CORPORATE LAW – 405

Week 12 and 13

Barrister Shayyan Qaiser

LLM (Harvard Law School)
Bar-at-Law (Lincoln’s Inn)
BPTC (City Law School)
LLB (Hons) (University of London)
 Today’s session

• Directors’ duties
 Recap
• Corporate management
• Fiduciary relationship between directors and the company
 Background

• Prior to the Companies Act 2017 we had the Companies Ordinance 1984 and the
Companies Act 1913
• Both the earlier statutes did not provide for directors’ duties
• Developed through common law, i.e. judges, to prevent directors from abusing their
considerable powers
• Finally directors’ duties were codified in the Companies Act 2017
• Codifying led to loss of flexibility but ensured certainty and predictability and dealt
with any defects in common law
To whom do directors owe their duties?
 To whom do directors owe their duties? (UK law)

• UK law is clear – duty is owed to the company

• Section 170(1) of the Companies Act 2006:
“The general duties specified in sections 171 to 177 are owed by a director of a
company to the company.”
• Percival v Wright (1902) – duty owed to company
• Breach of duty – wrong to company – proper claimant is company (Foss v Harbottle)
• Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical
Services Ltd (1983):
• Duty owed to company
• Not to creditors (present or future)
• Not to individual shareholders
• Hawkes v Cuddy (No 2) (2009) – director nominated by shareholder does not owe any
specific duty to the shareholder – only to company
 To whom do directors owe their duties? (Pakistani law)

• Under Pakistani law, the Companies Act 2017 is not clear – why?
• No clear provision similar to Section 170(1) of the UK Companies Act 2006
• Rather confusion created by virtue of Section 204(2) of the Companies Act 2017:
“A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees the shareholders the community and for the protection of
environment.”
• According to Foss v Harbottle, directors owe duty to the company and if the wrong is
done to the company then only the company can bring an action against such directors
(or the minority through a derivative claim if there is fraud and wrongdoer control)
• Is Section 204(2) of the Companies Act 2017 consistent with the rule in Foss v Harbottle,
which the Pakistani courts have adopted?
• Need to revisit Section 204(2) or clarify the same?
Who is the company?
 Who is the ‘company’?
• Contractarian analysis – shareholders
• Realist theory – shareholders + creditors + employees + general public
• Greenhalgh v Arderne Cinemas Ltd (1951) – duty owed to shareholders as a general body (existing
interests)
• Report of the Second Savoy Hotel Investigation – future shareholders (future interests)
• Gething v Kilner (1972) – when directors recommend as to whether a takeover offer should be
accepted or not, they owe a duty to the shareholders:
• To be honest
• Not to mislead
• Heron International Ltd v Lord Grade (1983) – in a takeover situation, duty to current shareholders
• Coleman v Myers (1977) – quasi-partnership – direct duty towards shareholders
• Peskin v Anderson (2000):
• Foremost duty to company
• Duty to shareholders in certain situations (e.g. where the directors take it upon themselves to
advise the shareholders, in which case they should act with honesty and should not mislead)
 Directors’ duties pre-Companies Act 2017

• Pakistani corporate law did not specifically mention directors’ duties

• However such duties could be inferred from an organic reading of the Companies Ordinance
1984
• Jurisprudence in this area is underdeveloped

Messrs Muhammad Bakhsh & Sons Ltd. and another v. Azhar Wali Muhammad and 11
others [(1986) MLD (Sindh) 1870] (High Court of Sindh):
• “There is a fiduciary relationship between a director and the company. A director therefore,
has always to act in good faith vis-à-vis the company.”
• This essentially is the concept of the best interests of the corporation

Naseer A. Sheikh, etc. v The Commissioner of Income-Tax (Investigation), Lahore, etc.

