Company Law - Diretors II (Part 1)

Introduction – fiduciary duties

In addition to the common law duty of care and skill set out in Session 6, directors are in a position of trust and confidence, and as a result owe fiduciary duties to the company (as oppose to individual shareholders or creditors – Percival v Wright, although this has often been said to equate to the “interests of the general body of shareholders”.

Duty to act bona fide in the interests of the company as a whole

This is often considered to be the primary duty owed, and a breach may only be subsequently ratified by the members (see later) if this primary duty has not been breached.

The director must conduct the business affairs of the company for the benefit of the company as a whole and not for some other collateral purpose.

Charterbridge Corporation Ltd v Lloyds Bank

“The proper test, I think … must be whether an intelligent and honest man in the position of the director concerned, could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company.”

This is difficult to disprove, but is possible:

Re W&M Roith

Facts: A director, who was in very poor health, entered into a new service agreement which was to include a very generous pension for his wife if he were to die. He failed to disclose his poor health, and died soon afterwards.

Held: The director had acted contrary to the interests of the company – his sole intention had been to benefit his wife.

Duty to act for proper purposes/not for collateral purposes

“If a director chooses to participate in the management of a company and exercises powers on its behalf, he owes a duty to act bona fide in the interests of the company. He must exercise the power solely for the purpose for which it was conferred. To exercise the power for another purpose is a breach of his fiduciary duty.”

See Howard Smith v Ampol Petroleum.

Trusteeship of company assets

Directors are answerable as trustees for any misapplication of the company’s assets in which they participated and knew or ought to have known of the misapplication.

See Selangor United Rubber Estates v Cradock.

No conflict of interest

Aberdeen Railway v Blaikie Bros

“A rule of universal application is that no-one having… 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”.

This is a strict duty, and even extends to where there is the possibility of a conflict:

“The reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict”.

No secret profits

Following on from the ‘no conflict’ rule (and indeed some textbooks merge the two categories) is the rule against taking a secret profit.

Cook v Deeks

Facts: The directors of a company became aware of a lucrative contract that was about to be offered to the company they worked for. Instead of obtaining it for the company they worked for, they instead resigned and set up their own rival company, winning the contract.

Held: They had acted in breach of their duty, and so had to account for their profits to the original company.

IDC v Cooley

Facts: Mr Cooley had been employed as a director to develop contacts and businesses. He was approached by a third party who did not wish to deal with his employer, but did wish to employ him personally. Mr Cooley then resigned his post due to ‘ill health’ and began working for the third party.

Held: He had improperly taken advantage of information that he had gained in his capacity as director, and had to account for that profit to his original employer.

Although the above two cases involve instances of mala fides (bad faith), the duty is equally applicable to cases of bona fides (good faith):

Regal (Hastings) v Gulliver (House of Lords)

Facts: The company Regal owned a cinema, and wished to obtain a further two cinemas before selling all three as a package. A subsidiary company was formed to obtain the two new cinemas, but the company was unable to raise sufficient finance. To save the deal, the directors put in their own money.

Both companies were eventually sold at a profit for both the parent company and the directors.

The buyers of the companies argued that the directors had exploited their position, and should account for their profits.

Held: “The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit in no way depends on fraud or absence of bona fides; or upon such questions and considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having… been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called to account”.

The directors had to account for their profits to the new owners.

This strict approach is arguably because the judiciary fears that any relaxation could result in directors disregarding the company’s interests in favour of themselves. 

See also IDC v Cooley.
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