Company Law in Context

Directors’ Duties I – The Statutory Framework - Workbook

Contents
LECTORIAL HANDOUT................................................................................................................2
Study Unit Objectives.................................................................................................................3

WORKSHOP QUESTIONS..........................................................................................................15
Self-test questions ……………………………………………………………………………………………………………. 19

How to use this Workbook

Before the Lectorial:
 Print off the Workbook
 Read the Lectorial Handout
 Attempt Lectorial Activities 1, 2 and 3
 Read through the rest of the handout to gain familiarity with the subject; you do not
need to fill in the gaps as this will be done in the “live lecture” part of the Lectorial

During the Lectorial:

 There will be group discussion of Workshop Activities 1, 2 and 3 at the start
 You will complete the handout with the aid of the live lecture
 There will be in-class discussion of Activity 4
 You will have time to start preparing for the Tutorial, with the tutors “in the
background”

After the Lectorial:

 Review the handout
 Continue to prepare for the workshop

During the Workshop:

 There will be discussion of the Tutorial Activities

After the Workshop:

 Review your notes and make sure you understand what has been covered
 Complete the self-test questions at the end
 LECTORIAL HANDOUT

What we have covered so far on the module…

Section 1: Incorporation Basics:

1.1: Business Organisations

1.2: Corporate Personality
1.3: Registration – Key Actors & Process
1.4: Articles of Association
1.5: Corporate Decision-Making

Section 2: Corporate Finances:

2.1: Corporate Capital

2.2: Loan Capital
2.3: Capital Maintenance

Section 3: Corporate Actions:

3.1: Directors’ Duties I – The Statutory Framework

The Objectives of this Study Unit are to be able to:

 Outline the sources of the law relating to directors’ duties

 Explain the background to the general duties owed by directors set out in the
Companies Act 2006
 Outline the general duties set out in sections 170-177 Companies Act 2006,
and cite case law to illustrate each one
 Explain the concept of “corporate social responsibility” and its relevance (or
otherwise) within current English company law
 Explain and apply the relevant directors’ duties to a practical scenario

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LECTORIAL ACTIVITY 1
(a) In which three pieces of legislation is the law relating to directors’ duties principally

set out?

(b) Which other source is likely to be relevant?

[Write your answers here]

LECTORIAL ACTIVITY 2
(a) Where in statute is the definition of “director” set out? (Hint: look back at your

materials on Registration | Key Actors)

(b) Is it a helpful definition, in your view? Why/why not?

(c) Why do you think it was drafted that way?

[Write your answers here]

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LECTORIAL ACTIVITY 3
(a) According to regulation 3 of the Model Articles for private companies, how much

power do directors have?

(b) What are the implications of this?

[Write your answers here]

 
DIRECTORS’ DUTIES: BACKGROUND

 Historically – no definitive statement of directors’ duties – evolved piecemeal through

the ……………………………………………. on equitable principles
 E.g. “duty to act in good faith in the interests of the company”
 Disadvantages: lack of clarity; complex and inconsistent
 1998: Department of Trade & Industry commissioned a review of UK company law –
Modern Company Law for a Competitive Economy
 Overseen by the Company Law Reform Steering Group (CLRSG)
 2001: CLRSG submitted Final Report to DTI
 Two Government White Papers responding to Final Report
 Feedback and consultation
 Company Law Reform Bill 2005
 Companies Bill 2006
 Duties now codified in ………………………………………………………………………………………….

 Aim of CA 2006: …………………………………… company law

 CLRSG recommended …………………………………….. directors’ duties BUT this was to be
based on the common law principles
 BUT the language of the Act is not quite the same as the language traditionally used by
the courts
 E.g. s. 172 – “Duty to promote the success of the company” is not quite the same as
the common law “duty to act in good faith in the interests of the company”

Comment

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  “the [new] provisions may… prove exceptionally difficult for practitioners to interpret
as regards their nature, ambit and application, rendering the giving of advice to
directors by company lawyers as to how they should conduct themselves with regard
to their company a hazardous and potentially unfruitful exercise until extensive
interpretative case law becomes available”.

