Chapter 7 Directors' Duties - alastairhudson.com

asis, as discussed above, that the court will not substitute its own decision for the director‟s
decision, then it will be necessary to show that the director could not have believed either
reasonably 56 or in good faith that his decision was likely to promote the success of the
company. So, it is likely that it is only in cases of egregious default that the court will be
confident in upholding a breach of duty, and furthermore it is only in such cases that a
claimant will be confident in commencing an action. 57 For example, in Item Software (UK)
Ltd v Fassihi 58 a director of IS encouraged a distributor company dealing with IS to make its
terms more stringent and to consider dealing with him directly. In the event negotiations
between IS and the distributor company collapsed, as a result of the director‟s intervention. In
such circumstances the director was clearly not acting in the best interests of the company
(nor promoting its success, in modern parlance), and was operating on the basis of a conflict
of interest. Similarly, if a director invoices a company fraudulently so as to divert money to
himself, then that director would not be promoting the success of the company (and would
also be involved in a conflict of interest). 59 However, the cases are unlikely always to be so
clear cut.
DUTY TO EXERCISE INDEPENDENT JUDGMENT
It is an essential part of the duties of any fiduciary that that fiduciary is responsible for acts
which he performs and also that he is responsible for acts which he ought to have performed:
otherwise a fiduciary would be able to avoid liability for breach of duty in circumstances in
which he simply failed to act. This would be an opiate on the conscience of fiduciaries. 60
Therefore, company directors are required to perform their duties under Part 10 of the CA
2006 and, under s.173 specifically, they are required to act independently of control by any
other person. Therefore, from the perspective of fiduciary law at the very least, company
directors are required to exercise their own judgment as to the discharge of their duties and as
to the issues which confront the board of directors. Company directors may not simply act as
the proxies or nominees of other people. It will certainly not be a good defence to an action
for breach of a fiduciary duty that a director was simply taking instructions from another
person. Section 173(1) of the CA 2006 provides that:
“A director of a company must exercise independent judgment.”
However, it is not only direction from a third person which is considered (such as the person
who ultimately controls a shareholding in the company, or who employs or retains the
director in question), but rather it also encompasses senior executives or shadow directors in
the company who exercise a de facto power over the directors. In Re City Equitable Fire
56
It is suggested that, given that this was originally a common law test, a notion of reasonableness is
appropriate.
57
Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [44].
58
[2004] EWCA Civ 1244.
59
Tesco Stores Ltd v Pook [2003] EWHC 823. See also Fulham FC v Tigana [2004] EWHC 2585.
60
To borrow from Bahin v Hughes (1886) 31 Ch D 390.
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