Chapter 7 Directors' Duties - alastairhudson.com

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or, as here, a consultant, the person in question must be entitled to the benefit of the doubt." 10 Shadow directors Several of the statutory provisions in both the Companies Act and the Insolvency Act relating to directors also apply to “shadow directors". 11 Section 251 of the 2006 Act 12 provides that these are persons in accordance with whose instructions the directors are accustomed to act, excluding purely professional advice. These types of directors are different from “de facto directors” because they do not purport to act as directors. On the contrary, they claim not to be directors and so seek to hide behind those who are. In that sense, they “lurk in the shadows". [DISUCSSION TO FOLLOW] Directors as fiduciaries Directors as fiduciaries and agents A director owes fiduciary duties to the company and will act as an agent of the company. 13 The director‟s fiduciary duties and duties of care to the company, as will be considered in detail below. As Lord Cranworth L.C. held: 14 “The Directors are a body to whom is delegated the duty of managing the general affairs of the Company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect". [DISCUSSION TO FOLLOW] 10 ibid. at p.524. 11 Fiduciary duties could also apply to such persons: see Yukong Line Ltd v Rendsburg Investments Corporation of Liberia (No. 2) [1978] 1 W.L.R. 294, 311. 12 See also s.251 of the IA 1986. 13 “Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power": per Dixon J. in Mills v Mills (1938) 60 C.L.R. 150 at p. 186. 14 Aberdeen Rlwy. Co. v Blaikie Bros. (1854) 1 Macq. 461 at p. 471. 4
II. DIRECTORS’ GENERAL DUTIES Directors’ duties at the heart of company law The nature of directors‟ duties is one of the most interesting aspects of company law. Given that the activities of companies are in fact conducted by human beings, albeit under the disguise of corporate personality, and given that a company‟s directors are its principal human actors, then the duties of those directors to the company, and the effect of those duties on third persons such as the shareholders, employees, creditors and others, are central to the legal control of companies. The Companies Act 2006 introduced a statutory code of directors‟ general duties for the first time. Interestingly, this statutory code expressly preserves the effect of the previous case law and allows the precise nature of those duties to develop with any later case law. The case law relates specifically to the common law on directors‟ duties and significantly applies the equitable principles which govern the liabilities of all fiduciaries, including directors. The purpose of the statutory code was to formalise directors‟ duties so that non-lawyers could understand their duties as directors more clearly. THE STATUTORY SCHEME IN OUTLINE The extent of the statutory scheme on directors’ general duties in Part 10, CA 2006 The ambit of the statutory scheme The statutory scheme on directors‟ duties is contained in Chapter 2, Part 10 of the CA 2006 titled “General Duties of Duties”. That Chapter covers the principles in s.170 through to s.177, and attendant legislation. The ambit of the statutory scheme is set out in s.170 of the CA 2006 in the following terms: “(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.” Significantly, then the director owes the duties considered below to the company itself and not, for example, to the shareholders of the company. Therefore, the company is confirmed as being the proper plaintiff in relation to claims for any breach of such a duty by a director. The term “director” in this context is expanded by s.170(5) of the CA 2006 so that “[t]he general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply”. Therefore, as considered at the beginning of this chapter, shadow directors are treated as being directors. As a result, a person who controls a company or who performs the duties of a director without being formally appointed as such, may not avoid liability for breach of duty simply by virtue of not being appointed formally as a director if he is in truth a shadow director, as discussed immediately above. 5
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