(G Scanlan et al, Companies Act 2006 – A Guide to the New Law (Jordans 2007) 58)

S. 170 – Scope and nature of general duties (extract)

(1)The general duties specified in sections 171 to 177 are owed by a director of a
company to ……………………………………………..

[…]

(3)The general duties are based on certain ……………………………………… rules and

equitable principles as they apply in relation to directors and have effect ……………………
………………………………. those rules and principles as regards the duties owed to a
company by a director.

(4)The general duties shall be interpreted and applied …………………………………………………

as common law rules or equitable principles, and …………………………………………………………
……………………………………………….. to the corresponding common law rules and equitable
principles in interpreting and applying the general duties.

 IMPLICATIONS: to understand the statutory duties, we need to look at the old common
law cases upon which they are based.

S. 171 – Duty to act within powers

A director of a company must—

(a) act in accordance with the company's constitution, and

[i.e. a director must act in accordance with the company’s articles, including any objects
clauses – see SU 1.4]

(b) only exercise powers for the purposes for which they are conferred.

[Mainly refers to cases involving the …………………………………………………………………………….]

Directors are only to use this power in order to …………………………………………………………………

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………………………………………………………………………., not for other purposes e.g. changing voting
structures to their advantage.]

Howard Smith Ltd v Ampol Petroleum Ltd (1974) (JCPC, Aus)

 Ampol Petroleum Ltd and Bulkships Ltd together owned 55% of the shares in
R.W.Miller (Holdings) Ltd
 Ampol & Howard Smith Ltd made competing takeover bids for Miller
 Directors of Miller favoured Howard Smith Ltd’s bid – but Ampol & Bulkships would not
accept his offer
 Directors …………………………………………………………………………. to Howard Smith Ltd to
place Ampol and Bulkships in a minority position, to ……………………………………………………
………………………………………………………………………………………………………………………………………
 Ampol challenged the validity of the issue of shares
 Held: improper use of powers – designed to thwart wishes of majority shareholders
not ……………………………………………………………………………..

Lord Wilberforce:

“it must be unconstitutional for directors to use their fiduciary powers over the shares in the
company purely for the purpose of destroying an existing majority, or creating a new
majority which did not previously exist...”

S. 172 Duty to promote the success of the company

(extract)
(1) 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
in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and
others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business
conduct, and
(f) the need to act fairly as between members of the company.

S. 172(1): “the way he considers, in good faith”…

 i.e. a director must act, in the way he himself ……………………………. considers will be

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 most likely to promote the success of the company – this is a ………………………………………
duty
 Court will …………………………………………………………… to impose what it considers to be
best for the company with the benefit of ……………………………………. and expert evidence
 i.e. this is a ……………………………………………………. test

Regentcrest plc v Cohen [2001] BCC 494

 Mr Richardson was director of Regentcrest plc

 Company was entitled to claw back an asset from another company in relation to a
commercial transaction
 Mr Richardson waived that entitlement
 Regentcrest plc went into liquidation
 Liquidators of Regentcrest brought an action against Mr R for breach of his common
law fiduciary duty to act bona fide in the interests of the company
 He argued that he had agreed to the waiver for a valid commercial reason and in the
honest belief that it was in the best interests of the company, in accordance with his
duties as a director
 Held: no breach of fiduciary duty

Jonathan Parker J:

“The duty imposed on directors to act bona fide in the interests of the company is a
subjective one. The question is not whether, viewed objectively by the court, the
particular act or omission which is challenged was in fact in the interests of the
company; still less is the question whether the court, had it been in the position of the
director at the relevant time, might have acted differently. Rather, the question is
whether the director honestly believed that his act or omission was in the interests of
the company. The issue is as to the director's state of mind. No doubt, where it is clear
that the act or omission under challenge resulted in substantial detriment to the
company, the director will have a harder task persuading the court that he honestly
believed it to be in the company's interest; but that does not detract from the
subjective nature of the test.”

Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, CA

 Fassihi = director & employee of Item Software (“Item”)

 Item had a contract with Isograph
 Item tried to renegotiate the contract on more favourable terms
 During negotiations, Fassihi suggested to Isograph that he should set up a new co. to
……………………………………………………………………………………………………………………………………
 He also encouraged Item to take an ……………………………………………………………………………..
in its negotiations with Isograph
 Isograph terminated the contract with Item – entered new contract with F’s own co.
 Item dismissed F - sued him for breach of duty to act in good faith in the interests of

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 the co.
 Also alleged he had breached his duty by ………………………………………………………………….
………………………………………………………………………………………………………………….. to the co.
 CA agreed

LECTORIAL ACTIVITY 4 (to be covered in class)

Consider the list of factors for which directors are to have regard in s. 172(1) CA 2006.

(a) What strikes you about this list? What concept(s) does it reflect?

(b) How effective do you think this sub-section is, in controlling the behaviour of

directors? (Hint: see s. 170(1) CA 2006).

(You will return to this in the workshop.)

[Write your answers here]

S 173 – Duty to exercise independent judgment

(1) A director of a company must exercise independent judgment.

(2) This duty is not infringed by his acting—

(a) in accordance with an agreement duly entered into by the company that restricts the
future exercise of discretion by its directors, or
(b) in a way authorised by the company's constitution.

A restatement of common law duty that directors must not ………………………… their
discretion - considered in Fulham FC Ltd v Cabra Estates plc [1994] 1 BCLC 363

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S 174 – Duty to exercise reasonable care, skill & diligence
(1) A director of a company must exercise reasonable care, skill and diligence.

(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 the director in relation to the
company, [……………………………………………………..] and

(b) the general knowledge, skill and experience that the director has. [………………………
………………………………………………….]

Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498

 A money-lending company had 3 directors including Stebbing

 Stebbing worked full-time for the company
 Other two visited premises only very rarely and paid very little attention to it
 No board meetings were held
 Other two directors signed blank cheques at Stebbing’s request
 Stebbing used these to make loans which were unlawful and therefore irrecoverable

HELD:

 They had breached their duty to exercise reasonable care and skill
 All three directors were liable to make good the company’s losses

Foster J rejected the idea that non-executive directors have no duties to perform:

“The signing of blank cheques by H & P was in my judgment negligent, as it allowed S to do

whatever he pleased… they not only failed to exhibit the necessary skill and care in the
performance of their duties as directors, but also failed to perform any duty at all as
directors of Dorchester. In the Companies Act 1948 the duties of a director whether
executive or not are the same.”

Norman v Theodore Goddard [1992] BCC 14

 Mr Quirk, a surveyor, was one of two directors of LB Investments Ltd, a property

company – responsible for managing its properties
 The shares in the company were owned by a trust administered by Theodore Goddard
solicitors
 Bingham, a partner in TG and a trust law specialist, was the other director
 B advised Q that the company would save tax if it banked with Gibbon Ltd, a company

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 registered in Jersey which B said was controlled by TG
 Q accepted the advice
 In fact Gibbon Ltd was not controlled by TG but by B personally – it was a vehicle for
him to steal LB Investment Limited’s money
 Had Q taken reasonable care?
 Was he liable to replace the money stolen by B?

Held: Q had not breached his duty of care.

1. The court imposed a dual standard:

 Objective test: director need not exhibit greater degree of skill than might
reasonably be expected from a person undertaking his particular duties. His role in
the company was to manage its properties – so he was expected to show reasonable
skill in property management – which he had demonstrated.

 Subjective test: It might be that in considering what a director ought reasonably to

have known or inferred, the knowledge, skill and experience which he actually had
should also be taken into account in addition to that which a person carrying out his
functions should be expected to have. Q’s expertise was in property management –
he was not expected to have specialist knowledge about tax law.

2. The court also said that business could not be carried on upon principles of distrust - men
in responsible positions might be trusted until there was reason to distrust them. No reason
for Q not to trust B.

