This statement
requires an extensive analysis of Directors duties in English Company Law.

Along the lines of this analysis the core concepts surrounding directors’
duties such as the codification of directors’ duties and s.172 which has
arguably made one of the most significant changes in the Companies Act 2006,
will be highlighted. This will thus help to give an understanding on whether
the introductions of directors’ duties into the Companies Act has either just
simply codified the existing common law or if it has gone beyond that and has
clarified or improved this area of the law and how stakeholder’s interests are
impacted in English Company Law.

 

The modern day Companies
Act is the primary source of legislation used in UK Company Law. It replaces
the Companies Act 1985 and it it used to be the longest Act of Parliament
established with 1,300 sections1,
however this has now been surpassed by the Corporation Tax Act 2009. The definition of director is present
in s.250 as including ‘any person occupying the position of a director, by
whatever name called’. As highlighted in Re Hydrodan (Corby) Ltd (1994), there
are three different types of director; de jure (formally appointed and
registered as a director),2
de factor (not formally appointed but carries out all the duties and decisions
as a director)3 and
shadow directors (person in accordance with those directions or instructions
the director of the company are accustomed to act).4
Every company must have at least one director, however public companies must
have at least two directors.5
In order to address agency problems and reduce agency costs, it is vital that
directors do not misuse their power, therefore directors in both private and
public companies are subjected to various duties. Directors only owe their duties
of loyalty to the company and not to individual shareholders, as reinforced by
s.170(1).6
Directors are also considered as a company’s trustees or agent and are in a
fiduciary situation in relation to the company.7
Furthermore, they must first and foremost act in good faith and in the best
interests of the company.8
Even before the codification of directors duties where implemented within the
Companies Act, directors still owed the duty of care and skill to the company.9

 

The Law Commission
recommended that the complicated law on directors’ duties relevant to equitable
attitudes and at common law should be reformed and made simpler by using a
statutory form.10
It evaluated the advantages and disadvantages of codification such as certainty
and accessibility against its disadvantages such as loss of flexibility, whilst
also explaining why partial instead of full codification would be more
preferable in terms of directors’ principal duties. Eventually, the government
implemented the Law Commission’s recommendations and now the duties are
codified in the Companies Act 2006. Nonetheless, regardless of codification,
previous case law is still relevant to its application and interpretation as
director’s general duties ought to be interpreted and applied in the same way
as common law or equitable principles.11
The general duties in s.170-177 are assessed by comparison with their
corresponding common law rules.

 

S.171 states that
directors must act in agreement with the company’s constitution and that they
shall only exercise their powers for the purposes for which they have been deliberated.

It codifies the common law duty to act for proper purposes which was
established in the cases of Hogg v Cramphorn (1967) which held that directors
shall only exercise their powers for a proper purpose and not for any
collateral purpose and Howard Smith Ltd V Ampol Petroleum (1974) which held
that directors abused their fiduciary duties by authorising the issue if shares
for the purpose of altering the voting power in the company and such issue was
held invalid. Consequently, s.171
has made the law more accessible while preserving the clarity of the common
law.

                                                                                                                               

Under s.173, a
director is required to exercise independent judgement.12
The provision distinctively paraphrases the principle in Fulham Football Club
and Others V Cabra Estates plc (1994), that a director should not restrain his
discretion and should have independent judgement. S.174 states that a director
has a duty to exercise reasonable care, skill and diligence. If a director
breaches any of these duties, the company is the proper claimant to sue him.13
The provision replaces the previous common law duties which where established in
Dorchester Finance Co Ltd V Stebbing (1989), where it was held that non-executive
directors who were either qualified accountants or who had considerable accountancy
and business expertise had been negligent in signing blank cheques which allowed
the managing director to misappropriate the company’s money. Johnathan Parker J
in Re Barings plc (2002), held that directors may delegate functions, however
they remain responsible for those functions being undertaken. Whilst little was
expected from directors in relation to to care and skill previously, Gower and
Davis states that more recent cases imply a more objective standard of care and
the applications of the tests in s.214 Insolvency Act 1986. S.174 consolidates
the previous common law and introduces the objective standard of care which
could be enhanced by actual knowledge, skill and experience of a certain
director.14

 

S.175 codifies the
common law on the rules of no-conflict and no secret profit. A director must
avoid a scenario in which they have, or can have, a direct or indirect interest
that conflicts or potentially can conflict, with the interests of the company.15
It applies specifically to the misuse of any property, information or
opportunity16.

