The Law Relating to Private Companies – Directors’ Duties
Introducation
• fiduciary duties – equitable duties
• duties of care and skill - common law duties
• cumulative in their effect s219 (all apply in addition to each other, not just one at a
time)
• ss170-177 CA 2006 replaced duties in common law and equity
◦ s170(3) ‘The general duties are based on certain common law rules and equitabl
e principles as they apply in relation to directors and have effect in place of
those rules and principles as regards the duties owed to a company by a
director.’
◦ s170(4) ‘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.’
◦ so old cases remain relevant
• Remedies for breaches flow to the company and are the same as under common law
(s178(1)) (Percival v Wright)
• Directors owe duties to the company but note exceptions:
◦ directors may come to owe duties to individual shareholders on the facts:
▪ where director assumes responsibility to an individual shareholder: Pesky
v Anderson
▪ e.g. Re A Company - directors are not obliged to advise
shareholders on a takeover bid, but if they do, they must advise
them honestly, in good faith, not fraudulently, and not to
deliberately or carelessly mislead, and to accept the ‘best price'
▪ where directors persuade dependent shareholders to sell: Coleman v
Myers (director owed duty to individual member because the individual
member was habitually relying on the director for advice and the director
knew this)
▪ under the law of misrepresentation where they give advice: (Gething v
Kilner)
▪ where the company is the target of a takeover bid, could have duty to
individual shareholders (Heron v Lord Grade)
Remedies for breach of duty
• s178(1) ‘the consequences of breach (or threatened breach) of s171-177 are the same
as would apply if the corresponding common law rule or equitable principle applied'
• duty of care: primarily damages
• fiduciary duties: constructive trust, account of profits, equitable compensation,
injunction
De facto directors and directors’ duties
, • de facto: duties will apply, as long as claimant can prove de facto status: see Revenue
Commissioners v Holland aka Re Paycheck Services 3 Ltd
◦ in Holland, SC by bare majority held that the sole director of a corporate director
was not to be treated a de facto director of the companies directed
◦ note that corporate directors are prohibited in statute in many common law
jurisdictions; corporate directors were due to be banned in the UK from Oct
2015 by the Small Business, Enterprise and Employment Act 2015 (also see
proposed s156A CA 2006, requiring directors to be natural persons), but this has
been postponed
• de facto director undertakes functions in relation to a company that can only be
discharged by a director:
◦ Re Hydrodam (Corby); they are ‘one of the nerve centres from which the
activities of the company radiated’ per Arden LJ in Re Mumtaz Properties
• the claimant must prove that the alleged de facto director was acting in the capacity of a
director, rather than, say, the chairman of the company’s largest shareholder: see Arden
LJ in Smithton v Naggar
• hence complex questions of fact arise here
Shadow Directors
• s251(1) CA 2006 defines shadow director for purposes of Act: ‘a person in accordance
with whose instructions the directors of the company are accustomed to act'
• note that a person will not be deemed a shadow director ‘by reason only that the
directors act on advice given by that person in a professional capacity'
• shadow directors should be recorded on the register of people with significant control
• normally no overlap with de facto directors, who actually act as directors, but it is
possible that an individual may fall into both categories if they give instructions and also
act in the capacity of director
• Re Hydrodam: need to show board purporting to act as such, board didn’t exercise its
own discretion but acted on the directions of others
• Puzzle Operations v Apple: look for ‘habitual compliance over a period of time’ and ‘a
causal connection between their wishes and director’s conduct'
• Application of duties to shadow directors
◦ ss213 and 214 IA 1986, like many other statutory obligations, apply to shadow
directors
◦ shadow directors s170(5) ‘the general duties apply to shadow directors where,
and to the extent that, the corresponding common law rules or equitable
principles apply'
◦ but...
• common law unclear
◦ Ultraframe v Fielding [2005]: court reluctant to impose full range of duties on
mere shadow director
◦ Re Mea Corporation: shadow director owed duty to act in good faith in interests
of the company
◦ Vivendi SA v Richards [2013]: shadow director will normally be under a duty of
good faith and a duty to prefer the company’s interests over his own
, ◦ accordingly, need to look at role of the alleged shadow director and consider on
a case-by-case basis whether appropriate to impose specific fiduciary duties and
duty of care on a shadow director
• So there was statutory reform
◦ Small Business, Enterprise and Employment Act 2015, s89 amending s170(5) CA
2006 to read:
▪ ‘the general duties apply to a shadow director of a company where and
to the extent that they are capable of so applying'
◦ para 603 of the explanatory notes states that ‘in future, the starting point for
shadow directors will be that the general duties apply to them unless they are
not capable of applying (removing the current restriction) - this change in
default position is neither intended to precede the courts from looking at the
application of the duties on a case by case basis, nor from drawing on existing
case law in any given case’
◦ basically duties apply unless there is a reason why they shouldn’t (e.g. if shadow
director doesn’t deal directly with company’s assets)
Nominee Directors
• May be appointed by parent company, a major lender or an individual shareholder
(recall Cumbrian Newspapers)
• Duty remains owed to company not appoint (Kuwait Asia case)
• Scottish Coop Wholesale Society v Meyer (1959) AC 324: Where the interests of their
appointor and the company they direct conflict, directors must either prefer the
company’s interests or resign: Here the directors were in an impossible position when
the interests of the parent company, which appointed them, came into conflict with the
interests of the subsidiary (which they were directing).
• Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC
◦ KAB appointed two employees as directors of AICS.
◦ Per PC, they ‘were bound to ignore the interests and wishes of their employer, th
e bank. They could not plead any instruction from the bank as an excuse for brea
ch of their duties...’