3. Q had not been negligent in relying on B’s advice – reasonable to accept information B
had given him without further questions or independent inquiry.

i.e. Q would not have fallen foul what is now s 174!

S 175: Duty to avoid conflicts of interest

(1) A director of a company 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.

(2) This applies in particular to the exploitation of any property, information or opportunity
(and it is immaterial whether the company could take advantage of the property,
information or opportunity).

(3) This duty does not apply to a conflict of interest arising in relation to a transaction or
arrangement with the company. [This is covered by s 177]

(4) This duty is not infringed—

(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of

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 interest; or
(b) if the matter has been authorised by the directors.

(5) Authorisation may be given by the directors—

(a) where the company is a private company and nothing in the company's constitution
invalidates such authorisation, by the matter being proposed to and authorised by the
directors; or
(b) where the company is a public company and its constitution includes provision enabling
the directors to authorise the matter, by the matter being proposed to and authorised by
them in accordance with the constitution.

(6) The authorisation is effective only if—

(a) any requirement as to the quorum at the meeting at which the matter is considered is
met without counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their
votes had not been counted.

(7) Any reference in this section to a conflict of interest includes a conflict of interest and
duty and a conflict of duties.

NB also s.170(2):

(2) A person who ceases to be a director continues to be subject—

(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the
exploitation of any property, information or opportunity of which he became aware at
a time when he was a director…

i.e. a person remains subject to this duty even if he is no longer a director of a particular
company

Common law background to this duty:

Bray v Ford [1896] AC 44:

 
“[…] a person in a ………………………………… position … is not, unless otherwise expressly
provided, entitled to make a profit; he is not allowed to put himself in a position where his
interest and duty conflict.”

TWO ELEMENTS:

 No ………………………………………………………………………………………………….
 No ………………………………………………………………………………………………….

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 No secret profit

 i.e. if a director makes a profit by virtue of his position with the company, he needs to
…………………………….. it to the company, which may …………………………. to it being kept
(see s. 175(4)-(6))

No conflict

 i.e. a director cannot put himself in a …………………………. where …………………………………

…………………………………. conflict with those of the ……………………………………….
 Judged ………………………………………………. (Boardman v Phipps [1967] AC 46)
 No need to prove either …………………………….. or that the company has suffered
…………………… (Towers v Premier Waste Management Ltd [2011] EWCA Civ 923)

Illustrative case: Cook v Deeks (1916) 1 AC 554 (PC)

 Mr Cook, Mr Deeks, another Mr Deeks, & Mr Hinds were directors & shareholders of
the Toronto Construction Company.
 D, D & H wanted to break their business relationship with C
 The company had carried out a number of construction contracts with the Canadian
Pacific Railway Company.
 D, D & H negotiated a further contract, but after the arrangements were agreed, they
resigned their positions. They then signed the contract in their own names.
 D, D & H passed an ordinary resolution purporting to ratify the arrangement – i.e.
that the co. had no interest in the contract.
 C claimed that ………………………………………. was entitled to the benefit of the contract,
and that the OR was …………………………………………..

HELD:

 C’s claim upheld on both counts

 D, D & H had breached their duty …………………………………………………………………………….
 The action could not be ratified by an OR: the benefit of the contract belonged to the
company, and the directors could not validly use their voting power in the general
meeting to vest it in themselves.
 They had to ………………………………………………………………………………………………………………
for the profit they had made out of the contract.
 (Also an important case for understanding minority protection (SU 12))

Other cases which illustrate the “no conflict” rule:

 Aberdeen Railway Co v Blaikie Brothers [1854] All ER Rep 249 (HL)

 Industrial Development Consultants Ltd v Cooley (1972) 2 AER 162
 Island Export Finance Ltd v Umunna (1986) BCLC 460

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S 176: Duty not to accept benefits from third parties

 i.e. a duty not to accept bribes

 Attorney-General for Hong Kong v Reid [1994] 1 AC 324 (PC) – fiduciaries not to
accept bribes or secret commissions

S 177 – Duty to declare interest in proposed transaction or

arrangement

 This section imposes a duty on directors to declare any direct or indirect interest in a
……………………………………………………………………………………………………………...
 (e.g. A Ltd is considering entering into a contract with B Ltd. One of A Ltd’s directors
holds shares in B Ltd.)
 They should do this before the company enters into the transaction, s 177(4).
 This may, but need not, be made at the meeting; or by general or written notice (ss.
184 & 185).