This duty is not breached if the matter has been effectively approved by
disinterested directors.17
 In Cooks V Deeks, a Canadian case (1916),
a corporate opportunity was seen as a company’s asset which could not be misappropriated
by the directors, this rule correspondingly applies to the scenarios where a director
comes across an opportunity personally instead of there capacity as director.18

 

 S.176 states that a director must not accept a
benefit from a third party conferred by reason of him being a director. He must
also declare the nature and extent of any interest to other directors, if he is
in any circumstance interested in a proposed transaction or arrangement with
the company.19 S.177
codifies the self-dealing rules as established in the cases of Bentick V Fenn
(1887) and Aberdeen Railway Co Ltd V Blaikie Bros (1854). S.182 Companies Act, works
in correlation with S.177 as it states that a director, who is in any way,
directly or indirectly, interested in a transaction that has been entered into
by the company, must declare the nature and extent of that interest as soon as
is reasonably practicable. Overall it does seem that the courts are willing to
still take a strict approach in terms of the no-conflict and no-profit rules,
however, such a difficult approach is controlled by the potential authorisation
and ratification of a breach of the duties.20

 

S.172 is relevant
to the concern to promote the success of the company. It states that a director
is obligated to act in a way which he considers, in good faith, would be most
likely to promote the success of the company for the benefit of its members as
a whole. In doing so, they are required to have specific regard, between other
matters, to the interests of the company’s employees, the effect of the
company’s operations on the community and the environment and the need to act
fairly between members of the company.21
In Bristol and West Building Society V Mothew (1998), it was held that this is
subjective in nature in the scene that it is view as what a director considers,
not what a court considers, would be most likely to promote the success of the
company.22 Not
only does S.172 codify the common law duty to act bona fie in what the director
considers and not what a court may consider,23
as held by Lord Greene MR in Re Smith and Fawcett Ltd (1942), but it also
widens the scope of previous common law as it establishes the new concept of
enlightened shareholder value. It is contended that English Company law has
edged closer to, but has not completely adopted, the shareholder theory.

 

The test in s.172
remains subjective as what amounts to the success of the company depends on the
director’s good faith judgement.24
It appears that there are no objective principles in s.172 on which the actions
of directors can be assessed and, thus makes it very difficult to prove a
breach of this duty. Nevertheless, at common law objective considerations were
introduced by the courts to complement the subjective test. In Chaterbridge
Corp Ltd V Lloyds Bank Ltd (1970), the courts considered whether an intelligent
and honest director could in whole of the circumstances believed the
transaction to be in the benefit of the company. The objective consideration is
not codified in S.172, nonetheless, given the important role of common law
rules in relation to interpretation and application of the codified duties,25
Andrew Keay (2007) argues outspokenly that it is most certain that the courts
would consider the objective test in relation to assessing directors’ actions.26

 

There are many
different theories in relation to whose interests the company should be run,
and the debate on which theory is most ideal has started from as early as the
1930’s. The traditional view in the United Kingdom and the United States is the
shareholder value principle (or shareholder primacy), whereby a company should
be run for the wealth maximisation of its shareholders over those of other
parties such as customers and suppliers. Directors are under a duty to act in
the interests of the company,27
which are understood to be the best interests of present and future
shareholders.28 Supporters
of shareholder primacy such as Professor Berle, claim that it would be
inappropriate to release directors from a strict accountability to
shareholders. The shareholder value theory reflects the view that shareholders
are the owners of the company and therefore bare the residual risks.”29
 

