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Legal Duties of Directors

Duty to act within powers

A director of a company must act in accordance with the company’s constitution, and only exercise powers for the purposes for which they are conferred. For this purpose, the company’s constitution includes not only its articles of association, but also any decisions taken in accordance with the company’s articles, or by the shareholders (or a class of them) in circumstances where they are to be treated as decisions of the company by virtue of any enactment or rule of law.

The above duty codifies the previous principle of law, under which a director was required to exercise his powers in accordance with the terms on which they were granted, and to do so for a proper purpose. What constitutes a proper purpose must be ascertained in the context of each individual case. The case law on the previous law is helpful in this context, and the courts have held directors in breach of their fiduciary duties inter alia where they have exercised their powers to:

  • allot shares in order to manipulate voting power, or to retain their position and control of the company, possibly within the context of a take-over bid;
  • refuse to register a transfer of shares;
  • provide or withhold information to the shareholders;
  • call general meetings;
  • borrow and give security for any loan;
  • determine which competing offer from members’ shares, available under pre-emption provisions within the company’s articles of association, should succeed; and
  • enter an agreement with the company to transfer an important asset to the director in the event of the company’s insolvency.

Statutory duty

A director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with both:

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by that director in relation to the company; and
  • the general knowledge, skill and experience which that director actually has.

The Companies Act 2006 embodies the ‘objective-subjective’ test developed by the courts which set a minimum objective standard to be applied in the circumstances of the individual case based on such factors as the size of the company and the precise role or function which the relevant director has undertaken (whether executive or non-executive), and then provided for this to be adjusted upwards, if appropriate, to take into account any special skill or experience possessed by the individual director. Of all the general duties, this is the only one which is generally considered not to be a fiduciary duty.

Nature of director’s fiduciary duties to his company

The nature of the fiduciary duties owed to a company by it’s directors, and the legal source of these duties, was set out in the case of Aberdeen Rly Co v Blaikie Bros:

‘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 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 may possibly conflict, with the interests of those whom he is bound to protect’.

Fiduciary duties therefore arise in situations of trust where confidence by necessity is placed by one person or body in another. The example of such a relationship (namely that between a principal and agent) is equally applicable to the relationship of director and company.

The fact that a party places confidence in another gives rise to a potential legal framework which may provide a remedy in equity to the person who has placed trust and confidence in another and found that confidence to be misplaced. However, the fiduciary relationship between the director and the company gives rise to obligations which are owed by the director to the company and to the company alone. It follows from this principle that the shareholders in the company, the creditors, and even fellow directors, are unable to enforce these duties as against a particular director.

The fiduciary responsibilities owed by the directors to the company are important in two distinct respects. First, they are relevant to the manner in which the directors should exercise the powers which they hold. Second, they are relevant where issues of conflict of duties may arise. These aspects of the role and function of fiduciary responsibilities require further and separate consideration.

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