Companies Act 2006 - Dissertation Example

?Chapter Four Discussion and Analysis Most of the rights and obligations of company directors are contained in the Companies Act 2006. The provisionsof this Act attempt to protect the interests of all the stakeholders of a company, including the creditors. In general, the courts do not intervene with the decision-making process of directors, under normal conditions. This is the outcome of the universally held belief that the courts should not interfere with the in house management of a company. As such, this was the ruling Foss v Harbottle. Such intrusion takes place, only when it is evident that there is mala fide intent in the decisions of the directors. This is in accordance with section 306 of the Companies Act 2006. Although, section 172(1) of the Companies Act 2006 influences the general duties of the directors of a company; it has been seen to result in legal uncertainty, regarding their general duties. This is due to the absence of an exhaustive list of the duties to be discharged by the directors. Apparently, this bestows widespread discretionary powers upon directors. This wide discretion has been provided by the statute for the purpose of conducting the affairs of the company in a congenial manner. However, under certain circumstances, such discretionary power can be misused by the directors of a company, in order to further their personal interests. This had transpired in Hawkes v Cuddy & Others.1 A codification of some of the duties of the directors of a company was effected by the Companies Act 2006. Instances are the codification of the common law duty of care and skill, by section 174(1) of the Companies Act 2006. A very important feature of the codification of directors’ duties relates to the fact that not all of the directors’ duties have been codified.2Directors’ duties codified by the Companies Act 2006 are their principal fiduciary duties and the duty of care and skill. Thus, some of the duties have not been specified, and these include the duty of a director to act or regard the interests of creditors and the duty of a director to maintain confidentiality about the affairs of the company. In addition, these duties are not exclusive of each other, and in instances wherein more than one duty is applicable, the director is required to comply with all of these duties.3 It is apparent from the various law reports that section 172 of the Companies Act 2006, merely effects a codification of the obligations of directors under the common law. In Re Southern Counties Fresh Foods Ltd,4 the court made a comparison between the previous wording and the new form after codification.5Prior to the 2006 Act, there was no material difference in this position. This was clarified in Re Smith and Fawcett Ltd.6 The shareholders of a company can sue a director of their company, for breach of duty towards the company.7 Prior to the enactment of the Companies Act 2006, shareholders had to obtain the permission of the board of directors of their company, if they were desirous of initiating legal action against a director of their company. This inequitable situation was rectified to some extent, subsequent to the enactment of the Act, which permits shareholders to bring in derivative action against a director of their company. It is no longer necessary to obtain the prior permission of the board of directors of the company, to bring such derivative action. The business judgement rule absolves directors of liability for the decision taken by them, if these decisions had been taken in good faith, with due care and within their powers.8 A director’s liability will be absolved, if he had taken the concerned decision with due care and diligence. However, there is every possibility that the director may exceed the limits of his authority, in taking such decisions. In Lonrho Ltd v Shell Petroleum Co. Ltd 9, the House of Lords stressed upon the importance of the duty of directors towards the company. In Re Horsley & Weight Ltd 10 it was held that the directors owed a duty towards creditors. This was a novel development that took place after the enactment of the Companies Act 2006. However, in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd 11, the court held that no fiduciary duty was owed towards the creditors of the company. Moreover, in West Mercia Safetywear Ltd. v Dodd 12, it was opined by the appellate court that in cases of insolvency, interests of the creditors prevailed over the authority of the directors. Similarly, in the Kinsela v Russel Kinsela 13 case it was held that in instances of insolvency interests of creditors was of greater importance than the immunity of the directors. However, in Walker v Wimborne 14 the House of Lords opined that the directors owed a fiduciary duty towards the company and not the creditors. An examination of the above discussed cases reveals the fact that the courts had expressed different opinions under different circumstances. Thus it is evident that the interpretation of the law by the courts is not consistent, with regard to the duty of directors towards the creditors of the company. This causes uncertainty in ascertaining the outcome of any specific case. The activities of a company are governed by the entity that enjoys the majority shareholding in that company. In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)15 it was held that even the minority shareholders were entitled to make a claim against the directors of the company, if the conduct of the latter showed a breach of duty towards the interests of the minority shareholders. Section 471 of the Companies Act 2006 requires the directors to give importance to statutory obligations. However, section 172 of the very same Act, grants wide discretion to directors in considering these issues. Since these two provisions are disparate, there is legal uncertainty, in the context of the general duties of directors. The following case law reveals the duty of directors towards shareholders. In Allen v Hyatt 16 the court held that the directors are required to safeguard the interests of the shareholders. Similarly, in Coleman v Myers 17 the court decided that the directors owed a fiduciary duty towards the shareholders of the company. However, in Re A Company18 it was held by the court that the directors of the company were not obliged to obtain the best price for the shares held by the shareholders. This clearly evidences the fact that the directors do not owe a fiduciary