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company, normally in the form of dividend. 27 This misconception lies in the failure
of company law to appreciate the full implications of separate legal entity. 28 The law
fails to consider that the company is an entity of its own and is separate from its
shareholders. 29 Hence, the interpretation that the company‟s interest is equivalent to
the shareholders has totally ignored this fundamental principle in company law.
The law also imposes duties on directors to act honestly according to their judgment
for the interests of the company. The interests of the company have long be decided
as being the shareholders‟ interests since directors are managing the company on
behalf of shareholders. In addition, directors are subjected to fiduciary duties such as
the duty to exercise their powers for proper purpose as well as using their care, skills
and experiences. Directors have to exercise these duties for the purpose of advancing
the interests of shareholders and failure to do so will result in liability. 30
Shareholders can exercise rights to vote and can replace directors if they are not
satisfied with director‟s performances, although in reality, directors‟ market power,
27 Company Law Review Steering Group “Modern Company Law For a Competitive Economy: The
Strategic Framework” A Consultation Document (DTI, London, 1999)
at June 2010 at [5.1.5].
28 Ireland above n23 at 48. The writer argued that the concept of shareholders ownership dated from
the early emergence of the joint stock company which was similar to partnership. At the time,
shareholders and companies were identified as one with the company and shareholders shared
property in common as partners in partnership. However, as a result of separate legal entity,
shareholders no longer retain that rights to property and their interests in the company "are simply
bundles of contractual and statutory rights which the shareholder has against the company" - Robert
Pennington Company Law (6 th ed., Butterworths, London,1990) at 56. The shareholders' positions
in these circumstances are similar to the creditors.
29 John Farrar “Frankenstein Incorporated or Fools‟ Parliament? Revisiting the Concept of the
Corporation in Corporate Governance” (1998) 10 Bond LR 142 at 147 [Frankenstein]; Otto Kahn-
Freund “Some Reflections on Company Law Reform” (1944) 7 MLR 54 at 55.
30 See Re Smith & Fawcett Ltd [1942] 1 All ER 542; Heron International Ltd v Lord Grade [1983]
BCLC 244; Foss v Harbottle (1843) 2 Hare 461; however, different considerations apply when the
company is insolvent or near insolvent in which case, directors owe duty to creditors- see Walker v
Wimborne & Ors (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR
722.
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