Essay: (Draft) There is sufficient law to regulate Directors and maintain free market principles

Through the analysis of the Companies Act 2006 and some relevant case law this assay will attempt to show that there is a sufficient body of law to appropriately regulate company directors and maintain free market principles at the same time.
Introduction:
The majority of the company’s power and responsibility for managing it’s affairs are vested with the company Director. The company’s constitution is the governing document which sets out the powers of a director and sets out how the company is to handle and manage its affairs. Depending on the size and type of company, the constitution can be a very comprehensive legal document which can impose obligations which are even more stringent that statute or common law. It is important to remember however, that, companies are the engine behind economic strength which translates into political strength. Therefore, the government is required to finely balance the need to adequately hold director’s accountable with the need for economic and political growth. Too much regulation and laws could potentially stifle economic activity or may make it very difficult for companies to trade freely and efficiently. In todays globalised world governments are in a preverbal arms race to attract global corporations to their countries to do business or to become the preferred jurisdiction for company global headquarters.
[set out types of directors, definition of director, general duties, definition of constitution]
[set out briefly some details of each duty and give some commentary on each duty and identify how this duty could prevent abuse]
[discuss some case law where there was some abuse of power, discuss the improper purpose rule (Eclairs case 2015), discuss lack of enforcement, enforcement would be very costly, interefer or slowdown economic activity, overall there are strong laws relating to director duties and when such cases are bought before the courts there is sufficient law to hold directors properly to account for their actions]
s.250, which says “director” includes any person occupying the position, “by whatever name called.”
At least since the early 20th century director’s owe their duty to the company as oppose to the company shareholders. This has remained the case even in the Companies Act 2006 (Companies Act 2006, 170(1)) Percival v Wright [1902] 2 Ch 421).
The law has always viewed directors as “fiduciaries”—that is, “someone who has undertaken to act for or on behalf of another”, in circumstances that give rise to a relationship of trust. (Bristol and West Building Society v Mothew [1998] Ch 1)
However, there is now a conflicting opinion as to whether or not a company director owes a fiduciary duty to the company. It was decided in Ultraframe (UK) Ltd v field and other 2005 that a director did indeed owe a fiduciary duty to the company. However, in contrast it was decided in Vivendi SA v Richards (2013) that a director did not owe any fiduciary duty to the company.
Nevertheless, it is important to note that since 2006 the general duties owed by a company director are set out in the Companies Act 2006 (“CA”). Chapter 2 Part 10 of the CA sets, which set out 7 general duties. These duties are not exhaustive as there other duties provided for in other provisions of the act such as: the duty to deliver accounts (section 441 of the CA), the duty to consider and act in the best interest of the creditors when in solvency (section 172 (3) of CA) and the duty not to accept benefits from third parties (section 176 of the CA). Additionally, Directors owe duties to their employees under various employment related laws.
The majority of director duties set out in common law and equity have replaced and superseded by the CA. However, section 170 (3) of the CA provides that the general duties of directors ought to be interpreted in the same way as common law and equitable principles. Nonetheless, the statutory duties of directors should also be applied in accordance with the “explanatory notes” to the CA.
If one considers the stringent duties described in the Companies Act 2006, it is quite clear (as will be set out below) that the prescribed duties sufficiently hold company directors accountable and more importantly the prescribed duties attempt to prevent abuses of director powers. Although there have been cases where company directors have been found to have abused their powers, generally the Companies Act 2006 and the director duties and obligation therein do provide adequate safe guards.
It must also be remembered that in addition to the above statutory duties a company may apply more onerous and stricter duties on its director(s) by incorporating such duties into the companies articles. Moreover, the company articles cannot water down or dilute the statutory duties and section 232 of the CA prohibits any company from exempting any director from a breach of any such statutory duties. It is common practise in large companies to have additionally stringent and robust constitutions as the aforementioned. Large companies are probably at greater risk of abuse of director powers, so companies such as these having a constitution which imposes more stringent duties than even the law requires is a good example that current body of law regulating companies and its directors have served in creating a general culture of accountability in the corporate world.
It is pertinent at this point of the essay to discuss the different types of director the common law and statue law generally recognises.
There are generally 3 types of directors:
1. Executive Director: who is an employee officially appointed by the company to perform executive functions of the company
2. Non-Executive Director: who is not an employee of the company and does not perform any executive function and would generally, act in the capacity of an independent advisor or in some form of non-executive supervisory role.
3. De-Facto Director: who performs the roles of an executive director and is treated by the company board in the same capacity but the person is not officially or validly appointed as an executive director
4. Shadow Director: is a person or entity who has the power to instruct and direct the actions of the validly appointed company directors and the majority board members. This is set out in section 251(1) of the Companies Act. Furthermore, It must be noted that in order to be considered a shadow director the mere giving of instructions is not sufficient. The Board must act upon the instructions of the shadow director i.e the company board must “do something” in respect of the instructions given by the shadow director. (Ultraframe (UK) Ltd v field and other 2005). However, a corporate body cannot be a considered a shadow director of a subsidiary company (section 251(3).
