DIRECTORS DUTIES

Fiduciary position of directors: fiduciaries must not benefit from their positions of trust; developed by
equity
General duties under s.171-177 owed by director (including shadow director s.251) to the company
s.170(1).
Perceival v Wright directors do not owe a fiduciary duty to grp of SH or invidiual SHs but to all SHs
generally. THIS IS THE LAW TODAY.(directors purchased shares from some SHs without informing they
were negotiating with an outsider for sale of companys shares at a higher value). EXCEPTIONS:
Hawkes v Cuddy no duty on director towards his nominator. Nominee director can take into account
nominators interests provided it does not amount to a breach of a fiduciary duty.
Report of the Second Savoy Hotel directors owe a duty to existing AND future members
Coleman v Myers (NZ Case) in a small pvt domestic company where only a few SHs directors may owe a
duty to grp or individual SHs.
Dawson Int v Coats if directors take it upon themselves to advice SHs shud be done in good faith. Not to
mislead
General Duties of SHs
*Duty to act within powers s.171 directors shall act in accordance with cos constitution; only exercise
powers for purpose for which they were granted
Howard Smith v Ampol Petroleum held though directors were not motivated by self interests the share
allotment was not made to satisfy Millers need for further capitak but to destroy Ampols majority
shareholding. Thus improper exercise of power. Thus when directors are acting for the benefit of the co.
must also exercise powers within its parameters.
Extrasure Travel Insurance v Scattergood four stage test to determine if directors use of power was
proper:
- Identify power whose exercise is in question: directors ability to transfer funds
- Identify proper purpose for which this power had been delegated to the director: ensure
Extrasures survival and promote its commercial interests
- Identify purpose for which power was in fact exercised: enable parent co to pay creditor
- Decide if it was a proper exercise of power: it was not

Re West Coast Capital Glennie L test under s.171 is a subjective one, looks at purpose behind which
directors were exercising power.
Hogg v Cramphoin share allotment invalid notwithstanding directors acted in good faith as their primary
motive was to remain in control.
Eclairs Group Ltd (2014) purpose of restriction was immaterial

*Duty to promote the success of the company: s.172 director must act in a way he considers is in good
faith and would most likely promote the success of the company, having regard to
- Likely consequences of any decision in the long term
- Interests of cos employees
- Need to foster cos business relationship with suppliers, customers and others
- Impact of cos operations to community and environment
- Desirability of maintaining a reputation for high standards of conduct and
- Need to act fairly as between members of the co.

Breach of s.172 & s.172(3) when director caused company to make certain payments knowing co had
been unable to pay its debts as they fell due: Re HLC Environmental Projects Ltd (2013).
Based on the common law position in Re Smith and Fawcett Greene L: directors to exercise their discretion
bona fide in what THEY consider, not what court considers as the best interests of the company.
Cant avoid objective considerations Charterbridge Corp v Lloyds Bank Pennychick J intelligent and
honest man in the position of a directorreasonably belives that the transactions were for the benefit of
the co.
Item Software v Fassihi breach of duty of loyalty by failing to tell Item Software that he had planned to
acquire the transaction for himself. Disclosure of duty is intrinsic to the duty of loyalty.
GHLM Trading v Maroo (2012) Nowey J: if directors subjectively considered it was in the cos interests for
something other than misconduct to be disclosed he would still be in breach of his duty if good faith if he
failed to do so
Neptune v Fitzgerald at board meeting of only director & secretary, director service ctt terminated and
100,892 paid to him as compensation. Director failed to act honestly and in cos best interests.
CREDITORS: S.172(3) when a co is insolvent primacy must be given to creditors (creditors interests are
indirect as they are represented through a liquidator)
Yukong Line Ltd v Rendsburg Toulson J director of insolvent co. who breached his duty by transferring
assets of the co. beyond creditors reach will owe a duty to all creditors in general. No corresponding
duty to individual creditors

*Duty to exercise independent judgement: s. 173(1) director must exercise independent judgement, not
fetter the future exercise of his discretion
Boulting v Cinematograph Denning no stipulation is lawful by which directors agree to carry out their
duties in accordance with the instructions of another
Fulham Football Club CA held though directors are expected to exercise independent judgement it does
not prohibit them from making a contract which binds their future exercise of power.

