Directors' Statutory Duties

11/7/2022
BUSINESS
ASSOCIATIONS
Lecture 4 Directors Duties
Review ss 171 - 177 CA
1. Duty to act within powers

2. Duty to promote the success of the company
DIRECTORS’ 3. Duty to exercise independent judgment

4. Duty to exercise reasonable care, skill and diligence
DUTIES: 5. Duty to avoid conflicts of interest
OVERVIEW 6. Duty not to accept benefits from third parties
7. Duty to declare interest in proposed transaction or
arrangement
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S171-173 deal with Directors’ powers
S174 deals with skill and competence/negligence
S175-177 deal with fiduciary loyalty
Understand relationship of statutory

duties and common law rules
Other duties – ie duty of confidentiality
owed to company – not referred to in
DIRECTORS – these sections
No distinction in principle in the duties
GENERAL owed by executive and non-executive
directors
POINTS “Director” includes ‘shadow’ and ‘de

facto’ directors
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Executive - employee working exclusively for

the Company
Non-executive - does not participate in day to
day management but attends and votes at
board meetings
TYPES OF
Shadow - not appointed to the board but
DIRECTOR gives instructions or directions to the board
who then act in accordance with those
instructions or directions s251 CA
De facto – never formally appointed but
performs the functions of a director
THE Statutory statement on Accounts
STATUTORY Duties can be more onerous (e.g. in

Articles)
DUTIES
Owed to the company
UNDER CA
2006
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DIRECTORS’ DUTIES: OVERVIEW

ss 171 CA
Duty to act within powers
Duty to promote the success of the company
Duty to exercise independent judgment
Duty to exercise reasonable care, skill and diligence
Duty to avoid conflicts of interest
Duty not to accept benefits from third parties
Duty to declare interest in proposed transaction or
arrangement
The statutory duty replaces

the common law principle
under which directors must
S171 act within the powers
EXPLAINED conferred on them by the
company’s memorandum and
articles of association and use
them for their proper purpose
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ss 172 CA
arrangement
S172 replaces the fiduciary duty to act in

good faith in the best interests of the
company and replaces the statutory duty
under s309 CA 1985 to consider the
interests of the employees
S172 Case law and statute prior to CA 2006 is

still relevant
Re Southern Counties Fresh Foods Ltd
EXPLAINED [2008] EWHC 2810
Court compared new wording with the old
and concluded they came to the same
thing, with the new wording giving a more
understanding of the scope of the duty
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A director of a company must act in the way he considers, in

good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole, and
TO WHOM DO in doing so have regard (amongst other matters) to:
(a)the likely consequences of any decision in the long
DIRECTORS term
(b)the interests of the company’s employees
OWE THEIR (c)the need to foster the company’s business
DUTIES? relationships with suppliers, customers and others
(d)the impact of the company’s operations on the
S172 CA 06 IN community and the environment
(e)the desirability of the company maintaining a
MORE DETAIL: reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the
company.
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ss 173 CA
arrangement
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ss 174 CA
arrangement
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S 174 CA EXPLAINED
S174 codifies recent formulations of a director’s

common law duty of care, skill and diligence
Gregson v HAE Trustees Ltd and Ors (2008) -
section 174 merely codifies the existing law
Lexi Holdings v Lupman (2009)-MD of Lexi

misappropriated £59m. Sisters of MD found
liable for £42m and £37m for failing in this duty.
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S174(2) This means the care, skill and diligence

that would be exercised by a reasonably
diligent person with
(a) the general knowledge, skill and
experience that may reasonably be expected
of a person carrying out the functions carried
out by a director in relation to the company,
(objective test) and
(b) the general knowledge, skill and
experience that the director has (subjective
test). 15
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Difficult for the Courts to decide on the qualities of a

“reasonable director”.
Companies can be large or small.
Directors can be highly qualified and others not.
Law permits any person over 16 to be a director
irrespective of qualifications.
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ss 175 CA
arrangement
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ss 176 CA
arrangement
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ss 177 CA
Duty to declare interest in proposed transaction or arrangement
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REFLECTIONS ON CODIFICATION OF
DIRECTORS DUTIES
ss178-179 CA 2006-civil consequences for breach
Enlightened Shareholder Value and s172 practical

difficulties
Are Directors working for themselves as
employees or the Company and its shareholders?
High salaries and benefits but risk personal liability
if Company fails or suffers losses.
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Companies and their place in society
CORPORATE Behave with due CSR towards

