Director Duties Company

Carry out a research exercise to find the legislative programme which the UK government set out in the Queen's Speech on May 17th 2005 and write a report identifying an area of law of relevance to businesses which may be subject to alteration if the proposed programme goes through and briefly explain the process by which the proposed change would be enacted.

“Company law will be reformed to encourage greater levels of investment and enterprise.”

One of the key areas that is proposed in reference to company law is changing the role of the shareholder in companies. A key part that this bill will deal with is the director’s duties where the whitepaper proposes that director’s duties which are now at the common law level be put into a stutory frame work:

“The statutory statement of duties will replace existing common law and equitable rules. The duties owed to the company, and – as now – only the company will enforce them. (In certain circumstances, the shareholders may be able to bring a derivative action, albeit essentially for the company’s benefit)”.

The reasoning for this statutory framework is to deal with protecting shareholders from directors indirectly in respect to current case law. In order to examine this the current situation in respect to the fiduciary duties of directors will be discussed and how in any way the current law wll be changed, or if this statutory change will just re-inforce modern movements and protection of individual share holders.

Director’s Duties, Company Law & Shareholders – The Current Law:

The general duty that the director holds is to the company, which has been established through the law of equity, which will be further discussed in the next section. In relation to contracts that personally benefit the director under contract law the company can make it avoidable as it is in breach of the basic duty that the director holds, which is implied in the present Company Acts. However there is the provision that if the director declares to the board his personal interest, at the soonest possible time, then if the board approves the contract then this contract is valid. This is not the extent to which parliament has legislated director’s personal interests in contracts as can be seen in the CA 1985. Section 317 of the CA 1985 has been briefly touched upon in his declaration of personal interest in the contract, yet the legislation goes further to define how and what the director must declare. This includes the nature of the interest; whereby a general notice of interest in a company or with a specific person is sufficient notice; however only the agreement from the board in full knowledge of an interest will save a contract from being avoided, otherwise contract law will allow the contract to be avoided. If the interest is financial, rather than just a connection with a person, then the director must make a declaration to the accounts; hence strictly regulating not only direct contracts but also indirect or casual transactions. There are certain exclusions which include; transactions within the company group; or a service contract between a director and its company; as well as financial transactions which are below the limits set out. Therefore the current law has set out some basic provisions in protecting the company, which impliedly protects the shareholder because the shareholder is whom the director is holding its trust for. Yet after an extensive three year review it has been revealed that the individual shareholder’s interests may not be sufficiently protected by protecting the company’s interest and declaring any interest in a contract to the board.

Therefore the present law does not create a fiduciary duty between individual shareholders and a director, rather this is implied because the director owes a fiduciary duty to the company as a whole, which is strictly adhered to in Regal (Hastings) Ltd v Gulliver. This creates a limitation in the extent that the law of equity can protect the individual shareholder’s interest, because it means that the company must bring a claim and ordinarily the shareholder cannot bring a claim because no duty is held to the individual shareholder. This can cause problems in the case that all the directors enjoy a personal interest in the transaction and therefore leading to a situation where there is no one in the company prepared to take action against the directors. This has led the law to make exceptions, but these exceptions are not for the interest of the shareholders but for creditors and employees. Hence creating a situation where there are individual fiduciary duties held but as of yet not held to individual shareholders. Therefore as long as the director believes he is acting in the best interest as the company, not individual shareholders and then he can use and dispose of company property as he wishes. In addition in personally interested transactions, as long as the company is notified and the board agrees, that are in the best interests of the company and for proper purposes, i.e. not fraudulent, negligent or reckless, are seen as perfectly valid. If the director is to make profit from valid personal dealings this then must be fully disclosed, otherwise he would be in breach of his fiduciary duty to the company; even if the company could not have made profit without this dealing. In short the current law of equity does also provide some indirect provisions in protecting the shareholder; however there is no direct fiduciary duty between the director and individual shareholder; whereas there is a direct duty to an employee or a creditor. This seems to indicate quite a large void in the both the law of equity and legislation as the company would not exist without individual shareholders; therefore as long as it can be shown that an action was in the company’s general good interest then the effects on the holdings of an individual shareholder seems to be irrelevant. However in the recent case of Crown Dilmun and Dilmun Investments v Nicholas Sutton and Fulham River Projects the court held that the director, whom held a direct personal interest in the contested deal, required the additional written permission of the deal from individual shareholders in the business deal as there were serious consequences and conflicts in the case and ignorance is no excuse:

The fact that Mr Sutton believes all of this is possible is a good demonstration of his minimal understanding of his duties and responsibilities and possibilities of conflict which he never understood at all.

The Proposed Changes:

The Dilmun above case indicates that the current legal changes are beginning to understand the importance of fair-spirited actions to individual shareholders. The statutory changes that the Queen’s speech has proposed is to protect this move to indirectly protecting the shareholder, i.e. the outcome of the Dilmun is being put into statutory form and by this there is further engagement of the shareholder. This will make individuals more prone to investing in companies as shareholders and boost economic growth in the UK – the aim of the Company Bill. Therefore there is a small change in the current legal situation, rather the protection of an important change that recent Dilmun Case indicates, i.e. there is a movement to protect individual shareholders. This seems to be the direction that new legislation and proposed reforms seem to be indicating also. The main point is that without individual shareholders there would not be a company, therefore their interests should be equally protected as individual employees and creditors. Hopefully the Dilmun Case and the proposed reformswill indicate a movement towards protecting individual shareholders interests, as well as creating a direct fiduciary duty between directors and shareholders.

Bibliography:

N. Bridge, 2004, Directors Behaving Badly, NLJ 154(7129)
Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell
Department of Trade and Industry can be found at: www.dti.gov.uk
DTI, Company Law Reform White Paper March 2005 can be found at: www.dti.gov.uk/cld/WhitePaper.htm
The Insolvency Service can be found at: www.insolvency.gov.uk
Keenan and Bisacre, 1999, Company Law (with Scottish supplement), Prentice Hall
Pillans and Bourne, 1999, Scottish Company Law, Cavendish
Queen’s Speech, 17^th May 2005, can be found at: http://www.number-10.gov.uk/output/Page7488.asp
Sealy, 2001, Cases and Materials in Company Law, LexisNexis UK

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