duty towards the shareholders under certain circumstances. The consequences to directors, who are in breach of their legitimate duties, are contained in section 178 of the Companies Act 2006. As such, the company constitutes the legal entity that can claim damages for the violation of duties by directors. The Companies Act 2006 details some factors, which directors have to take into consideration, while arriving at decisions. These elements have to be kept in view, while assessing whether a particular course of action promotes the best interests of the company. These factors are of equal importance and none of these can assume greater importance than the duty to promote the company’s success. The objective is to ensure the company’s success; however, such success cannot be at the cost of compromising other fiduciary duties. A comprehensive statement of the pertinent law is not provided by the list of codified duties. In addition, the Companies Act 2006 specifically declares that these duties are founded on the equitable and common law rules. Consequently, any interpretation of the Companies Act 2006 provisions has to be on the basis of such rules. In effect, the connotation of the statute will necessitate a perusal of the extant case law. Section 178 of the Companies Act 2006, makes a director liable for any loss caused due to breach of duty. The claimant in instances where the company suffers a loss is the company itself. This effectively makes the board of directors the claimants for any loss that is caused to the company by a director. Since, the action has to be initiated against a fellow director; there will be marked reluctance to do so. Hence, a considerable amount of impunity is enjoyed by the director of a company. As per the provisions of Company law, the directors of a company are duty bound to safeguard the interests of the company. This requires them to act in the best interests of the company. On occasion the courts have intervened and prevented a company director from using his powers for inappropriate purposes. This is in contrast to the major shareholders, who do not labour under any such fiduciary duty towards the minority shareholders or the company. Section 174 of the Companies Act 2006 requires a director of the company to exercise reasonable skill, care and diligence in the discharge of his duty. In cases against directors, the plaintiffs are required to establish a breach of duty of care by the directors. The latter are held to have committed a breach of their duty if they fail to comply with the provisions of the law or if they fail to reasonably supervise the affairs of the company. Section 170(4) of the Companies Act 2006 states that 'The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.' This provides the courts with a degree of flexibility, which enables them to address the changing commercial circumstances. As such, the statutory formulation of the general duties of a director does not prevent the ratification of the unauthorised acts of a director. A major drawback with the Insolvency Act 1986 lies in the fact that no liability is attached to the director of a company for wrongful trading. This makes it very difficult for the courts to convict a director who is guilty of wrongful trading. Furthermore, this lacuna inadvertently provides protection to directors during a period when insolvent liquidation is imminent and these directors continue with trading in order to protect the interests of the creditors. Such directors can avoid liability by merely demonstrating that they had taken all reasonable measures to reduce loss to creditors, if the company was to undergo insolvent liquidation.19 Although the Insolvency Act attempts to protect the interests of the creditors at times of liquidation, it cannot limit the director from doing wrongful trading. This is because such trading will be in the best interests of the creditors. As per section 172 of the Companies Act 2006, in order to evade liability for breach of his duties, a director should have believed that the decision taken by him was in the best interests of the company. Thus, section 172 is subjective in nature. There are several instances, wherein company directors have made substantial gains, without extending any benefit to the shareholders. The activities of company directors have been allowed to take place with hardly any interference. This is despite the numerous rulings of the courts, in which directors had been indicted, for their dubious activities. [Thao, from what I have seen in your chapter four, it looks more like describing directors duties according to cases. I do believe that you have mentioned many of those duties under chapter three. Can you please tell me what is your aim of doing chapter four?] This chapter analyses the extant literature on the dissertation topic. Chapter Five Conclusions The concept of trustee was prior to that of a company, in English law. Consequently, it was natural and necessary to utilise individuals to don the role of trustees. This resulted from the fact that initially, the director of a company was its trustee. Subsequently, the title in the property was transferred to the company, on account of general incorporation. All the same, the director was termed a trustee by the courts, as he continued to exercise control over the assets of the company.20 With the passage of time, it became evident that a director had to be enterprising and take risks in order to achieve success for the company. Thus, it was recognised that a director could not restrict himself to being a mere trustee of the company’s assets. Something more was required of him, and it came to be accepted that the director would have to undertake a certain amount of calculated risk. This was in contrast to a trustee whose role was limited to preserving trust property and ensuring that such property was not subjected to avoidable risk.21 Consequently, a director is expected to face risks and come to a conclusion, as to whether a particular risk is worth undertaking. At present, directors are not considered to be trustees and on the other hand they owe an unalterable fiduciary duty to their company. Therefore, the director of a company has to act in the best interests of the company and take all precaution to avoid the improper exercise of his powers.22 Another important facet of company directorship is that a company director cannot restrain his future discretion, until and unless the company consents to such