‘stakeholders’ in society
SOCIAL
RESPONSIBILITY How does this fit with a company’s legal
duties?
- CONTEXT NB s418(5) CA 2006-false statement in
directors’ report
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Understand that the courts will take into account

the existing case law when interpreting either:
1. Fiduciary duties (equitable principles)
2. Common law duties (from the common law)
[Link your analysis of the statute with an

understanding of the case law.]
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DIRECTORS AS FIDUCIARIES
Aberdeen Rly Co Ltd v Blaikie Bros (1854) per Lord

Cranworth
To act bona fide in the interests of the company
To exercise powers for their proper purpose
To avoid conflict of interests and not to profit from directorial position
Comparable with trustees

Consider these duties and their limits – example of Nick
Leeson and Re Barings Plc (No. 5) [1999] 1 BCLC 433, also [2000] 1
BCLC 523 CA
Knowledge and understanding
Boundaries of delegation
Power to delegate did not absolve directors from responsibilities and duties.
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TO WHOM DO DIRECTORS OWE

THEIR DUTIES (1)?
Shareholders as individuals v the company?

Contractarian
Greenhalgh v Arderne Cinemas Ltd (1951)-the
Company as a whole
Re Pantone 485 Ltd (2002)-when insolvent,
duty is to creditors
Peskin v Anderson (2001)-no fiduciary duty to
shareholders
Pluralist
Report of the Second Savoy Hotel Investigation
(HMSO 1954)-duty to shareholders, creditors,
employees etc.
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TO WHOM DO DIRECTORS OWE

THEIR DUTIES (2)?
Creditors?
Multinational Gas and Petrochemical Co Ltd v Multinational Gas and
Petrochemical Services Ltd (1983) per Dillon LJ-owe duty to company not
creditors or shareholders
Employees?
S172 CA 06
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S171 DUTY TO ACT WITHIN POWERS

[CF TRADITIONAL DUTY TO EXERCISE
POWERS FOR THEIR PROPER PURPOSE]
Hogg v Cramphorn (1967)-improper use of fiduciary

power
Howard Smith Ltd v Ampol Petroleum Ltd (1974)-issue of

new shares invalid
Teck Corpn Ltd v Millar (1972) per Berger, J Directors

must act in good faith and have grounds for that belief
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S172 DUTY TO PROMOTE THE SUCCESS OF THE

COMPANY [CF DUTY TO ACT BONA FIDE IN THE
INTERESTS OF THE COMPANY]
Re Smith & Fawcett Ltd (1942)
‘directors must exercise their discretion bona fide in what they consider
– not what the court may consider – is in the interests of the company’ –
to this extent the test is a subjective one
per Lord Greene MR
Charterbridge Corpn Ltd v Lloyd’s Bank Ltd (1970)
‘whether an intelligent and honest man in the position of a director of
the company concerned, could, in the whole of the existing
circumstances, have reasonably believed that the transactions were for
the benefit of the company’ Per Pennycuick J
Madoff Securities International Ltd (in liquidation) v Raven (2013)
The test can be an objective one. So, if a director embarks on a course
of action without considering at all the best interests of the company and
there is no basis on which he/she could come to the conclusion that it
was in the interests of the company, the director will be in breach.
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S172 DUTY TO PROMOTE THE SUCCESS OF

THE COMPANY [CF DUTY TO ACT BONA FIDE
IN THE INTERESTS OF THE COMPANY]
Creditors?
General rule no duty owed
In the context of insolvency the rule is modified and
resembles the rules which apply to shareholders
Difficult in practice is determining the point at which
the company is insolvent and when therefore the
focus should shift away from the shareholders and
towards creditors
See Re HLC Environmental Projects Ltd (2013)
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S172 DUTY TO PROMOTE THE SUCCESS OF

THE COMPANY [CF DUTY TO ACT BONA FIDE
IN THE INTERESTS OF THE COMPANY]
s414C(1) Companies Act 2006

Requires a report to inform members of the
company and help them assess how the directors
have performed their duty under s.172
NB this does not apply to small companies and is

qualified with respect to medium sized companies (as
defined)
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S173 DUTY TO EXERCISE INDEPENDENT

JUDGMENT
[CF DUTY TO ACT BONA FIDE IN THE
INTERESTS OF THE COMPANY]
Fulham Football Club Ltd v Cabra Estates plc (1994)
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S174 DUTY TO EXERCISE REASONABLE