*Duty to exercise reasonable care, skill and diligence s.174 (1)

s.174(2)it should be exercised by a person with a) general knowledge, skill, experience that is reasonably
expected from such person
b) general knowledge, skill and experience that a director has
Re Donoghue case
Re Cardiff Savings Bank (Marquis of Butes case) director must exercise care at meetings he us actually
present at. Here appointed as director at 6 months, only attended one meeting in 39 years.
Re City Equitable Fire Insurance Romer J 3 guiding principles to the directors exercise of care
1. Director need not exhibit greater degree of skill than what is reasonably expected from him
2. Director not bound to give continuous attention to the co.
3. When delegating functions of a director in absence of suspicion the director will be justified in
trusting that official to perform his duties honestly.
After Donohuge v Stevenson more strict approach as duty of care based on reasonable foresight.
Re DJan of London Ltd director signed without reading an inaccurate insurance proposal coz of busy
schedule. Director liable and prima facie accountable for losses suffered by the co.
Re Barings plc court will not accept the argument that a director did not have time to perform his duties
Dorchester Finance v Stebbing system of signing blank cheques was clearly negligent. Directors liable.
Lexi Holdings v Luqman (2009) action brought against the directors for inactivity when MD of Lexi
misappropriated 59m. Held directors ought to have known that the loan application required a
convincing explanation. Liable.

*Duty to avoid conflicting interests s.175 director must avoid a situation where he has or can have a
direct or indirect interests that conflicts or possibly conflicts with his duty owed to the company.
s.175 directors are liable to account for any profit made personally in situations where they might be a
conflict with their duty owed to the company.
Boulting v ACTAT Upjohn LJ applies only where there is a real conflict, not a theoretical one
Chan v Zacharia Deane J director in breach of this duty must account for any gain he might have made in
situations where there is conflict or a significant possibility of conflict which may exist between the
director and the co.
Regal (Hastings) v Gulliver 2 additional cinemas for Regal. Directors made a handsome profit. New BOD
and the company brought action against former directors and successfully claimed profit. Russel L rules
of equity which insist that those who make a profit using their fiduciary position must account for that
profit, and this does not depend on fraud or absence of bona fide. Liability arises from the mere fact that
a profit has been made in the stated circumstance.

The corporate opportunity device: prof. Prentice: a principle which makes it a breach of fiduciary duty by a
director to appropriate for himself an opportunity which is considered to belong rightly to the company he
serves.
Corporate opportunity is viewed as a asset and should thus not be misappropriated by directors.
Cook v Deeks Toronto Construction Company secured a series of contract with Canadian pacific. Three
directors of
TCC severed themselves from the co. and formed their own company. Later they informed Canadian
pacific that their new co. will undertake the work. Court held 3 directors are liable and should hold
contracts on constructive trust on behalf of TCC.
IDC v Cooley Roskill J even though the company could never have received the opportunity, a director
cant obtain such an opportunity in his personal capacity.
Peso Silver Mines v Cropper (Canadian Case) BOD Pesso offered a 106 mines by another company. Bona
fide director declined the offer saying it was a risky proposition and due to the cos poor financial status.
Later 3 directors of Pesso & co.s geologist purchased these mines. New BOD sued- former director in
breach of fiduciairy duty. SC dismissed appeal directors entered into a decision to reject purchase of
mines in good faith and for sound commercial reason, thus entitled to acquire those transactions.
Island Export Finance v Umunna Hutchinson J directors in their public interest should be free to exploit an
opportunity in a new position.
Balston v Headline Filters director obtained lease of premises in order to start up his own business. On
resignation he had not decided on nature of the business he would enter. Later one of plaintiffs
customers contacted his former director and informed him that P co. would be discontinuing its supply of
certain type of filter tube. Former director therefore began to supply this product to these customers.
Falconer J: no breach of fiduciary duty even when intention to commence business can be found prior to
resignation.
Plus Group v Pyke Pyke & Plonk were directors of plus Group. Disagreement and Pyke resigned and
incorporated his own company. Customer of claimant co. contracted with him. No breach. Highly unlikely
this customer would enter into transactions with the claimant company in the future.
Bhullar v Bhullar (2003) CA relying on IDC v Cooley found appallent liable when they purchased land
without disclosing it to the Co.
O Donnell v Shanahan (2009) directors of co. acquired a corporate opportunity not in the existing line of
business of the co. they serve, CA held even if co not willing to accept opportunity, directors are liable.
Rimer LJ said rationale of no conflict, no profit rule to underpin fiduciairy duty of undivided loyalty to his
beneficiary.
If opportunity comes to director in his capacity as a fiduciary, his principal is entitled to know about it.
Premier Waste Management v Towers Mummery LJ Rationale of no conflict rules lies in its strict legal
regard for the protection of those interests potentially at risk, from a director who does not give his
individual loyalty to the co.
Commonwealth Oil v Baxter (2009) The duty of a company director to avoid conflicting interests did not
extend only to commercial opportunities which came to his attention in the exercise of his function as a
director of the company in question or which, as such director, he was tasked to pursue. He was obliged
not to place himself in a position where his own interests conflicted with the performance of that duty,
and not to act for his own, or a third party's, benefit, in a situation of potential conflict, without the
company's informed consent.