behaviour. Furthermore, a company director is precluded from allowing things to come to such a pass that there is conflict between his personal interests and those of the company. A firm stand on this issue has been established by English company law, which declares that good faith must be performed and also be seen to have been done. Strictly speaking, a fiduciary cannot compromise his position in a manner that can be expected to prejudice his judgement and then circumvent liability by refusing to accept that his decision had been biased.23 Section 172 of the Companies Act 2006 requires the director of a company to act in good faith and in a manner that would stimulate the company’s success and provide substantial benefit for all of its members. Moreover, a director has to be cognisant of the probable outcomes of any decision over time; the welfare of the employees of the company; the necessity to develop the business relationships of the company with suppliers, customers and other relevant entities; and the effect of the operations of the company on the environment and community; the maintenance of high standards of business conduct and the necessity for equitable behaviour between the company’s members. These stipulations supplant and drastically alter the previous duty of directors to act in good faith and in the best interests of the company. These issues had been taken up for consideration, previously by company directors. However, very few of these had been expressly provided for in the statute. A notable exception being that of the welfare of the employees, which has to be promoted by the directors, as provided for at section 309 of the Companies Act 1985. Nevertheless, the list of factors specified in the 2006 Act is not comprehensive and a director may consider other matters. On the basis of equitable principles and certain rules of the common law, the statutory general duties, which apply to the directors of a company, were formulated. These statutory duties are substitutions for the principles and rules on which they have been created. It is very important to realise that only a few of the equitable principles and rules of the common law that had been so substituted. Thus, the codification is not comprehensive. As such, these statutory duties do not include the trusteeship of the company’s assets by the director. However, there is no indication that this principle has been repealed or incorporated. The shareholders of a company were at a distinct disadvantage, because directors were not accountable for their actions to the shareholders. This made it impossible for shareholders to commence legal action against directors who infringe their duty. By the same token, the shareholders of a company could not force the board of directors of the company to take legal action against a director who has breached his duty. It can be surmised that the attempt to control conflict of interest among corporate constituencies by the Companies Act 2006 is extremely unsatisfactory. A scrutiny of the case law reveals that company directors enjoy considerable freedom, with respect to the decisions that they take. The Companies Act 2006 provides a number of rights to shareholders. These rights are aimed at safeguarding them from unfair prejudice. On account of these rights, the members of a company can initiate legal action, if they perceive that the affairs of the company are being conducted in a manner that is harmful to their interests. If it is possible to prove that the affairs of the company had not been conducted in a proper manner, it is possible to obtain an equitable remedy. The legislation of the UK is more concerned with the manner in which a company’s business is conducted. Shareholders in the UK are protected to some extent against unfair prejudice, under the provisions of part 30 of the Companies Act 2006. It also provides them with the right to petition the court, in relation to the conduct of the affairs of the company, in a manner that could prove to be harmful to their interests. This right has been extended to the third parties to whom the shares of the company had been transferred. Moreover, this Act accords protection to the rights of the minority shareholders. The latter can commence legal action against the directors of the company, on behalf of the company, whenever the proposed actions or actions of these directors involve breach of fiduciary duty, breach of trust or negligence. In addition, the director of a company is required to exercise reasonable care, diligence and skill in the discharge of his duties. This is enjoined in the provisions of the Companies Act 2006. A director is deemed to have committed a breach of duty, if he had failed to comply with the provisions of the law. A breach of duty is also attributed to a director if he had failed to reasonably supervise the affairs of the company. It is incumbent upon the directors of a company to protect the interests of the company. This requires them to always act in a manner that protects and promotes the best interests of the company. As such, a director is precluded from utilising his powers for improper purposes. This is contrasted by the position of the shareholders enjoying majority, who are not under any fiduciary duty towards the minority shareholders or the company. Nevertheless, there are some limitations on the rights of the majority of the shareholders, with respect to the exercise of the voting power in the shares. From the foregoing discussion it is evident that legal proceedings on behalf of the company have to be initiated by the directors. However, directors are generally reluctant to initiate legal action against a fellow director. In most of the cases the courts imposed a duty of care on the directors, with regard to the company as well as the other stakeholders. Nevertheless their decisions were at variance in various situations. Although, the 2006 Act codified the general fiduciary duties of directors, this was not exhaustive. As a result, the courts have to rely, to a considerable extent, upon previously decided cases, in dealing with breach of duty by directors. In fact it was found that many directors were abusing their powers, under the guise of promoting the best interests of the company. Some statutory privileges, such as the Business Judgement Rule, tend to grant the directors of a company, an opportunity to exercise their mala fide intentions. Read More

 

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