The Nature of Company Law - Essay Example

? Company Law The nature of directorship is fundamental to company law. In practice, companies manifest diverse categories of director detailing executive directors, as well as non-executive directors. Overall, the possibility of manifestation of conflict of interest between a director’s fiduciary and persona capacities is rife within a majority of the organizations. The law outlines that directors cannot receive any benefit from their position, unless they obtain an express legal authority from the board to do so. The Companies Act outlines that a director of a company must to circumvent situations in which the director possess, or can manifest an express or indirect interest that diverges of may clash with the interests of the company. This manifest prominently amid the utilization of any assets, opportunity, or information and fails to link to a clash of interest flowing from a transaction or pact with the company or in the events in which the subject has been permitted by the company’s directors (Davies 2012, p.8). Highlighting conflict of interest impacting on the director demands exploring whether the director engaged will obtain a substantial gain from the manifest conflict of interest. Background The decision that the directors’ duties should be codified was accompanied by the debate centring on the “stakeholder question.” This relates to the question on whose interests that companies should be run (whether the interests of the shareholders, the community, or employees). This debate centred on two approaches: The first school of thought detailed pluralism, which details that the role of the company centres on serving the interests of the multiple interest groups of stakeholders. As such, the duties of directors should be broadened to ensure that the directors respond to a broad collection of stakeholders other than shareholders (Lowry 2012, p.2). The second school of thought inclines towards the enlightened model maintaining that the function of the company hinges on generating value for the gain of shareholders while, simultaneously, matching the laid long-term objectives of the company, and associations that the company enjoys with other stakeholders inclusive of suppliers, community, employees, and others (Lacy 2002, p.154). At the height of debate, the Company Law Review settled for the enlightened shareholder approach, which appreciates the premise that it is the interests of the shareholders that should be placed first (Lowry 2012, p.3). The enlightened shareholder approach also recognizes that the company’s possibility for success anchors in maximizing on the relationships that the company enjoys various stakeholders groups. Discussion The orientation of the directors’ obligations embodies one of the most critical features prominently highlighted by the Company Law. The statutory scheme recognizes the directors’ roles outlined in C.2, Part 10 of the Company Act 2006. The title of “director,” in this case, is broadened to embrace shadow directors. The directors are required to conduct their duties as per the provisions detailed in C. 2, Part 10 of the Company Act 2006 to the company, instead of doing so for the shareholders and other stakeholders within the company (Arden 2007, p.162). The roles handed to the directors encompass aspects such as an obligation to act as per the applicable provisions of his/her powers detailed by the company’s constitution; a role to promote the long-term achievement of the company as perceived to be in good faith; an obligation to employ reasonable care, meticulousness, and skill; an obligation to manifest independent judgment; an obligation to evade conflict of interest where it may arise; an obligation not to acknowledge gains flowing from incidences such as secret commissions and bribes; and, an obligation to clarify on the interests amid the transactions (Calder 2008, p.59). Directors’ Duty to Act as per their Powers A company embodies a person and as such, ought to proceed as per the provisions of the law, as well as in harmony with the terms detailed within the company’s own constitution. As a result, the directors of the company are correspondingly restrained. Section 171 of the Company Act 2006 specifies that: a director of a company must (a) carry out his or her functions as provided for in the company’s constitution and (b) use powers in line with the underlying principles shaping the duties that the directors were conferred. Section171 of the Companies Act outlines that (a) each director bear an obligation to act in agreement with the company’s constitution, which connects to the idea that the director ought to employ his or her own authority as afforded by the provisions detailed within the company’s constitution. The director should not seek to render the company act contrary to the terms delineated within the company’s own constitution (Calder 2008, p.60). Furthermore, section171 of the Companies Act detailing the directors’ powers (b) delineates that the director must to use the powers at his/her disposal for the purpose for which the powers were given. Any departure from this enforces a positive compulsion on directors who are expected to act as per the company’s constitution, as per the spirit and letter of the company’s constitution. The role to appraise the company’s best interest falls under section 172 of the provisions of the Companies Act 2006 (Arden 2007, p.163). The company’s directors can be perceived as having perpetrated a contravention of duty in the event that they operate divergent to the stipulations of the company’s memorandum or articles. In the event that the directors’ acts infringe on the laid standards, then the directors’ will be responsible to avail explanations for any gains drawn from the transaction and to pay off the corporation for any loss occasioned by the dealings. Directors’ Role to Foster the Success of the Company One of the inventive novelties contained in the Companies Act 2006 entail the establishment of a statutory obligation on the directors’ of companies in “rooting and cultivating the long-term success of the company.” The extensiveness of this obligation is possibly enormous and is not restricted exclusively on the prosperity of the entity only, but rather adopts what can be regarded as a “three-dimensional” orientation to the company’s position within the society at large, and the relations between third parties in addition to shareholders. It is critical to highlight that the statutory standard necessitates the endorsement of the company’s success mainly “to the benefit of its stakeholders,” which in actual sense elevates the members’ necessities instead of success in a broad sense. For this reason, it could be inferred that the combined interests of the stakeholders reigns supreme and should be considered by the directors rather than solely taking the individual interests of the sole member (Webster 2010, p.44). In addition, section 172 of the Companies Act 2006 outlines that: (a) any director of the company must act in a way that he perceives to be in good faith, in order to foster the efficacy of the corporate governance structures for the benefit of all its members communally. This emanates from the deliberation of the possible outcomes of any pronouncement in the long term, plus the motivation to propel the entity’s business relations with key stakeholders such as clients, suppliers, and others. The necessity to arrive at just decisions that appeal to all members of the company, and the urge for the entity to guard its favourable reputation for maintaining high standards in the course of the business conduct (Hicks and Goo 2008, p.357). For example, a portion of the shareholders may not be able to support capital investment with the aim of deriving gains within the future, while, at the same time, the other segment of the shareholders may prefer to derive a high dividend pay-out without delay. In the outlined scenario, it would be an infringement of the role of the directors to select, within the abstract, to exchange the interests of some of the shareholders with another. Directors’ Duty to exercise Independent Judgment This remains a core constituent of the roles of each of the fiduciary expected to be accountable for acts or omissions that he/she performs, plus those considered responsible for acts or omissions that he/she should have been expected to perform. The Companies Act instructs that directors should act autonomously devoid of any control by other persons (Holgate and Buckley 2009, p.27). Consequently, companies are anticipated to implement their own judgment in undertaking their roles and addressing the issues that a majority of stakeholders confront the company operations. The Companies Act outlines that Company directors cannot simply act as proxies or nominees of other people. Directors’ Role to Oversee Care, Skill, and Diligence The Companies Act requires undertaking of an evaluation with the aim of gaining knowledge for the individual acting as a director. This spotlights the general knowledge, instead of technical knowledge, and the skill and experience connected to an ordinary director, regardless of whether the defendant in a certain case fails to attain a certain level of experience (Loughrey 2013, p.53). Therefore, all directors should live up to the set standards expected of an objective director. Directors’ Duty not to Admit benefits from Third Parties Section 176 of the Companies Act 2006 provides that a director has a role not to exploit third parties on the basis of his/her position, or his responsibility as the director. A third party, in this case, entails an entity different from the company, a connected body corporate, or an individual acting for the benefit of the company. The Companies Act 2006 maintains that this function is not infringed upon if the recognition of the gains cannot be rationally delineated as possibly yielding to a conflict of interest (Slorach and