Does the present law adequately prevent and control abusive, self-interested conduct by

company directors?

Abusive conduct
Self-interested conduct

Introduction
 The Companies Act 2006 (‘CA 2006’)
 Important question
 Scholar/Academic/case addressing it
 Summary of what I am going to analyse

Background
A company is a separate legal personality. Directors are required to act on it’s behalf. There
are three types: De Jure directors are formally and validly appointed to the board of directors
by the company; De Facto directors, whilst not appointed, performs tasks particular to
directorship. Shadow directors, excluding professional advisors, are implied directors if they
instruct other directors All directors manage companies and their assets. Since this position
lends directors significant powers and responsibilities, it is vital duties are imposed on them
to uphold behavioural standards, and protect the company and its beneficiaries. Directors
duties are set out in s.171 to 177 CA 2006.They are owed by the directors to the company
(s.170(1)). S.170(3) states that the statutory duties “have effect in place” of the common law
duties. However, s.170(4) states that the duties must be interpreted and applied in the same
way as the common law and equitable duties. Thus the existing authorities can still be
invoked. S.178 imports remedies for breach of duty, from common law and equity.

Loyalty /the corporate objective

S.171 requires directors to act in accordance with the company’s constitution,1and only
exercise powers for the purposes given.2

Re Smith and Fawcett 3: Directors must act bona fide in the best interests of the company
and not for “collateral purposes”.4

Hogg v Cramphorn:

Howard Smith v AMPOL5: Power is exercised properly where “substantial purpose” for which power
was exercised is proper.

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2
3
4
5
Criterion Properties6:

S.172 specifies directors must act in good faith to further the company's success, for the
benefit of its members as a whole. In doing so, the director must have regard to factors
(a)-(f)(s.172).

Lowry: The framing of s.172 does go further than the pre-existing law it replaces. At
common law the considerations to be taken into account in discharging the good faith
duty were seen as matters of process and diligence. Whereas the factors listed in the
provision are matters which go to the issues of a director’s good faith and duty. The real
significance of s.172(1) may well lie not with the question of it’s enforceability, but rather
in its value as serving a normative function that the “long term should predominate over
the short, not vice versa, but that both should be evaluated and balanced, in determining
what contributes best to company success.

s.173 directors must exercise their independent judgement

Competence/Negligence
S.174 establishes directors' duty of care. A dual standard is imposed, the first limb being
objective- directors must demonstrate knowledge, skills and experience that might be
reasonably expected of a person of their position (s.174(2)(a))- the second, subjective-
the director must demonstrate the knowledge, skills and experience that they have
(s.174(2)(b))

Honestly/ self-dealing

 S.175 states the duty to avoid actual or potential conflicts with the company's
interests. It concerns conflicts of interest and duty, and conflicts of duties
(s.174(7)). The duty applies particularly to the exploitation of a company's
property, information or opportunity (s.175(2)). However, it only arises over
directors' third party dealings (s.175(3)). Furthermore, ss.175(4)(b), 175(5) and
175(6) provide the board a procedure for authorising conflicts by the board.
Persons ceasing to be directors remain subject to this duty (s.170(2)).

 s. 176 provides directors cannot accept benefits from third parties. Dissimilarly to
s.175, s.176 provides no authorisation procedure.

 S.177 directors with direct or indirect interests in their company's transactions

must declare to other directors the nature and extent of those interests (s.177(1)-
(4)), unless unaware of their interest or the transaction concerned(s.176(5)).
`

Conclusion