(PLD 1992 SC 276) (Supreme Court)
• "It is to be borne in mind that qua the company, the Directors hold fiduciary relationship and
are required to exercise powers vested in them for the benefit of the company…”
 Directors’ duties pre-Companies Act 2017 (contd.)
Inam Ullah Khan v Aksa Solutions Development Services (Pvt.) Ltd., etc. (2019 CLD 355)
(Islamabad High Court)
• Directors of a company are saddled with the duty of loyalty, trust and utmost good faith
• They are under a duty to act with diligence and care
• They owe a fiduciary duty towards the shareholders and the company
• There is another core duty of full disclosure, particularly when shareholders are required to
take decisions and/or when an act or transaction involves conflict of interest
• The fiduciary duty envisages that each director shall act for the benefit of the company and
the shareholders
• A director, therefore, cannot place himself in a position where his/her interest and duty would
conflict
• The interests of the shareholders and the company shall prevail and dominate the personal
interests of the directors
• The directors have to discharge the onus to establish affirmatively that even if a personal
interest has been gained, the same is not a result of conducting the affairs or exercising
authority in a manner that lacked probity and fair dealing, or was burdensome, harsh and
wrongful
 Directors’ duties pre-Companies Act 2017 (contd.)

• The other few reported cases are those decided by the SECP from which the following
broad principles can be deduced:
• a director breaches his duty if he does not comply with the relevant law
• directors are supposed to act in the best interests of the company and not in their
personal interest
• directors owe a fiduciary duty to the company and its shareholders
• directors are to “exercise care consistently to maximize the value to all of the
shareholders”
• the Commission can take action against the directors of a company in the best
interests of the shareholders and creditors of a company

*Note that these cases did not involve comprehensive discussions of the principles that
have been deduced which were either mentioned briefly or in passing
 Directors’ duties under the Companies Act 2017
204. Duties of directors.–
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of
the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its employees the shareholders the
community and for the protection of environment.
(3) A director of a company shall discharge his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain,
he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) In addition to the preceding sub-sections, the Commission may provide for the extent of duties and the role
of directors as may be specified.
(8) Without prejudice to any other action that may be taken under this Act or any other law, any contravention
or default in complying with requirements of this section shall be an offence liable to a penalty of level 1 on
the standard scale.
 Section 204(1) Companies Act 2017

Pakistani law UK law

Section 204(1) CA 2017 Section 171 CA 2006 (Duty to act within
powers)
Subject to the provisions of A director of a company must—
this Act, a director of a (a) act in accordance with the company's
company shall act in constitution, and
accordance with the articles (b) only exercise powers for the purposes for which
of the company. they are conferred.
 Section 204(1) Companies Act 2017 (contd.)

Points to note:
• E.g. if the AOA provides that for transactions A, B and C, the directors will require the
approval of 75% of the shareholders. Failure to comply with this clause of the AOA
could result in the directors being held liable for breach of duty
• Pakistani provision only refers to the AOA whereas the UK provisions talks about the
company’s constitution as a whole
• Therefore the Pakistani directors’ duty provision does not cover the MOA and the ultra
vires doctrine
• But note Section 500 of the CA 2017 which reads as under:

“500. Penalty for carrying on ultra vires business.—If any business or part of business
carried on or any transaction made, by a company is ultra vires of the company shall be
an offence and every person who acted as a director or officer of the company and is
responsible for carrying on such business shall be liable to a penalty of level 3 on the
standard scale, and shall also be personally liable for the liabilities and obligations arising
out of such business or transaction."
 Section 204(1) Companies Act 2017 (contd.)

