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INTRODUCTION

DUTIES OF DIRECTORS

Directors, as the principal management organ of the company, must act for its benefit; as
such they are viewed as fiduciary. Their fiduciary position can be traced to the origin of the
modern company. Therefore, generally director’s duties can be divided into 3 categories, that
is the onerous fiduciary duties found in equity to act in the interest of the company, the
relatively light common law duties to exercise and skills, and duties imposed by statutes like
Insolvency Act 1986 and Company Directors Disqualification Act 1986.

Duties of the directors can also be divided into seven major responsibilities, to the company,
to employees, to shareholders, to creditors, to outsiders, political donations, and the Cadbury
report. If we referring to the company, there are two major duties, the fiduciary duties and
skill and care.

FIDUCIARY DUTIES

A director must account to the company for any personal profit he may make in the course of
his dealing with the company’s property. Thus, if a director buys shares in the company at par
when the issue price greater, he must account to the company for the difference; where he has
sold at a profit, he must account the profit. Again if a director receives gifts of money or
shares from promoters of the company or from person selling property to it, he must account
for these sums to the company. The reason for this is that there has been a conflict of interest.
The director is supposed to make negotiation for the company’s benefit, and he can hardly
have done so if he was taking gift from the other party. He must also account for commission
received from person who supplies goods to the company. In addition, a director who in the
course of his employment obtains a contract for himself is liable to account to the company
for the profit he makes, even if it can be shown that the company would not necessarily have
obtained the contract. The accountability arises from mere fact that a profit is made by the
director; it is not a question of loss to the company.

DUTIES OF SKILLS AND CARE

In addition to his fiduciary duties, a director also owes a duty of care to the company at
common law not to act negligently in managing its affairs. The standard is that of a
reasonable man in looking after his own affairs, and might not fairly be said that the earlier
cases show that the duty is not a high one.
QUESTION

“It may not be enough for the director simply to refrain from voting or even to absent himself
or herself from the meeting during discussion of the impugned business. The circumstances
may require the director to take some positive action to identify clearly the perceived conflict
and to suggest a course of action to limit the possible damage”: per Parker in Fitzsimmons v
R (1997) 23 ACSR 355,358 ( Court of Criminal Appeal, Western Australia )

In the light of the above statement, discuss on the issue of competition with the company.

Directors owe a fiduciary duty, above all other considerations, to act bona fide in the interest
of the company. The bona fide is a subjective test, i.e., what the director, and not the court
considers for the benefit of the company – Re Smith & Fawcett Ltd.

If the director honestly believes that it is in the interest of the company, he will not be held
liable. The reason behind the subjective test is that the court refrains from interfering with the
management decision made by the directors. Where the company is one in a group of
companies, the director must act in the interest of his immediate company.

Lord Greene MR in Re Smith & Fawcett Ltd stated that the directors are under a duty to act
bona fide in the interest of the company and not for any collateral purpose. This is called the
‘proper purpose doctrine’.

Moreover, the directors must not place themselves in a position where their personal interest
and their duties may collide or conflict. This also known as ‘no conflict rule’. The policy
underlying the duty was explained by the house of lords in Aberdeen Railway Co v Blaikie
Bros (1854) 1 Macq 461, where it was held that a contract between the company and the
partnership of which one of the directors was a partner was avoided at the instance of the
company.

Carrying on or being associated with a business competing with that of the company give rise
to a conflict between a director’s interest and his duties. As such, the director carrying out
business without consent of his company is strictly precluded from competing with them. In
the case of London and Mashonaland Co Ltd v New Mashonaland Exploration Co Ltd (1891)
WN 165, it was held that a director of a company may be a director of a competing company.
However, this decision can be justified on the facts of the case as the director concerned was
inactive figure head who owed no duty to his company other than not to divulge confidential
information. A competing directorship will not be wrong unless there is actual or potential
conflict that can lead to conflict of interest.

Underlying these equitable principles the law imposes an obligation on a director to exercise
reasonable skill and care in carrying out his functions as would be expected of an individual
of his knowledge and experience. This duty was set out and amplified by Romer J in Re City
Fire Equitable Insurance Co where he also stated that a director is not bound to give
continuous attention to the affairs of the company and that a director is allowed to delegate
relevant duties to an official, having regard to the Articles of Association of the company and
exigencies of the company.

This intrinsically subjective standard reflects the traditional reasoning adopted by the Courts
that directors are better equipped in matters of business judgment to determine what is in the
interests of the company providing such decisions are made in good faith. Nevertheless, this
standard does lead to a scale of competence upon which directors can often operate at the
lower extreme and moreover, given the diversity of the size and management structures of
different types of companies, it is no surprise that the equitable rules governing directors
duties have considerably amplified the light scope and application of common law directors'
duties in a bid to ensure minimum standards of behaviour from directors.

Cooks v Deeks (1916) 1 AC 554

The facts

The Toronto Construction Co had four directors, Mr GM Deeks, Mr GS Deeks, Mr Hinds


and Mr Cook. It helped in construction of railways in Canada. The first three directors
wanted to exclude Mr Cook from the business. Each held a quarter of the company's shares.
Deeks, Deeks and Hinds took a contract with the Canadian Pacific Railway Company (for
building a line at the Guelf Junction and Hamilton branch) in their own names. They then
passed a shareholder resolution declaring that the company had no interest in the contract. Mr
Cook claimed that the contract did belong to the Toronto Construction Co and the
shareholder resolution ratifying their actions should not be valid because the three directors
used their votes to carry it.

Held

Not withstand that their conduct was ratified by the company, the directors were held
accountable. The Privy Council advised that the three directors had breached their duty of
loyalty to the company, that the shareholder ratification was a fraud on Mr Cook as a
minority shareholder and invalid. The result was that the profits made on the contractual
opportunity were to be held on trust for the Toronto Construction Co.

Lord Buckmaster said that the three had, “deliberately designed to exclude and used their
influence and position to exclude, the company whose interest it was their first duty to
protect... the benefit of such contract... must be regarded as held on behalf of the company. it
appears quite certain that directors holding a majority of votes would not be permitted to
make a present to themselves. This would be to allow a majority to oppress the minority....if
directors have acquired for themselves property or rights which they must be regarded as
holding on behalf of the company, a resolution that the rights of the company should be
disregarded in the matter would amount to forfeiting the interest and property of the minority
of shareholders in favour of the majority, and that by the votes of those who are interested in
securing the property for themselves This would be to allow a majority to oppress the
minority. Such use of voting power has never been sanctioned by the court.”

Opinion: The three other director