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Company Law negligence - Case Study Example

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Company Law negligence

Section 171 CA 2006 provides that directors have a duty to act within their powers. A director of a company must: (a) act in accordance with the company constitution; and (b) only exercise powers for the purposes for which they are conferred. In the case of Re Smith & Fawcett Ltd [1942] Ch 304 it was held that: "directors must act bona fide in what they consider - not what a court may consider - is in the interest of the co., and not for any collateral purpose".5 Alex, Brad and Carl who are the directors of Zed Ltd owe duties to Zed Ltd and not the employees of the company or anyone else.
Since Brad worked as a chemical engineer in the company before becoming a director and the other directors complain that he should have known about this new technology, it must be addressed to what extent Brad's actions were reasonable and whether he had any specialized knowledge to which he should have exercised. As a director, he is obligated under s.172 CA 2006 to promote the success of the company in a way that he considers to be good faith. He must take into consideration the likely consequences of any decisions in the long term; the interests of the company's employees; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct, and; the need to act fairly as between members of the company.6 This duty is subjective as per Lord Wilberforce in Howard Smith Ltd v Ampol [1974] AC 821 : "There is no appeal on merits from mangement decisions to courts of law: nor will the courts of law assume to act as a kind of supervisory board over decisions within the powers of maangmeent honestly arrived at".7 In general, the short term view would be that of maximization of profits for shareholders.; the long term view considers ultimate benefit of continued existence of company for all members present and future.8 Each director of Zed Ltd must be seen as taking both into consideration in determining if they were acting bona fide. Moreover, directors not entitled to take into account employee interests as per the case of Parke v Daily News Ltd [1962] 2 All ER 929.9 However, new provision introduced that "directors were to have regard to the interests of the company's employees in general as well as the interests of its members" (s.309 CA 1985).10 However, this section has been widely criticized.
The fact that the other directors were accountants would not excuse them in any way if they claim to have been solely relying on Brad's expertise as s.173 CA 2006 imposes that each director has a duty to exercise ...Show more

Summary

New statutory provision on directors' general duties largely came into force with the enactment of the Companies Act 2006 on 1st October 2007; except ss 175-177 which have been enacted as of 1st October 2008. Previously this area consisted of duty of care and skill, governed by common law and fiduciary duties, governed by equitable principles.1 "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", s.170(4) CA 20062…
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