 

The stakeholder
theory (also known as the pluralist approach), in comparison, highlights the interests of stakeholders, who can
affect or be affected by a company’s activities. It requires that directors
manage company for the benefit of all the stakeholders, and it is widely used
in many continental European and East Asian Countries such as Germany and
Japan. Merrick Dodd argues that the company should be run not only on for the
interests of shareholders but also for all their stakeholders.30
He discovered that other stakeholders such as employees and customers and the
public also had a valid interest on how the company should be managed. Whilst the
stakeholder theory is beneficial in the wider context and in the long run, it unavoidably
involves a fine balance of stakeholder’s potentially conflicting interests. During
the recent company law reform, the stakeholder theory was considered but was
not adopted in Companies Act 2006, primarily due to the complications faced by
directors in balancing the interests of different groups and the concerns in
enforcing these duties. The Company Law Review Steering Group (The Strategic
Framework, 1999) rejected the stakeholder approach as neither workable nor
desirable. It argued that it was impractical to identify all the stakeholders
and redefine the nature and the extent of directors’ duties, if the stakeholder
theory was adopted, the shareholders would not be effectively accountable for
anyone as there would be effectively accountable to anyone as there would be no
clear yardstick for assessing their performance. There seemed to be a lack of a
proper measure to enforce the stakeholder theory, and the CLRSG put forward a
strong philosophical argument against the theory, that it would turn directors
away from business decision makers into moral, political and economic
arbiters. 

 

The enlightened
shareholder value is adopted as a new alternative approach, introduced into the
Companies Act 2006. Not only does S.172 codify the common law duty to act in
good faith in what a director considers to be in the interests of the company31,
but it also brings about the enlightened shareholder value. A director must
take into considerations a number of factors present in S.172(1) to ensure that
the company generates dividend for shareholders, whilst at the same time
directors should take an appropriately balanced view of the implications of
decisions over time and promote effective relationships with other stakeholders
such as their employees, customers, suppliers and within the community. The attraction
of the company maintaining a reputation for a high standard of business management
and the need to act in a fair manner between the members of the company is
really important.

 

The enlightened shareholder
value is viewed to be able to achieve wealth generation and competitiveness for
benefit of all more efficiently, as it requires a long-term approach and allows
directors to consider other interests as the best method of securing prosperity
and welfare overall. Sarah Kiarie held a similar view point, that the
enlightened shareholder value appears a compromise between shareholder primacy
and stakeholder theory by maintain the primacy of shareholders’ interests
whilst considering other stakeholder’s interests.32
Notwithstanding the introduction of the non-exhaustive list in s.172(1) which a
director has to consider when making decisions, it is evident that shareholder
primacy is still dominant as a director must act in a way that promotes the
success of the company for the interests of members as a whole.

 

S.172 provides,
for the first time, some guidance on directors’ objectives in managing the
company’s activities. It is beneficial in the wider context and in the long
run, however there are some problems. Firstly, the long list of factors may
extend the administrative process and lengthen the time the board takes to make
decisions as directors must undertake all they reasonably can to have regard to
these factors. There is no clarity on which criteria should be implemented to
assess objectively whether the action of the directors has led to the success
if the company. Daniel Atterborough, suggests that S.172 allows directors
discretion to give their own interpretations of success.33
This may result in an increase of uncertainty as directors may have different
understandings of the meaning of success. Moreover, the factors listed in s.172
are not fully exhaustive and other relevant factors should also be taken into
account. It is undecided whether a director would be in breach of this duty if
they considered the factors, except the
one in relation to the environment. It is also problematic when there is a
conflict between two or more factors, such as, when a decision favours the
employees but is detrimental to the community or environment.