Ellis 2007, p.87). Directors’ Duty to Circumvent Conflicts of Interest One of the core principles detailed in the Company Law centring on fiduciary duties entails the duty to circumvent conflict of interest. This flows from the central standard of equity. The conflict of interests, in this case, features the conflict that may manifest as a director’s fiduciary obligations and the director’s personal interests clash (Fernando 2009, p.189). For example, conflict of interest is evident in instances in which the director of an entity exclusively takes up a business that is in competition with the company and proceeds to vote against utilization of certain business prospect in order for him/her to exploit the chances on his own accord (Adenas 2004, p.257). As a rule of thumb, the fiduciary will be demanded to evaluate any illegitimate gain obtained from arrangements that manifest conflict of interest, and second, the fiduciary must circumvent obtaining gains from such circumstances that manifest conflict of interest, but also protect against any potential that a conflict of interest may arise. The role to thwart the conflict of interest is contained in section175 of the Companies Act 2006, which details that any director of a company must circumvent circumstances where he/she may manifest, an express or indirect interest that heralds conflicts, or possibly may diverge, with the overall interests of the company (Degenhardt 2010, p.182). As a result, the function can be regarded as much wider relative to a role of simply circumventing deriving gains from conflicts of interest or bringing loss to the entity or its stakeholders through the exploitation of a conflict of interest. The director’s conflict of interest can be regarded as direct in the circumstances in which the director is well placed to benefit for availing personal service to the company, or it can be indirect in the circumstances in which a director possess a stake within an entity that have derived a profit from a given transaction. The Application of s.175 to former Directors According to the Companies Act ,“a person who ceases or terminates his/her directorship still remains subject to the role espoused by section 175 based on the utilization of any asset, prospect, or information of which he or she gained awareness of at the period when he or she was a director at the company (Sealy and Worthington 2008, p.273). As such, Directors should be well acquainted to the possibility of conflict of interests in their execution of their mandate and explore ways on how to minimize their impacts and vulnerability. Conclusion It is apparent from the provisions detailed in the Companies Act 2006; there are valuable protections against the potential that directors will administer the company based on their own self interests, rather than those of the stakeholders. The Companies Act 2006 has heralded noteworthy regulatory functions for directors to ensure that the company’s interests are always placed before those of their own and are completely safeguarded. One of the outstanding transformations and that holds much promise to all stakeholders details the role to foster success of the company. The fresh duty stems from the underlying standard of the fiduciary duty that demands that directors act within the “company’s best interest.” References List Adenas, M. (2004). European comparative company law, Port Chester, NY, Cambridge University Press. Pp.277. Arden, D. (2007). Companies Act 2006 (UK): A new approach to directors’ duties, Australian Law Journal 81, pp.162-179. Calder, A. (2008). Corporate governance: a practical guide to the legal frameworks and international codes of practice, London, Kogan Page. Pp.59-60. Davies, P. (2012). Gower and Davies: The principles of modern Company Law, London, Sweet & Maxwell. Pp.8. Degenhardt, K. (2010). Companies Act 2006, Bremen, Europ Hochsch.-Verl. Pp.182. Fernando, A. C. (2009). Corporate governance: principles, policies and practices, New Delhi, Pearson Education. Pp.189-190. Hicks, A., & Goo, S. H. (2008). Cases and materials on company law, Oxford, Oxford University Press. Pp.357. Holgate, P., & Buckley, E. (2009). Accounting principles for non-executive directors, Cambridge, UK, Cambridge University Press. Pp.27. Lacy, J. (2002). The reform of United Kingdom Company Law, London, Cavendish. Pp.154-155. Loughrey, J. (2013). Directors' duties and shareholder litigation in the wake of the financial crisis,Cheltenham, UK, Edward Elgar Publishing Limited. Pp.53. Lowry, J. (2012). Codifying the corporate opportunity doctrine: The (UK) Companies Act 2006, International Review of Law 5 (1), pp.2-17. Sealy, L. S., & Worthington, S. (2008). Cases and materials in company law, Oxford, Oxford University Press. Pp.273 Slorach, J. S., & Ellis, J. G. (2007). Business law, Oxford, Oxford University Press. Pp.87. Webster, M. (2010). The director's handbook your duties, responsibilities and liabilities, London, Institute of Directors. Pp.44-45. Read More