Free Law Essays - Diduciary Duties
Under the current legislation the directors of the company have statutory and common law duties such as fiduciary duties. However, many directors do not seem to know who they owe duty to; the shareholders of the company or the company itself. A director exercises his agency function for his principal, the company, through the Board or when other directors specifically delegate the function to him as an agency for the Board. Invariably, directors are in control of the company’s assets and therefore their duties as an agent of a company are not similar to any commercial agent. These duties in addition to being an agent are known as fiduciary duties.
If a director has been given certain powers by the Memorandum and Articles of Association or the shareholders then he is required to act within that limit. For example if the directors are only allowed to borrow £50,000 and they exceed that power then, in addition to third party rights, there will be a clear breach of duty as agents of the company. On the other hand if the directors act according to the shareholders’ instructions and make commercially unsound decision then it is not considered as a breach of duty.
Although a Company is a legal entity and has a separate legal personality, the management of its affairs is entrusted to its Directors. A Director of a company can be said to be a Manager who is a Fiduciary and an Agent of a company.
In Aberdeen Rlwy Co V Blaikie Bros Lord Cranworth LC stated that the Directors are those people to whom the duty of managing the affairs of the company has been delegated and they are the agents of the company. Therefore it is their duty to act in the best interest of the company. On the other hand in Great Eastern Rlwy Co v Turner Lord Selborune commented that the directors are the trustees of the company’s money and property. They act as an Agent when they enter into a transaction on behalf of a company. This view was confirmed in by Lord Johnston in McLintock v Campbell when it was stated that the director’s functions are two fold: as an Agent and as a Trustee. He went on to say that the director’s duties as an Agent always come first.
In the comparative analysis of company law the director’s duties are divided into loyalty based on fiduciary principles developed by courts of equity. The duties of care and skill have a basis of law of negligence.
As agents of the company there is no personal liability on directors when they enter into contracts on behalf of the company provided they have the authority to do so. If they act outside their powers given to them by the company’s constitution then they would be liable for breach of warranty of authority however their action may be retrospectively approved in a general meeting by the shareholders.
It is possible that the directors are specifically appointed to negotiate a sale of the company’s shares and if so then the shareholders become liable for their fraud. In Briess v Woolley R, a Managing Director of N Ltd made the company profitable by fraudulent trading and then negotiated the sale of the shares with E Ltd without disclosing how the company was made so profitable. This was subsequently approved by the shareholders and the sale was completed. When the fraud was discovered the shareholders were sued for damages and it was held that they were liable as R was acting as their agent while negotiating the sale of the shares.
On the other hand if the directors hold themselves out as agents for the shareholders then the directors must account for any profit they may make to the shareholders. In Allen v Hyatt Directors induced some of the shareholders of a company with which they were negotiating amalgamation to give them option on their shares at par pretending it was necessary for the deal in hand. When they exercised their option they made a profit. It was held that they were liable to account for the profit to the shareholders.
If a person professes a particular skill while acting as an agent then he must display that skill. However, being a director of a company is not considered as a profession and therefore the company law does not impose any requirement of special skills from the persons appointed as directors.
In CMS Dolphin Ltd v Simonet it was held by Lawrence Collins J that a director was liable for breach of fiduciary duty in diverting a business opportunity from his company although the director in question had left the company. However, even after leaving the company a director’s fiduciary duties continue and therefore he may not divert business opportunities from the company or misuse information while he was acting as a director of his previous company. In this particular case the director took all the company’s staff and its main clients with him and set up in business on his own.
New Proposals
Under the Government’s White Paper “Modernising Company Law” there have been some changes proposed with regard to the Director’s duties. Under the current legislation the directors of the company have statutory and common law duties such as fiduciary duties. However, many directors do not seem to know who they owe duty to - the shareholders of the company or the company itself. The White paper looks at the role and legal status of non-executive directors in the UK companies. It attempts to reform director’s duties towards different interested parties. Although codification of directors duties seems like a good idea but it is more than likely that it would give rise to litigation, claiming breach of duties.
The White paper makes it clear that the owners of the company should hold the directors responsible for the company’s performance. This should create effective corporate governance. Government’s supporting attitude, towards the existing directors rather than intervening itself in corporate decision making process, is demonstrated further by giving shareholders more power to voice their concerns on range of matters concerning the company. The core issue of Corporate Governance has been identified in the White paper regarding the Directors duties as what purpose and a company and its directors should pursue. In addition to this, directors’ accountability and company’s control has been considered as an issue of corporate governance. The paper does not make any attempt to change the definition of a “Director”.