CARE, SKILL AND DILIGENCE
Re Cardiff Savings Bank, Marquis of Bute’s Case (1892)-Marquis appointed director at 6
months old
Re City Equitable Fire Insurance Co Ltd (1925)

No greater skill than reasonably expected from a person of his knowledge and
experience
Not bound to give continuous attention to the affairs of the company
Delegation of duty is possible to some other official so long as honest belief in their
ability is held
Donoghue v Stevenson (1932)-duty of care
Norman v Theodore Goddard (1991)-appropriate test for negligent conduct in s214(4) IA

1986
S214(4) IA 1986 (Wrongful Trading)
Now see s174(2) CA 06
NB a director must now be aged 16 or over (s157 CA 06)
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S214(4) INSOLVENCY ACT 1986
“the facts which a director of a company ought to know or

ascertain, the conclusions which he ought to reach and the
steps which he ought to take are those which would be known or
ascertained, or reached or taken, by a reasonably diligent person
having both:
(a) the general knowledge, skill and expertise that may

reasonably be expected of a person carrying out the same
functions as are carried out by that director in relation to the
company, and
(b) the general knowledge, skill and experience that that
director has”
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SS175-177 DUTY TO AVOID CONFLICT OF

INTEREST, NOT TO PROFIT FROM
DIRECTORIAL POSITION/TAKE A
PERSONAL BENEFIT AND DUTY TO
DISCLOSE PERSONAL INTERESTS
Bray v Ford (1896)
Lord Herschell “It is an inflexible rule of a court of equity that a
person in a fiduciary position..is not..entitled to make a profit”.
Boardman v Phipps (1967)

Lord Upjohn (dissenting judgement) said that there must be a
real sensible possibility of conflict between his duty and interest
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Regal (Hastings) Ltd v Gulliver (1942) – Key case
Directors had acted in good faith and used their own

money in acquiring shares. Regal had suffered no
loss.
Court said that directors were in a fiduciary relationship

and are accountable for profits made when shares
were sold.
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This is a principle which makes it a

CORPORATE breach of fiduciary duty by a director
OPPORTUNITY to appropriate for his own benefit an
economic opportunity which is
DOCTRINE considered to belong rightly to the
company which he serves-Professor
Prentice 1974
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The Corporate Opportunity Doctrine

Cook v Deeks (1916)
IDC Ltd v Cooley (1972)
Peso Silver Mines v Cropper (1966) [Supreme Court of
Canada]
Queensland Mines Ltd v Hudson (1978) [Privy Council]
Island Export Finance Ltd v Umunna (1986) - post -
resignation
NB s175 (4)(a) CA 06 and Lord Upjohn’s (dissenting)
formulation in Boardman v Phipps
S175 (5) CA 06 authorisation procedure
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THE CORPORATE OPPORTUNITY

DOCTRINE (2)
Bhullar v Bhullar (2003) CA per Jonathan Parker LJ
‘No conflict/profit’ rule universal and inflexible

The test was “the reasonable man, looking at the
facts; was there a real sensible possibility of conflict?”
Do not focus on whether the company has a
beneficial interest in the opportunity but if the
director's exploitation of the opportunity attracted the
application of the rule
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THE CORPORATE OPPORTUNITY

DOCTRINE (3)
O’Donnell v Shanahan [2009] EWCA Civ 751
“the rationale of the ‘no conflict’ and ‘no profit’ rules is

to underpin the fiduciary’s duty of undivided loyalty to
his beneficiary. If an opportunity comes to him in his
capacity as a fiduciary, his principal is entitled to know
about it. The director cannot be left to make the
decision as to whether he is allowed to help himself to
its benefit.” Per Rimer LJ
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Equitable compensation (damages)
Duty to account
Constructive trust
REMEDIES JJ Harrison(Properties) Limited v Harrison (2002)

and Paragon Finance plc v Thakerar & Co Ltd
(1999)-monies held by director as constructive
trustee
CMS Dolphin Ltd v Simonet (2001) per Lawrence