Points to note:
• Pakistani provision does not contain an equivalent of part (b) of the UK provision
which refers to the ‘proper purposes doctrine’
• Directors’ powers must be exercise for the purpose for which they were conferred and
not for any collateral purpose
• Examples:
• The directors of Company A transfer company funds to Company B, another
company within the same group to enable Company B to pay a creditor pressing
for payment. This could raise potential issues as to whether the directors’ of
Company A had exercised their powers for an improper purpose
• Directors of a company issue more shares in order to dilute the shareholding of
the majority. While issuance of more shares is legal, the purpose for which this
was done may be questioned in such a case
• How would such issues be dealt with if faced by the Pakistani courts? See Section
204(2) CA 2017
 Section 204(2) Companies Act 2017

Pakistani law UK law

Section 204(2) CA 2017 Section 172 CA 2006 (Duty to promote the success of the company)
A director of a company (1) A director of a company must act in the way he considers, in good faith,
shall act in good faith in would be most likely to promote the success of the company for the
order to promote the benefit of its members as a whole, and in doing so have regard (amongst
objects of the company other matters) to—
for the benefit of its (a) the likely consequences of any decision in the long term,
members as a whole, and (b) the interests of the company's employees,
in the best interests of the (c) the need to foster the company's business relationships with
company, its employees suppliers, customers and others,
the shareholders the (d) the impact of the company's operations on the community and the
community and for the environment,
protection of 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.
 Section 204(2) Companies Act 2017 (contd.)
Points to note:
• Examples:
• A director who borrows money ostensibly for the benefit of Company A but then transfers
it to benefit Company B which was insolvent and in which he held a substantial
shareholding is not acting in good faith in the best interests of the company
• A director exploiting the goodwill of the company’s business for his own benefit by
registering a trademark linked to the company’s business in his own name
• Duty to promote the success of the company – should companies run for the benefit of
shareholders or whether a broader stakeholder approach should be adopted?
• UK has adopted the approach of promoting ‘enlightened shareholder value’
• According to this approach, directors, while ultimately required to promote shareholder
interests, must take account of a range of factors affecting the company’s relationships and
performance
• Pakistani provision requires directors to “act” in the best interests of the various stakeholders
and not merely “consider” their interests
• By using the word “shall” as opposed to “may”, the statute imposes an obligation upon the
directors to act in the interest of the various stakeholders (c/f. state corporate constituency
statutes in USA)
 Section 204(2) Companies Act 2017 (contd.)

Points to note:
• Duty imposed towards everyone mentioned in the Pakistani provision?
• Practical effectiveness of such provision?
• Implications on the rule in Foss v Harbottle (proper claimant rule)?
• What if the interests are in conflict with each other? To what extent does a director have to
look out for the interests of the other stakeholders when they conflict with the interests of
shareholders?
• The Act provides no guidance on how to resolve conflicts amongst interests (c/f UK provision)
which, unlike certain constituency statutes, for e.g.. § 515(b) of the Consolidated Statutes of
the State of Pennsylvania which explicitly provides that:
 
“The board of directors, committees of the board and individual directors shall not be required, in
considering the best interests of the corporation or the effects of any action, to regard any
corporate interest or the interests of any particular group affected by such action as a dominant
or controlling interest or factor. The consideration of interests and factors in the manner
described in this subsection and in subsection (a) shall not constitute a violation of section 512
(relating to standard of care and justifiable reliance).”
 Section 204(3) Companies Act 2017

Pakistani law UK law

Section 204(3) Section 174 CA 2006 (Duty to exercise reasonable care, skill and diligence)
CA 2017
A director of a (1) A director of a company must exercise reasonable care, skill and diligence.
company shall (2) This means the care, skill and diligence that would be exercised by a reasonably
discharge his diligent person with—
duties with due (a) the general knowledge, skill and experience that may reasonably be expected
and reasonable of a person carrying out the functions carried out by the director in relation to the
care, skill and company, and
diligence and (b) the general knowledge, skill and experience that the director has.
shall exercise
Section 173 CA 2006 (Duty to exercise independent judgment)
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.
 Section 204(3) Companies Act 2017 (contd.)