The basic goal, identified by the paper, of the directors is the success of the company. The directors should be concerned mainly with the best interest of the company’s employees, customers and suppliers in addition to its own interest and that of its shareholders. This is to help maintain and improve company’s reputation in the business world and its impact on business community. Although this could be perceived as a definite improvement on the previous directors’ duties it could lead to confusion which one is likely to turn into litigation as some of the duties outlined in the proposal are rather nebulous. In the process of promoting company’s success it could become rather difficult for the directors to decide the strategy which would be in everybody’s best interest. Although, the paper supports the directors’ duties towards employees and customers, the duties towards its creditors are still under review as it requires the directors to identify the risk to creditors as soon as company starts to suffer financial difficulties and runs the risk of going into insolvent liquidation. However, this particular aspect is considered in more detail in the Insolvency Act 1986 and it should not, therefore, be included in the Company law.
It is vitally important that the directors should consider implications of their short and long-term actions. They should also take into account how their actions would affect the parties interested in the company’s affairs.
The directors are required to volunteer information to auditors as failure to do so would attract unlimited fines and two year prison sentence. Under current legislation section 389 A of the Companies Act 1985 it is an offence to deliberately make a false statement to the auditor but a deliberate intention to mislead is not necessary in order to establish an offence. Also if a company and its directors are convicted of flouting company law they could be named in a central register, similar to ‘naming and shaming’ strategy. In general the directors are owed duties to the company rather than to the individual shareholders. This then follows that the company itself, and not the shareholders, who is normally able to bring the claim. Obviously, this could be a problem when it comes to enforcing these duties as the directors are in control of the company’s affairs.
It is interesting to note that a company can only be sued for a wrongdoing performed by itself, rather than it agents unless these agents have exceeded their authority.
Another important proposal is with regard to a contract which a company itself is unable to accept due to lack of resources for example, then a director may be able to take that contract personally for his own benefit. This allows directors to make full use of information, property etc which belong to the company for their own benefit without the consent of the shareholders and members provided they obtain the authorisation from the Board of Directors to do so. The important difference here which must be noted is, in case of private companies, the board of directors will have such powers to authorise a director to exploit a corporate opportunity like that unless it has been expressly denied in the company’s constitution. On the other hand, in case of Public limited companies, the board of directors will not have such powers bestowed upon them as they need authorisation from the shareholders first unless a specific provision to authorise such transaction has been made in the company’s constitution.
Conclusion
The express and implied terms of a directors’ employment contract are covered by agency and fiduciary duties stated by the company’s constitution and by statute. If the majority shareholders of the company are unhappy with the directors’ conduct of the company’s affairs, are the directors allowed to just shun the wishes stating that majority shareholders’ wishes are not in the best inertest of the company as a whole?. No. However, this must be kept in mind that fifty one percent of the shareholders can pass an ordinary resolution to remove the directors of the company. On the other hand if the directors try to carry out the wishes of the majority shareholders only, they are restricting their discretion which is awarded to them in trust for the company as a whole and therefore they may become liable to the minority shareholders for causing unfair prejudice. It is interesting to note that in Boulting v Association of Cinematograph, Television and Allied Technicians Lord Denning MR stated that if the directors wanted to prefer majority shareholders’ interest they can do so as long as it is in the best interest of the company. If the director’s decision affects different groups of shareholders then he must act fairly.
From the above discussions it is apparent the directors’ duties to the company are fiduciary and as an agent of the company. They are accountable to the shareholders regardless of their shareholding. The analysis shows that the director’s owes duty of care and skill primarily to his principal, the company. It is worth considering that fiduciary duties are owed to “corporate beneficiaries” including duty of good faith.
Bibliography
1. Company Law by Charelsworth and Morse page 119 published by Thomson Sweet & Maxwell, Sixteenth Edition
2. Company law by Hicks & Goo, 5th Edition
3. Gower and Davies’ Principles of Modern Company Law, Seventh Edition by Paul Davies published by Sweet & Maxwell
4. Company Law by Janet Dine published by Palgrave Law Masters fourth Edition
5. Levy Solicitors’ Web site: Article by Peter watson