Collins J-director accountable for profits
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Those who assist a director to breach the duty will

also be liable
Dishonest Assistance
Royal Brunei Airlines Sdn Bhd v Tan (1995) per
Lord Nicholls
REMEDIES: Barlow Clowes International Ltd (in

liquidation) v Eurotrust International Ltd
ACCESSORY [2006] PC
It is accepted by practitioners that
LIABILITY professional tribunals are likely to apply
the objective approach favoured in
Barlow Clowes.
Knowing Receipt
BCCI Ltd v Chief Akindele (2000) per Nourse LJ
Recipients state of knowledge had to make it
unconscionable for him to retain benefit.
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Statutory provisions
S239 CA 06
Only applies to the ratification by a Company
of conduct of a director which amounts to
negligence, default, breach of duty or breach
of trust
RATIFICATION Only disinterested members’ votes are

counted
Cannot ratify that which is not ratifiable
(consider actions which could be the
subject of a derivative action)
Requires ordinary resolution
s177 CA 06 Director (if a shareholder) must declare

interest.
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s1157 CA 06
Honest and reasonable actions which

ought fairly to be excused
COURTS GRANT
RELIEF FROM Re Welfab Engineers Ltd (1990)
LIABILITY
Re Pro4Sport Ltd (in liquidation)
(2015) – relied on professional advice
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DIRECTORS DUTIES
Identify directors’ roles in
running the company and Address any inconsistencies or
discuss their relationship relevant jurisprudence from
with the company other jurisdictions
Identify the statutory Consider ratification of
codification of directors’ breaches
duties Consider remedies available /
Apply the relevant rule(s) personal liability /
disqualification
Discuss any development
of the Discuss applicable defences
rule(s) and judicial for directors
interpretation
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Directors' Statutory Duties

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11/7/2022

Review ss 171 - 177 CA

1. Duty to act within powers

DIRECTORS’ 3. Duty to exercise independent judgment

S171-173 deal with Directors’ powers

S174 deals with skill and competence/negligence

S175-177 deal with fiduciary loyalty

Understand relationship of statutory

POINTS “Director” includes ‘shadow’ and ‘de

Executive - employee working exclusively for

THE Statutory statement on Accounts

STATUTORY Duties can be more onerous (e.g. in

DIRECTORS’ DUTIES: OVERVIEW

The statutory duty replaces

DIRECTORS’ DUTIES: OVERVIEW

S172 replaces the fiduciary duty to act in

S172 Case law and statute prior to CA 2006 is

A director of a company must act in the way he considers, in

DIRECTORS’ DUTIES: OVERVIEW

DIRECTORS’ DUTIES: OVERVIEW

S174 codifies recent formulations of a director’s

Lexi Holdings v Lupman (2009)-MD of Lexi

S174(2) This means the care, skill and diligence

Difficult for the Courts to decide on the qualities of a

DIRECTORS’ DUTIES: OVERVIEW

DIRECTORS’ DUTIES: OVERVIEW

DIRECTORS’ DUTIES: OVERVIEW

ss178-179 CA 2006-civil consequences for breach

Enlightened Shareholder Value and s172 practical

Companies and their place in society

CORPORATE Behave with due CSR towards

DIRECTORS’ DUTIES: OVERVIEW

Understand that the courts will take into account

1. Fiduciary duties (equitable principles)

2. Common law duties (from the common law)

[Link your analysis of the statute with an

Aberdeen Rly Co Ltd v Blaikie Bros (1854) per Lord

Comparable with trustees

TO WHOM DO DIRECTORS OWE

Shareholders as individuals v the company?

TO WHOM DO DIRECTORS OWE

S171 DUTY TO ACT WITHIN POWERS

Hogg v Cramphorn (1967)-improper use of fiduciary

Howard Smith Ltd v Ampol Petroleum Ltd (1974)-issue of

Teck Corpn Ltd v Millar (1972) per Berger, J Directors

S172 DUTY TO PROMOTE THE SUCCESS OF THE

S172 DUTY TO PROMOTE THE SUCCESS OF

S172 DUTY TO PROMOTE THE SUCCESS OF

s414C(1) Companies Act 2006

NB this does not apply to small companies and is

S173 DUTY TO EXERCISE INDEPENDENT

Fulham Football Club Ltd v Cabra Estates plc (1994)

S174 DUTY TO EXERCISE REASONABLE

Re City Equitable Fire Insurance Co Ltd (1925)

Donoghue v Stevenson (1932)-duty of care

Norman v Theodore Goddard (1991)-appropriate test for negligent conduct in s214(4) IA

S214(4) INSOLVENCY ACT 1986

“the facts which a director of a company ought to know or

(a) the general knowledge, skill and expertise that may

SS175-177 DUTY TO AVOID CONFLICT OF

Boardman v Phipps (1967)

Regal (Hastings) Ltd v Gulliver (1942) – Key case

Directors had acted in good faith and used their own