Points to note:
• Pakistani provision has combined two relatively comprehensive UK provisions into one
very brief provision

Reasonable care, skill and diligence:

• Example:
• A director signs inaccurate documents without first reading it which ultimately
results in the company to suffer from losses
• It is no excuse for a director to say that he was unaware of a certain state of affairs
because he had trusted others to manage the company
• Inactivity on behalf of non-executive directors leading to an executive director
committing fraud and misappropriating company assets
• UK provision has defined the standard of reasonable care, skill and diligence – the test
is a mix of objective and subjective standards [see parts (a) and (b) of sub-section (2)]
• Pakistani provision does not – so what is the applicable standard?
 Section 204(3) Companies Act 2017 (contd.)

Independent judgment:
• Directors cannot fetter the future exercise of their discretion
• Example
• A director who seeks advice of outsiders without exercising his own independent
mind and judgment
• UK provision specifically mentions that such duty would not be breached in two
situations – no such thing in Pakistani provision

Pakistani law
Section 204(4) CA 2017
A director of a company
shall not involve in a
situation in which he may
have a direct or indirect
interest that conflicts, or
possibly may conflict, with
the interest of the
company.
Section 204(4) Companies Act 2017
UK law
Section 175 CA 2006 (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.
(4)This duty is not infringed—
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of
interest; or
(b) if the matter has been authorised by the directors.
(5) Authorisation may be given by the directors…
 Section 204(4) Companies Act 2017 (contd.)

Points to note:
• Example:
• A director being a director of a competitor
• A director being a potential customer of or supplier to the company;
• A director owning property adjacent to the company's property the value of which
could be affected by the activities of the company
• Pakistani provision is brief as compare to the UK provision which is quite
comprehensive
• In the Pakistani provision, even the possibility of a conflict of interest is enough and the
actual existence of a conflict of interest is not necessary
 Section 204(4) Companies Act 2017 (contd.)

Points to note:
• This provision should be read with Section 205 CA 2017 which is about disclosure of
interests by directors
• Salient features:
• Every director of a company who is in any way, whether directly or indirectly,
concerned or interested in any contract or arrangement entered into, or to be
entered into, by or on behalf of the company shall disclose the nature of his
concern or interest at a meeting of the board
• A director shall be deemed also to be interested or concerned if any of his
relatives, is so interested or concerned
• Director’s relatives are:
• The director‘s spouse
• The director‘s children (including step children)
• The director‘s parents
• Director has to give notice of such disclosure
• Failure to disclose shall render the director liable to penalties under the CA 2017

Pakistani law
Section 204(5) CA 2017
A director of a company
shall not achieve or
attempt to achieve any
undue gain or advantage
either to himself or to his
relatives, partners, or
associates and if such
director is found guilty of
making any undue gain,
he shall be liable to pay
an amount equal to that
gain to the company.
Section 204(5) Companies Act 2017
UK law
Section 175 CA 2006 (Duty not to accept benefits from third parties)
(1) A director of a company must not accept a benefit from a third party conferred by
reason of—
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A “third party” means a person other than the company, an associated body
corporate or a person acting on behalf of the company or an associated body
corporate.
(3) Benefits received by a director from a person by whom his services (as a director
or otherwise) are provided to the company are not regarded as conferred by a third
party.
(4) This duty is not infringed if the acceptance of the benefit cannot reasonably be
regarded as likely to give rise to a conflict of interest.
 Section 204(5) Companies Act 2017 (contd.)

Points to note:
• Example:
• Taking a bribe from a supplier?
• Accepting an invitation to a cricket match?
• Where do you draw the line between fostering good relations with contractors and
achieving undue gain?
• What if a large contract is up for tender, should the director who will make the
decision accept hospitality or a gift from one of the potential bidders?
• ‘Undue gain’ has not been defined in the CA 2017
• Under UK law:
• There is no need to show that the company has suffered harm: it is the director’s
acceptance of the benefit and the reason it was offered that are key
• A director is free to accept the benefit if no reasonable person would see it as
giving rise to a conflict. However this is not always be an easy call to make,
therefore it is always beneficial to have a company policy on the acceptance of
gifts and hospitality
 Section 204(6) Companies Act 2017

Section 204(6) CA 2017: “A director of a company shall not assign his office and any
assignment so made shall be void.”