Post Resignation Breach- s.170(2) a person who ceases to be a director will continue to be liable
under the duties set out in s.175. thus cannot exploit confidential info, trade secrets, company
databases, customer and supplier lists, etc.
Item Software v Fassihi The fundamental duty that a director owed as a fiduciary to act in good faith in the
best interests of the company included a requirement to disclose his own misconduct.
Framlington v Anderson Blackburne J in the absence of special circumstances, director commits no
breach of duty merely coz while he was a director he may take steps so that on seizing to be a director he
can immediate take steps to start up a business in competition with that co.
CMS Dolphin v Simonet A director who following his resignation exploited a maturing business opportunity
of a company owed fiduciary duties in relation to the opportunity
Foster Bryant v Bryant Rix LJ For director to be liable after resignation, must be some relevant connection
or link between resignation and obtaining the business.
Directors action to demonstrate: a)lack of good faith b) resignation was an integral part of dishonest plan

*Conflict of interest and Duty and Conflict of Duties s.175(7) conflict between duty and interest
may also include conflict of duties:
London and Mashonaland v New Mashonaland Lord Mayo director of two companies. Held no proof
confidential info had been disclosed, thus director not in conflict of duties. Liable only if AoA prohibited
such appointment.
AUTHORITY FOR PERMITTING DOUBLE EMPLOYMENT
BUT Bristol & West Building Society v Matthew Millet LJ: double employment = conflict of duties
Plus Group v Pyke Sedley J questioned if Mashonaland should be regarded as good law.

Avoiding Liability For Conflict of Duty: s.175(5) conflict can be authorized

s.175(5)(a) pvt co- authorized by independent director, unless constitution provides otherwise
s.175(5)(b) public co- directors cannot authorize conflict of duty unless constitution expressly permits.
s.175(6) authorization effective if conflicted director has not participated in taking of decision or decision
valid
without participation of conflicted director

Self Dealing Rule: s.175(3) director not liable for having an interest in a transaction or arrangement with
the co. thus director engaged in self dealing not liable under s.175.
BUT s.177 if director directly/indirectly has an interest in a transaction with the co he must declare the
nature and extent of that interest to the other directors.
Director may also avoid liability for self dealing after the transactions has been entered into by disclosing
his interest under s.182
Aberdeen Railway Co v Balikie Brothers co. contracted with a partnership for supply of iron chairs; co.
found out director was a partner in the partnership. Lord Cranworth :

Titto v Waddel Megarry VC: equity as astute to prevent a trustee from abusing his position profiting from
his trust- the shepherd must not become the wolf.

s.177(6) director who has an interest in a particular transaction with the co. need not disclose his
interest if
a. cannot reasonably be regarded as a situation which would give rise to a conflict of interest
b. if other directors are already aware of it
if it concerns the terms of his service contracts and he has been appointed for that purpose.
s.182(6) A director need not declare an interest under this section
(a)if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b)if, or to the extent that, the other directors are already aware of it (and for this purpose the other
directors are treated as aware of anything of which they ought reasonably to be aware); or
(c)if, or to the extent that, it concerns terms of his service contract that have been or are to be considered

(i)by a meeting of the directors, or

(ii)by a committee of the directors appointed for the purpose under the company's constitution.