An important safe guard of the Companies Act to consider is that the director owes its duties to the company (s170(1)) and does not by virtue owe such duty to the company shareholder(s). This is a good example of the Act attempt to prevent abuse of power. The fact that generally the director owes their duties to the company and not shareholders means that the director is required to but the interests of the company before the interests of the shareholders. Being a shareholder of a company means the shareholders primary interest is to make the maximum return on the investment made to own such shares. This paradigm can therefore create a conflict in that the mindset of maximising profits may create a risk that shareholder(s) might in certain instances overlook, fail to consider or even intentionally conduct their affairs which may go against the interest of the company in favour of shareholder’s(s) personal gain. Therefore, unless the company director also owns shares in the company, or has some kind of profit sharing agreement or bonus or incentive package linked to the profit of the company, the company director would generally be a paid employee of the company on a fixed salary. Therefore, generally speaking, the company director would have no incentive to abuse their powers for monetary gain (which generally maybe considered the main cause in cases involving abuses of director powers), thus providing a good balance of accountability and governance.
As explained above, directors are bound by numerous duties including the seven general duties. The first duty being that a director must only act within the powers conferred by law and also by the company constitution which may be more stringent than the common law and statutory duties but not less as described above (Section 171 (1)(b) CA). The constitution of the company for the purpose of the CA is defined as: 1) The company articles 2) Decisions in accordance with company articles made by the company and it’s board 2) resolutions and agreements made by the company and it’s board that affect the constitution of the company.
Further safeguards on the use of director powers were introduces in a recent supreme court case, which identified the equitable principles by which directors ought to exercise thier powers for a proper purpose, the “proper purpose rule”. (Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil and Gas plc [2015] UKSC 71) This case importantly recognises that when considering use of director powers for proper purpose, access power is not the primary concern nor does it fall within the scope of this consideration. Instead, the utmost consideration must be the abuse power. However, the abuse of power is a very subjective matter and a very ancient subject which mankind has grappled with. Since the earliest time of man, there has always been instances of abuses of power by people who possess such power. Nevertheless, in modern times huge strides have been made (as evidenced by the large body of law concerning this subject including the Companies Act 2006) by lawmakers to try to minimise and reasonably prevent such abuses of power particularly by directors who in today’s society are the bearers of enormous power due to the large amounts of wealth (and the power that such wealth attracts) owned, generated and managed by these companies.
When determining whether an act is an abuse of power, the state of mind of those who acted and the motive on which they acted are very important factors for consideration. (Hindle v John Cotton Ltd (1919) 56 Sc LR 625, 630).The Eclairs group case appropriately held that a company cannot breach one director duty in order to comply with or satisfy another director duty. For example, a director cannot breach its duty to act within the powers conferred to the director by law in order to promote the success of the company which is also a statutory duty.
Section 172 of the Companies Act requires a director to act always in good faith in a manner which will promote the success of the company for the benefit of it members (section 172(1))
The director performing the executive function of the company, must always have regard to their actions and the consequences of such actions. Moreover, the director must also have regard to the environment and the community as a whole and the consequences of their actions on the same. Similarly, the company director at the same time must also foster good business relations between the company and its customers, suppliers and others.
However, section 172 has not provided a definitive meaning of what may be considered as “promoting the success” of the company. The general view is that “promoting the success” of the company would mean actions which would increase the long term value of the company. This means that a director acting reasonably is required to always manage the affairs of the company in a manner which provide benefit to the company in the long run. A director who would abuse their power would usually do so for personal gain which would be incompatible with this duty as such abuses of power are normally unlikely to create long term value or benefit for the company. Determining such actions would generally be left to the director’s judgement acting in good faith. Therefore, the test to determine whether this duty has been reached is objective, that is, one would need to consider whether the director honestly and genuinely believed that they acted in a manner which would promote the success of the company. Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810). However, a director may be considered as acting in bad faith where it was not a decision that a reasonably competent and intelligent director would have made. (Charterbridge Corporation v Lloyds Bank Ltd [1969] 2 All ER 1185)
The CA even goes as far as to require the company registrar to provide the director on appointment such info setting out the roles and duties of the director (section 1097b of the CA). Therefore, companies implementing this provision would provide further protective measure against abuses of power as the director from the start of taking on such a role will be well informed about their duties which should increase the likelihood of the director performing the duties required of them.