Points to note:
• Not a directors’ duty
• A restriction on directors
 Section 204(7) Companies Act 2017

Section 204(7) CA 2017: “In addition to the preceding sub-sections, the Commission may
provide for the extent of duties and the role of directors as may be specified.”

Points to note:
• Not a directors’ duty
• Empowers the SECP to provide for the extent of duties and the role of directors
• Why couldn’t the extent of the duties have been provided in the CA 2017?
 Consequences of breach of directors’ duties

Section 204(8) CA 2017:

“Without prejudice to any other action that may be taken under this Act or any other law,
any contravention or default in complying with requirements of this section shall be an
offence liable to a penalty of level 1 on the standard scale.”

• Therefore, in case of breach of any of the duties under Section 204(1) to (5) CA 2017,
directors would be liable to a penalty
• Particularly with respect to breach of Section 204(5) CA 2017 (duty not to achieve undue
gain), the director will be liable to pay an amount equal to that gain to the company
• What about disqualification of a director?
 Consequences of breach of directors’ duties (contd.)
• Section 172 CA 2017 provides a list of circumstances in which the SECP can pass a disqualification order
(for a period of up to five years) against a director from parts (a) to (o) (i.e. 15 circumstances):
(a) conviction of an offence in connection with the promotion, formation, management or liquidation of a
company, or with the receivership or management of a company's property;
(b)  persistent default in relation to provisions of this Act requiring any return, account or other
document to be filed with, delivered or sent, or notice of any matter to be given, to the Commission or the
registrar;
(c)  a person has been a director of a company which became insolvent at any time (while he was a
director or subsequently):
Provided that order against any such person shall not be made after the end of the period of two years
beginning with the day on which the company of which that person is or has been a director became
insolvent;
(d)  the business of the company in which he is or has been a director, has conducted to defraud its
creditors, members or any other persons or for a fraudulent or unlawful purpose, or in a manner oppressive
of any of its members or that the company was formed for any fraudulent or unlawful purpose; or
(e)  the person concerned in the formation of the company or the management of its affairs have in
connection therewith been guilty of fraud, misfeasance, breach of trust or other misconduct towards the
company or towards any of its member; or
 Consequences of breach of directors’ duties (contd.)

(f)  the affairs of the company of which he is a director have been conducted in a manner which
has deprived the shareholders thereof of a reasonable return; or
(g)  the person has been convicted of allotment of shares of a company for inadequate
consideration; or
(h)  the person is involved in illegal deposit taking; or
(i)  the person has been convicted of financial irregularities or malpractices in a company or
(j)  the company of which he is a director has acted against the interests of the sovereignty and
integrity of Pakistan, the security of the State, friendly relations with foreign States; or
(k)  the company of which he is a director refuses to act according to the requirements of the
memorandum or articles or the provisions of this Act or fail to carry out the directions of the
Commission given in the exercise of powers under this Act; or
(l)  the person is convicted of insider trading or market manipulation practices; or
(m)  the person has entered into a plea bargain arrangement with the National Accountability
Bureau or any other regulatory body;
(n) the person has been declared a defaulter by the securities exchange;
(o) that it is expedient in the public interest so to do.
 Consequences of breach of directors’ duties (contd.)

• Such order may be passed by the SECP on its own motion or upon a complaint
• The accused director must be given an opportunity of hearing
• The section does not specifically mention breach of directors’ duties under Section 204 CA 2017 as
a ground for passing of a disqualification order
• Arguably, some of the parts of Section 172 CA 2017 may be relied upon as encompassing breach of
directors’ duties in order to make out a case for the passing of a disqualification order
What do you think about the provisions relating to
directors’ duties under Pakistani law?
End