*Duty not to accept benefits from third parties: s.176(1) by reason of being a director or in doing
something as a director.
REMEDIES: s.178 consequences of breaching s.171-177 same as those applied in common law
Coleman Taymar v Oakes claiming damages or account for profits from that director
CMS Dolphin v Simonet if director obtained a corporate opportunity which rightly belonged to the co.
director should hold that opportunity on constructive trust for benefit of the co.

ACCESSORY LIABILITY: Royal Brunei Airlines v Tan person assisting director to have acted dishonestly.
Dishonesty- would an honest person is directors position would have acted in the way a director did.
BCCI v Chief Akindolo if one receives funds with actual or constructive knowledge that director had
obtained such funds by breaching his duty- liable to return funds to the co. Nourse LJ: unconscionable for
him to retain benefits of the funds.
Belmont Finance v Williams Buckley LJ : One who receives misappropriated funds becomes constructive
trustee for the co. of the misapplied funds.

AUTHORIZATION OR RATIFICATION: SHs ought, in principle, to be able to release directors from their
general duties, but SHs generally act by resolution and it is important to ask precisely what their
resolution seeks to achieve.
If approval of SHs is given before the breach of duty authorization. If approval given afterwards-
ratification.

AUTHORIZATION: S.180(1) Where a director enters into a transaction for breach of either s.175/s.177
the co. may authorize the breach of duty.
s.180(2) if approval of the aforementioned sections have been given it is not necessary to comply
s.175/s.177.
s.180(4)(a) the general directors duties have effect subject to any rule of law enabling the co. to give
authority for anything to be done by the directors that would otherwise be a breach of duty.

RATIFICATION: S. 239 applies to ratification by a co. of all breach of duties set out in Part 10 CA 2006
s.239(2) decision of a co. to ratify such conduct must be made by a resolution 51%
FURTHER: a. members to have full knowledge of circumstances surrounding the breach & be aware that
assent is being sought
b. if resolution passed without complying with above, ratification void
c. ratification effective only if vote of director (who is also a member) is disregarded
Northwest v Bealty if majority votes obtained, ratification valid even if wrong doer director voted provided
without wrong doers vote majority percentage could be proved.
s.239(7) does not affect any rule of law with regard to acts incapable of remedy. Ex: director has
misappropriated co. property. A ratification of such would offend the principle of equality.
Cooks v Deeks Directors who obtained corporate opportunity must hold this benefit on trust for the co. It
was an interest available to all SHs.
BUT if director makes an incidental profit can be ratified. Does not affect the principle of equality.

Relief from Liabilities- director or any office of the co. has the possibility of appealing to the court
preventing the full application of statutory duties. S.1157 court has discretion to relieve, prospectively or
retrospectively against liability for negligence, default, breach of duty or breach of trust provided director
had acted HONESTLY and REASONABLY and that having regard to the circumstances he or she ought to be
excused.
Re DJan of London Hoffman: conduct of a person may be reasonable despite amounting to a lack of
reasonable care at common law. Thus honest but negligent director might be relieved from liability
provided negligence in question was the kind of things that can happen to any busy person
Neptune v Fitzgerald no relief where directors have abused their position for financial gain.
Re Welfab Engineers T and W it was said had sold co assets at an undervalue. Held had acted in good
faith in going for the third offer and in the circumstances had obtained what they considered to be the
best result by saving the business. It was not for them to have acted as informal liquidators in obtaining
the best deal for creditors.
Bairstow v Queen Moat Houses no relief for directors who produced fraudulent accounts which overstated
co. profits in order to mislead the market.

Transactions which require authorization by the directors: otherwise transactions void

1. Long term service ctts s.188
2. Substantial property transactions s.190 refers to non cash assets which belong to the co.
British Racing Drivers Club v Hextall if director enters into a sub property transaction there is a
danger that his judgement may be distorted by conflicts of interest and loyalties even in cases of
no actual dishonesty.
s.191 substantial property transaction- where assets exceed 10% of co.s asset or is worth
100,000 or more.
Re Duckworth
3. Loans to directors- s.197 any transactions involving the giving of a loan to a director will be void if
not approved by the members.