Duty to exercise independent judgment (section 173)
Naturally, abuses of power would stem from decisions made by the director that would ultimately result in abuses of power. Therefore, the judgement exercised by the director when making such decisions is a very important factor when considering abuse of power. The Companies 2006 therefore requires directors to exercise their powers independently free from the influence, the subordination and the will of others. This is the case regardless of whether this s done by delegation or by any other means unless permitted to do so by the company constitution which Itself must conform with the requisite statutory and common law principles. It is important to note that company directors are not prohibited from taking advice provided that the director exercises independent judgement. This provision is particularly good to prevent directors from being unduly influenced in a manner which may go against the best interest of the company. There is real risk that directors maybe directly or indirectly influenced by the company shareholders. This provision obliges the company director to make independent judgement in matters affecting the company and provides the director with statutory power to prevent against being subordinated to the will of the company shareholders.
Moreover, the company director is also required to exercise reasonable care, skill and diligence.
Section 174 of the Companies Act 2006 has to large extent codified the various common law duties for a company director to exercise reasonable skill and care when performing the executive functions of a director (Re D’Jan of London Limited [1993] BCC 646).
In determining whether a director has breached this duty there is a subjective and objective test. The Objective test is the minimum level of duty that all company directors must meet, that is to possess the general knowledge, skill and experience that may be reasonably expected by a person carrying out the functions of the director. However, where the director may have specialist knowledge then the more stringent subjective test ought to be applied, that is the general knowledge, skill and experience, the director “actually has”.
Considering the above it would be expected that a person may only take the responsibilities of a director unless suitably experienced and qualified to perform the role of a director with reasonable care, skill and diligence. This does not mean that a director cannot delegate certain responsibilities to other suitability experienced and qualified colleagues and take advice from the same colleagues when needed, provided the director by doing this does not attempt to escape liability of director duties. This is a further example of there being sufficient law to protect against abuse of power by the director in that it requires the director (before taking director responsibilities) to properly consider whether they are suitably able, experienced and competent to perform and comply with the duties expected of them by law. Therefore, a director accused of breaching their duties cannot use their incompetence or lack of experience as an excuse.
The abuse of power often is a by-product of some form of conflict of interest. The companies act sufficiently safe guards against this risk by compelling the director to ensure that they do not place themselves in a position or a circumstance which would give rise to a conflict of interest or even a potential or possible conflict of interest between the duties owed to the company and their own personal interests (section 175). This applies particularly to the exploitation of company property, information or opportunity. An objective test is used to determine whether a director has committed a breach of this duty in that it does not depend upon whether the director knew or was aware that their actions were a breach of this duty. (Richmond Pharmacology Ltd v Chester Overseas Ltd and others [2014] EWHC 2692, Stephen Jourdan QC at paragraphs 69 to 72)
Similarly, it may also not be a conflict of interest where the subject matter of the conflict was authorised by the company acting independently unless such authorisation is invalidated by the company constitution.
It is important to note that the duty extends after the person ceases to be a director of the company although this would only be applicable to property, information, or opportunity that person became aware of whilst a director at the company. Property, information or opportunity that the person became aware of whilst not a director of the company may not be subject to such provisions.
The Companies Act 2006 adds for protective measures to the duty relating to director conflicts of interest by imposing further duties on the director not to accept benefits from third parties (section 176) and the duty to to declare interest in proposed transaction or arrangement with the company (section 177).
Section 176 replaced and codified the common law fiduciary duty of a director not to exploit the position of the director for personal benefit. Under this provision a director may not take a benefit or bribery from a third party which conferred to the director due his position or office at the company. The term benefit has not been defined in this section, however, in parliamentary debate it was agreed that an ordinary dictionary meaning of this term ought to be given. Therefore, the oxford dictionary defines benefit as a favourable or helpful factor, circumstance, advantage or profit. (House of Commons, Company Law Reform Bill [Lords] in Standing Committee D, Solicitor-General, column 622).
It is important to note that benefits given by the company itself or a subsidiary of the company such as a company car are excluded from this provision. More importantly it must also be noted that the company board cannot authorise the acceptance of such benefits, although the company articles may set out provisions of how to deal with such conflicts provided such provisions do not go against any requisite law.
A director pursuant to section 177 may not have an interest in a transaction with the company unless such interest has been properly declared to the company and consequently approved by the company members. Directors ought to declare the nature and extent of the interest to the company, regardless of the interest is direct or in-direct. The director does not have to be a party to the contract in order for this duty to be applicable. Therefore, directors are required to carefully consider their interests and dealings. It is important to note the declaration must be made in writing (written notice) in accordance with section 184 of the CA or a general notice in accordance with section 184 of the CA. However, a declaration will not be required where the director is not aware and could not have reasonably been aware of the interest or was not aware of the company transition or arrangement. Once the declaration is properly made the explanatory notes to the CA explain that the director may then take part in decision making relating to the transaction or arrangement which is the subject of the declaration of interest, this is however, subject to the company articles permitting the director to do so. Furthermore section 180(4)(b) of the CA states a director will not be in contravention of section 177 if the director acted according to the company articles dealing with such conflict of interest.