected to play a central role in the development and appeal of the law’
3
.It could thus be debated the point of contention is perhaps not whether judges should or should not adopt a more interventionist role but hypothetically, ‘whether judges can betrained to change the way they intervene’
4
.Mayson, French and Ryan allude to the fact two criticisms of judicial interference whichemerge from the realms of company law reside in the ‘decisions of great practical importance
1
http://www.judiciary.gov.uk/publications_media/speeches/pre_2004/09111999.htm
2
CA 2006 s 171: Duty to act within powers, s 172: Duty to promote the success of the company, s 173: Duty toexercise independent judgement, s 174: Duty to exercise reasonable care, skill and diligence, s 175: Duty toavoid conflict of interest, s 176: Duty not to accept benefits from third parties & s 177: Duty to declare interestsin proposed transactions with the company.
3
De Lacy, J.,
 Reform of UK Company Law
, Routledge, 2002
4
McKenzie, I. K.,
 Law, power, and justice in England and Wales
, Greenwood Publishing Group, 1998 (pg 10)
1
 
to business people’ and whether ‘judges should be free to disapply rules whenever they like’
5
. Emphasising this point, Lightman lends the window to the view that;‘Some judges’ intervention in earlier days was not always such that the experiencewas particularly pleasant or elevating. This gave judicial intervention a bad name. Butthe increasing interventionist role of modern judges (in corporate affairs) is designedand calculated to advance the legislative code as well as the pursuit of justice’
6
.The courts have readily intervened and developed the common law duties of care and skill of directors as well as assisting in the equitable fiduciary duties. Through tackling theinconsistencies surrounding directors’ competence and self interest traits corporate judgeshave arguably regulated and clarified the complex landscape of director’s duties. This iscontested in the proposition that;‘Although the courts have jumped the gun in interpreting certain statue provisionstheir endeavours have usually served only to pre-empt intervention by parliament’
7
.De Lacy’s above burden is exemplified by the codification of duties and installation of aCombined Code by recommendation of the Company Law Review Steering Group; partly totry and avoid further governmental intervention as well as the need for more stringent laws.Director’s duties stem from the distinct functions of acting as an entrepreneur revolvingaround striving to maximise profits of a company and secondly acting as trustee over theassets of a company. The Cadbury Report confirmed these functions through definingcorporate governance as ‘the system by which companies are directed and controlled’
8
.The entrepreneurial function has incurred criticism as being profoundly overlooked due to thelack of intervention by the courts particularly exemplified in
Carlen v Drury
9
upon which thecourt was unenthusiastic to foretell directors’ business decisions. On the other hand, it has been contested that;‘It is the laws themselves, and
the ways in which the courts apply them
, that matter for real outcomes’
.
5
French, D., Mayson, S.W., Ryan, C.L.,
 Mayson, French & Ryan on Company Law
, Oxford University Press,26
th
Edition, 2009, 20.
6
http://www.judiciary.gov.uk/publications_media/speeches/pre_2004/09111999.htm
7
De Lacy, J.,
 Reform of UK Company Law
, Routledge, 2002
8
http://www.corpgov.net/library/definitions.html
9
(1812) V & B 154
10
Enriques, L., ‘Do Corporate Law Judges matter? Some evidence from Milan’,
 European BusinessOrganization Law Review
, Vol. 3, (2002)at page 767
2
 
The new statutory duty of care, skill and diligence has been coined ‘modest’
nevertheless itis worthy to note the courts are becoming more robust in determining the standard of care acompany should expect. Romer J’s original formulation of the extent to degree required fromthis duty was exacerbated in
 Re City Equitable Fire Insurance Co Ltd 
however the proactive approach of Foster J in
 Dorchester Finance Co Ltd v Stebbing 
 
witnessed a more profound interpretation of the facts. Foster J’s point of contention was not necessarily whatconstituted the appropriate degree of care and skill to be expected from the defendants butrather the crux of his decision took into consideration the defendants experience inaccountancy and business; thus they were liable for negligence as well as a breach of their fiduciary duties.
 Norman v Theodore Goddard 
reaffirms this noticeable shift and positiveinterventionist approach whereby;‘at the end of the 20
th
century, courts realised that this (
 Re City Equitable Fire Insurance Co Ltd 
) was too low a standard and they adopted the dualobjective/subjective standard from IA s 214(4) (wrongful trading) …the CA 2006, s174(2), has now given it statutory force’
.Hoffman J proposed a director should display such care as that which is reasonably expected;thus in comparison to Romer J’s view it poses a much more objective element in assessing adirectors conduct particularly squared with that of the relevant directors abilities and notconferring to the conduct of an individual performing directorial functions. It is interesting tonote how this prevailing pivotal ‘objective trend’ has flurried, causing a dramatic change aswitnessed in the now codified duty which is partially accredited to judicial activism andstatute development. This enlightenment illustrated by the courts gives effect to the evidencethat there is a fairly wide construction of legislation and a generous approach to public policy.In a different manner, a rather rigorous judicial advancement has been made regardingdirectors fiduciary duties, namely in carrying out a ‘prophylactic’ function due to whatDignam and Lowry consider a ‘considerable managerial autonomy’
. The Company Law
11
Ottley, M.,
 Briefcase on Company Law
, 2
nd
Edition, Routledge Cavendish, 2002
12
(1925) Ch 407: It was held a director; firstly need only display such skill as may be reasonably expected froma person of his knowledge and experience. Secondly, need not give the affairs of the company continuousattention and thirdly; a director is entitled to leave the day to day running of the company to the officials of thecompany and is entitled to assume, the absence of suspicious circumstances that such officials are performingtheir duties honestly.
13
(1989) BCLC 498
14
(1991) BCLC 1028
15
French, D., Mayson, S.W., Ryan, C.L.,
 Mayson, French & Ryan on Company Law
, Oxford University Press,26
th
Edition, 2009, 488.
16
Dignam, A., Lowry, J.,
Company Law
, 5
th
Edition, Oxford University Press, 2008, 325
3

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