Chapter 7 Directors' Duties - alastairhudson.com

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treatment of the company‟s members is another aspect of that process. Hence, s.172(1)(f) requires that directors have regard to “the need to act fairly as between members of the company.” The nature of the success of the company: consequent provisions The success of any given company must be decided on its own merits, specifically by reference to the objectives of that company on its formation as expressed in its constitutional documents. Subsections (2) and (3) of s.172 are new. Section 172(2) of the CA 2006 provides that: “Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.” Therefore, if the company is created with constitutional purposes which are beyond the mere benefit to members (much as a co-operative industrial and provident society is organised around a common bond between members such that the altruistic goals of the organisation outweigh the individual rights of individual members 46 ), then those alternative purposes may be taken to constitute a part of the evaluation of the success of that company. 47 Section 172(3) of the CA 2006 provides that: “The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.” Section 214 of the Insolvency Act 1986, for example, requires the directors to contribute to the company‟s assets in the event of wrongful trading. More generally, it is a contested idea in company law whether or not the company and its directors should owe more than contractual duties to its creditors. 48 On one view, the common law held that the directors owed their duties in this sense to the company and not to third parties. 49 In any event, the directors‟ duties were to ensure that the creditors were not placed in a worse position by the insolvency proceedings, as opposed to advancing their interests actively. 50 46 See Alastair Hudson, The Law of Finance (Sweet & Maxwell, 2009) 1310 et seq. 47 CAS (Nominees) Ltd v Nottingham Forest FC Plc [2002] 1 BCLC 613. 48 See, for example, West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. 49 Kuwait Asia Bank v National Mutual Life [1991] 1 AC 187, 217; Yukong Line Ltd v Rendsburg Investments (No2) [1998] 1 WLR 294. 50 Re Weldfab Engineers Ltd [1990] BCLC 833, Hoffmann J. However, identifying where reasonable continuation of activities has been carried on by the directors, as opposed to looking after creditors, is difficult to establish: Facia Footwear Ltd v Hinchcliffe [1998] 1 BCLC 218, 228. 16
The principle in the case law The “best interests” approach The case law did not have a principle relating to the promotion of the success of the company directly. Instead, the case law was concerned that the directors should act in the best interests of the company. As considered in the previous section, there were cases such as Punt v Symons, 51 Hogg v Cramphorn 52 and Howard Smith v Ampol 53 in which the directors had sought to obstruct potential takeovers of their companies by using their powers to allot new shares (so that there would not be a majority of shareholders able to vote in favour of the takeover). In those instances it was held that the directors must use their powers for the purposes for which they were intended and also that they must act in the best interests of the company, and not for some collateral purpose. So, in Punt v Symons, Byrne J held that issuing shares so as to frustrate the takeover was not “bona fide for the general advantage of the company”. In relation to the use of director‟s powers, this also involved identifying the proper purpose behind that power in the company‟s constitution. Interpreting the “success of the company” where there are different interests It is possible that the ongoing interests of the company are at odds with the short-term goals of shareholders: for example, the company may need to invest in its plant and machinery so as to make profits in the future, whereas some of the shareholders may prefer to receive a large dividend pay-out immediately. It is suggested that it would be a breach of duty if the directors chose in the abstract to prefer the interests of one group of shareholders over another group of shareholders. 54 Alternatively, a shareholder may be in competition with the company and so may wish to have the directors protect his own personal interests as opposed to advancing the company‟s business. That the directors owe their duties to the company under s.170 is important because it means that the directors must look to the company‟s interests as an abstract entity; and when taken with the prefatory words to s.172(1), it would suggest that the directors must consider the interests of the shareholders as a collective group (and thus as a “company” or association of people) instead of looking at the separate interests of individual shareholders. 55 The court‟s response On the decided cases, it is not always a straightforward matter to know how to deal with a contention that a director was not promoting the success of the company in good faith. On the 51 [1903] 2 Ch 506. 52 [1967] Ch 254. 53 [1974] AC 821. 54 Mills v Mills (1938) 60 CLR 150, HCA. 55 See, perhaps, Mutual Life Assurance Co of New York v Rank Organisation [1985] BCLC 11, 21, Goulding J; BSB Holdings Ltd (No2) [1996] 1 BCLC 155, 251, Arden J. 17
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Page 3 and 4: Who is a director? The exact name o
Page 5 and 6: II. DIRECTORS’ GENERAL DUTIES Dir
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Page 35 and 36: that the profit was earned outwith
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