 

Furthermore,
whilst shareholders may challenge directors’ breach of duties under S.994 by
bringing an unfair prejudice petition34
or using a derivative action against directors for breach of duties,35
there is a lack of procedure for other stakeholders such as employees or the
community to hold directors accountable if the directors fail to have regard to
their interests which are set out in S.172(1). As derivative actions are only obtainable
to members of the company,36
it is most probable that directors will continue to use their powers to promote
the success of the company for the benefit of its members. Agreeing with the
observation in Boyle and Birds, the impact of S.172 is more likely to be
educational rather than in any sense restrictive.37

 

Overall, the statement
is incorrect as whilst the Companies Act has codified directors’ duties, it has
also clarified the difficult rules existing at common law and has made it
easier for shareholders to detect and redress directors’ breach of these
duties. Nevertheless, there are significant
problems as the duty to promote the success of the company for instance, is
drafted in vague and u

1 Boyle,
A & Bird, J (2007) Boyle & Birds Company Law (7th edn)
Bristol:Jordans

2 Ma, F. (n.d.). Company
law. 2nd ed. University of Portsmouth: Pearson.

3 ibid n.2

4 S.252 Companies Act 2006

5 S.154 Companies Act 2006

6 Pervial V Wright (1902) 2 CH 421

7 Bristol and West Building Society V Mothew (1998)

8 Pervial V Wright (1902) 2 CH 421

9 Re City Equitable Fire Insurance Co Ltd (1925) Ch 407

10 Law Commission (1998) Company Directors: Regulating Conflicts of
Interests and Formulating a Statement of Duties (Consultation, Paper No.153)
London: The Stationery Office

 

 

11 S.170 Companies Act 2006

12 Southern Countries Fresh Foods Ltd, Re (2008) EWHC 2810 (Ch)

13 Foss v Harbottle (1843) 67 ER 189

14 Gower and Davis (2008) Gower and Davies Principles of Modern
Company Law (8th edn). p.494 London: Sweet & Maxwell

 

 

15 Bray v Ford (1896) AC 44

16 Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378

17 S.175(4) Companies Act 2006

18 Industrial Development Consultants Ltd v Cooley (1972) 2 All ER

19 S.177 Companies Act 2006

20 Lowry, J and Edmunds, R. (2000) The no conflict-no profit
rules and the corporate fiduciary: challenging the orthodoxy of absolutism. Journal
of Business Law 122

21 ibid n.1

22 Carlen v Drury (1812) 1 Ves & B 154

23 Re Smith and Fawcett Ltd (1942) 1 All ER 542

 

 

24 Regentcrest plc v Cohen (2001) 2 BCLC 80

25 S.170(3) & (4) Companies Act 2006

26 Keay, A.R (2007) Section 172(1) of the Companies Act 2006:
an interpretation and assessment. 28 Company Lawyer 106

27 Precival V Wright (1902) 2 Ch 421

28 Hutton V West Cork Railway Company (1883) LR 23 Ch D 654

29  Berle,
A.A (1931) Corporate powers as powers in trust. 44 Harvard Law Review 1049

30 Dodd, E.M (1932) For whom are corporate managers trustees?
45 Harvard Law Review 1145

 

 

31 Re Smith and Fawcett Ltd (1942) 1 All ER 542

32 Sarah Kiarie, ‘At crossroads:
shareholder value, stakeholder value and enlightened shareholder value: which
road should the United Kingdom take?’ (2006)17 (11) ICCLR 329.

 

33 Daniel Attenborough, ‘How Directors Should Act When
Owing Duties to Companies’ Shareholders: Why We Need to Stop Applying
Greenhalgh’ (2009) 20(10) International Company and Commercial Law Review 339.

34 Re a Company (No. 005134 of 1986), ex p Harries (1989)

35 S.260 Companies Act 2006

36 S.260 Companies Act 2006

37 Boyle,
A & Bird, J (2007) Boyle & Birds Company Law (6th edn) p.618
Bristol:Jordans