RECAP:
 S 170: Scope and nature of general duties
 S 171: duty to act within powers
 S 172: duty to promote the success of the company
 S 173: duty to exercise independent judgment
 S 174: duty to exercise reasonable care, skill and diligence
 S 175: duty to avoid conflicts of interest
 S 176: duty not to accept benefits from third parties
 S 177: duty to declare interest in proposed transaction or arrangement

NB: more than one may apply in a particular case (s. 179)

OUTSTANDING QUESTION:

 What are the consequences of breaching the duties?

 We cover this in SU 3.2.

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 WORKSHOP

Introduction
This part of the Study Unit, the workshop, is dedicated to consolidating your learning. This is

your opportunity to ask questions about anything that remains unclear.

In this workshop we will

 Ensure that the Study Unit objectives are met,

 Practise your research skills,

 Practise your ability to work in teams, use technology and take effective notes, and

 Answer any questions that remain.

Come with as much preparation completed as possible. During the workshop, you will get

the opportunity to chat to each other to find out more and record more details. We will

share and collate answers.

Workshop Activity 1
Where are directors’ powers set out? How much power do they have, and what are the

implications of this?

[Type your answer here]

Workshop Activity 2
In your own words, explain the relationship between the traditional duties imposed upon

directors by the common law, and the duties imposed upon them by ss. 170ff. Companies Act

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2006.

[Type your answer here]

Workshop Activity 3
What duties are now imposed upon directors by ss. 170 – 177 Companies Act 2006? Are you

able to cite at least one case which illustrates each? (Note: we will not go through this activity in

detail in the tutorial.)

[Type your answer here]

Workshop Activity 4
Access and read the following items, and then answer the following question.

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  Section 170, Companies Act 2006
 Section 172, Companies Act 2006;
 In the Reading List for this Study Unit, read as many of the articles on the section

172 duty as you are able;

 ‘ESG factors: Can directors of UK Companies take them into account?’ ( Burges

Salmon, 1 October 2019)

<https://www.burges-salmon.com/news-and-insight/legal-updates/environment/

esg-factors-can-directors-of-uk-companies-take-them-into-account/>

To what extent, in your opinion, are “corporate social responsibility” or “enlightened

shareholder value” meaningful concepts within English company law? Give reasons for

your opinion.

[Write your answers here]

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Workshop Activity 5
DEF Limited has three shareholders, D, E and F. Each holds 100 ordinary £1 shares. All

three are directors. D and E discover that F has set up a new company, GHI Limited, in

which he holds 100% of the shares. GHI Limited operates in the same field as DEF Ltd. D

and E believe this is the reason why, at a recent board meeting, F voted to increase DEF

Limited’s prices to levels they consider to be uncompetitive.

With reference to appropriate legal authorities, outline the issues raised by F’s involvement

in GHI Limited. (Note: you do not need to consider any potential remedies at this stage -

we will look at those next week.)

[Write your answers here]

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Self-test questions
Now, at the end of your Study Unit, take a moment to reflect and consider: Can you

confidently answer all of the questions below? If not, this is a good time to back over the

workbook to ensure you know and record the answer here.

1. What are the sources of the law relating to directors’ duties?

2. What is the relationship between the duties set out in ss. 170-177 Companies Act

2006, and the common law?

3. What duties are imposed upon directors by those sections? Can you cite at least one

case, to illustrate each?

4. What do you understand by the term, “corporate social responsibility”?

5. Can you explain and apply the relevant directors’ duties to a practical scenario?

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