Duties of Directors in the Company - Essay Example

Company law. Order 169039 Directors' duties Directors are the persons to whom management of a company is entrusted Together with managers and the secretary of the company they are the 'officers' of the company. It is not necessary that a natural person be appointed, a director may be another company. A person who acts as a director, e.g. by attending board meetings and taking part in board decisions will be a director even if he is called by another name as governed or trustee 2 Directors' are essentially agents of a company in that a director acts not on his own behalf but that of the company. A director's principle duties are owed to the company and not to the shareholders. Directors have the duty of managing the whole business of the company including taking business decisions and entering into contracts on behalf of the company. Directors exercise these powers by passing resolutions at board meetings. In the prevailing scenario where Wendy and Greg are directors of the block Ltd, there is a breach of directors' duties. Therefore the directors will be held liable for their acts. In this regard there is breach of:- ____________________ 1. K. Abbott, K. Wardman, Business Law 2001. 2. K. Abbott, K. Wardman, Business Law 2001. a) Duty of skill and care b) Fiduciary duties c) Duty to act bonafide for the benefit of the company as a whole d) Duty of skill and care. The directors' of a company are expected to perform their functions with reasonable care and attention. They must discharge their duties and obligations with skill and diligence as expected from a reasonable person of his knowledge and experience. They (directors) are however not liable for bonafide error of judgment as observed by Romer J. in Re City Equitable fire insurance company 3. In this case the company collapsed due to bad investments and bad debts and misappropriation caused by fraudulent acts of a director. The company suffered a loss to the tune of 1,200,000 are eventually was ordered to be would up. The director was convicted for his fraud and negligence. He was however acquitted in appeal because of an exception clause in the articles to hold directors liable only for gross negligence. In Jorchester finance Co. Ltd v. Stebbing 4 it has been held that the duty of care extends uniformly to all directors whether they are executive on directors of a company were held liable for the loss caused to the company due to their negligence in signing blank cheques which enabled the executive directors to enter the amount as they pleased in those cheques _______________ 3. Dr. H.V. Paranjape, Company law, 2000 4. Wardman, K. Abbott, Business law, 2001 . As regards the standard of care and skill expected from directors in performance of their duties, courts seem to unanimously agree that it is that of a reasonable person who with the same knowledge and experience would exercise in the situation. However, a distinction has been drawn between the standard of care and the standard of skill. For assessing a standard of care, the test of objective, while for the standard of skill is subjective. In this regard Wendy and Greg never exercised duty of care and skill. We are told that at the general meeting they failed to take suggestions of Kirstein and other Shareholders who were concerned about the company's expansion yet there was a fall in apartment prices. Further Greg's order of 50,000 from Alfonzo was not in good faith since name of the directors or shareholders was informed of the loan. Therefore the two directors Wendy and Greg lacked the duty of skill and care towards the company. b) Fiduciary Duties The duties of good faith and honesty arising out of fiduciary the fiduciary relationship between the director and his company are analogous to those of a trustee. The law imposes these duties upon the directors so that they are not allowed 'capitalize strategic position in the company to serve their own interests5' The Australian, uniform Companies Act has incorporated statutory provisions containing an explicit reference to the fiduciary obligation to directors towards their companies section 124 if the Australian companies Act states if:- _______________ 5. William C. Douglas, directors who do not direct, (1934) 47 Harv LR 1305 (1317). a) A director shall act at times act honestly and use reasonable diligence in the discharge of the duties of his office. b) An officer (including a director) shall not make use of any information acquired by virtue of his position as an officer (director) to gain directly or indirectly any improper advantage for himself or to cause detriment to the company' 6 The directors being in a fiduciary relationship with the company, they should act in good faith and with honesty in discharging of their duties. He is in fact a trustee of the company and thereof he should not exploit his position for personal gains, thus for example in cook V. Deeks 7 the directors of a company diverted a contract opportunity for their own benefit since they held th majority votes, they resolved that the company had no interest in the contract. They hardship held that the benefits of the contract in equity belonged to the company and the directors hand usurped their voting power for their personal gain. In Burland V. Earle 8 where a director was instructed to purchase some property for the company, he first purchased the same for himself and then sold it to the company at a profit. The lower court held him liable to account for the profit so made which in equity belonged to the company. But the Judicial committee of the Privy Council set a side the decision of the lower court and observed 'there is no _____________________ 6. Dr. N.V. Paranjape, Company Law 2000 7. Dr. N.V. Paranjape, Company Law 2000, (1916)1 Act 554) 8. (1902) Ac 83 (PC) evidence whatever of any mandate to the director to purchase on behalf of the company or that he was in any sense a trustee for the company for purchase of property". Therefore he had legally acquired the property which he later sold to the company hence he committed no breach of trust. C) Duty to Act Bona fide and for the benefit of the company s a whole. The phrase 'benefit of the company' means that the directors must have regard to the interests of the present and future members of the company, i.e. they muse view the company as a going concern and a balance this long-term view against the interests of the present members. It is not for the benefit of the company if they act in their own interest or the interest of a third party, without also considering the interest of the company. In Re Roith (1967) the controlling shareholder and director of a company wished to provide for his widow without heaving his shares. Acting on legal advice we entered into a service agreement with the company whereby on his death she would be entitled to person for life. Since the sole object of the transaction was to benefit the widow the agreement was not held to binding on the company. In this regard the directors have breached their duties and especially the ones explained above. They failed to act for the interest of the company. Therefore the liquidator should act and hold them (directors) liable for their liabilities (consequences) as follows:- i) Liability for ultra vires acts. Directors may be liable to the company for ultra-vires acts i.e. acts which are outside the powers of the company as defined in the memorandum for instance misappropriation of the company's funds may vender a director liable to replace such funds. If directors act malafide misusing the power bestowed on them, they would incur civil liability for breach of warranty like any other agent. The directors can be excused from such liability of the shareholders are prepared to pass 2 special resolutions ratifying the ultra vires act and indemnifying the directors against liability. ii) Liability for exceeding actual authority. Where a director binds the company by acting within its apparent authority, but exceeds his actual authority, that director is acting in breach of duty. He is liable to indemnify the company for any loss it has suffered an to account to the company for any profit he has made. iii) Wrongful trading: - When a company is facing insolvent liquidation and a director fails to take all steps to minimize loss to creditors of the company at a time when he knew or ought to have known that there was reasonable prospect of the company avoiding insolvent liquidation, then that director is liable for wrongful trading if the company goes into liquidation. The result of this is that the director will be required to contribute to the assets of the company to increase the amount available to pay creditors. Bibliography 1. K. Abbott, K. Wardman, Business Law, 7th edition 2001, Oxford University press. 2. Dr. N.V. Paranjape, Company Law 2000, 2nd edition, Central law agency. 3. Hicks, A, Teaching Modern Company Law, (1992) 4. Von Doussa, J W, 'Corporate Law Teaching and professional standards' (1999) 3(1) Flinders Journal of Law Reform 119. 5. Solomon Taylor & Shaw Solicitors, quick guide to directors duties and liabilities; (www.solts.co.uk) 6. www.taylorvinters.com Read More