◦ Appointor not liable unless it used its influence over them ‘to obtain an improper
advantage... or to cause harm’ to the company, in which case it would be ‘liable
for its own misconduct’. Seems to be referring to some kind of fraud or bad faith
◦ Note that there could also now potentially be shadow director liability on a
nominator
• Bennetts v Fire Commissioners - nominee director must only consider interests of
company for which he is a director and must be preferred in any conflict with interests
of nominating company
• Charterbridge - nominee may take account of the interests of the nominator provided
his final decisions or actions are made solely to promote best interests of company for
which he is a director
Past directors
• s170(2) applies duty to avoid conflicts, third party benefits to former directors
Introducation
• fiduciary duties – equitable duties
• duties of care and skill - common law duties
• cumulative in their effect s219 (all apply in addition to each other, not just one at a
time)
• ss170-177 CA 2006 replaced duties in common law and equity
◦ s170(3) ‘The general duties are based on certain common law rules and equitabl
e principles as they apply in relation to directors and have effect in place of
those rules and principles as regards the duties owed to a company by a
director.’
◦ s170(4) ‘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.’
◦ so old cases remain relevant
• Remedies for breaches flow to the company and are the same as under common law
(s178(1)) (Percival v Wright)
• Directors owe duties to the company but note exceptions:
◦ directors may come to owe duties to individual shareholders on the facts:
▪ where director assumes responsibility to an individual shareholder: Pesky
v Anderson
▪ e.g. Re A Company - directors are not obliged to advise
shareholders on a takeover bid, but if they do, they must advise
them honestly, in good faith, not fraudulently, and not to
deliberately or carelessly mislead, and to accept the ‘best price'
▪ where directors persuade dependent shareholders to sell: Coleman v
Myers (director owed duty to individual member because the individual
member was habitually relying on the director for advice and the director
knew this)
▪ under the law of misrepresentation where they give advice: (Gething v
Kilner)
▪ where the company is the target of a takeover bid, could have duty to
individual shareholders (Heron v Lord Grade)
Remedies for breach of duty
• s178(1) ‘the consequences of breach (or threatened breach) of s171-177 are the same
as would apply if the corresponding common law rule or equitable principle applied'
• duty of care: primarily damages
• fiduciary duties: constructive trust, account of profits, equitable compensation,
injunction
De facto directors and directors’ duties
, • de facto: duties will apply, as long as claimant can prove de facto status: see Revenue
Commissioners v Holland aka Re Paycheck Services 3 Ltd
◦ in Holland, SC by bare majority held that the sole director of a corporate director
was not to be treated a de facto director of the companies directed
◦ note that corporate directors are prohibited in statute in many common law
jurisdictions; corporate directors were due to be banned in the UK from Oct
2015 by the Small Business, Enterprise and Employment Act 2015 (also see
proposed s156A CA 2006, requiring directors to be natural persons), but this has
been postponed
• de facto director undertakes functions in relation to a company that can only be
discharged by a director:
◦ Re Hydrodam (Corby); they are ‘one of the nerve centres from which the
activities of the company radiated’ per Arden LJ in Re Mumtaz Properties
• the claimant must prove that the alleged de facto director was acting in the capacity of a
director, rather than, say, the chairman of the company’s largest shareholder: see Arden
LJ in Smithton v Naggar
• hence complex questions of fact arise here
Shadow Directors
• s251(1) CA 2006 defines shadow director for purposes of Act: ‘a person in accordance
with whose instructions the directors of the company are accustomed to act'
• note that a person will not be deemed a shadow director ‘by reason only that the
directors act on advice given by that person in a professional capacity'
• shadow directors should be recorded on the register of people with significant control
• normally no overlap with de facto directors, who actually act as directors, but it is
possible that an individual may fall into both categories if they give instructions and also
act in the capacity of director
• Re Hydrodam: need to show board purporting to act as such, board didn’t exercise its
own discretion but acted on the directions of others
• Puzzle Operations v Apple: look for ‘habitual compliance over a period of time’ and ‘a
causal connection between their wishes and director’s conduct'
• Application of duties to shadow directors
◦ ss213 and 214 IA 1986, like many other statutory obligations, apply to shadow
directors
◦ shadow directors s170(5) ‘the general duties apply to shadow directors where,
and to the extent that, the corresponding common law rules or equitable
principles apply'
◦ but...
• common law unclear
◦ Ultraframe v Fielding [2005]: court reluctant to impose full range of duties on
mere shadow director
◦ Re Mea Corporation: shadow director owed duty to act in good faith in interests
of the company
◦ Vivendi SA v Richards [2013]: shadow director will normally be under a duty of
good faith and a duty to prefer the company’s interests over his own
, ◦ accordingly, need to look at role of the alleged shadow director and consider on
a case-by-case basis whether appropriate to impose specific fiduciary duties and
duty of care on a shadow director
• So there was statutory reform
◦ Small Business, Enterprise and Employment Act 2015, s89 amending s170(5) CA
2006 to read:
▪ ‘the general duties apply to a shadow director of a company where and
to the extent that they are capable of so applying'
◦ para 603 of the explanatory notes states that ‘in future, the starting point for
shadow directors will be that the general duties apply to them unless they are
not capable of applying (removing the current restriction) - this change in
default position is neither intended to precede the courts from looking at the
application of the duties on a case by case basis, nor from drawing on existing
case law in any given case’
◦ basically duties apply unless there is a reason why they shouldn’t (e.g. if shadow
director doesn’t deal directly with company’s assets)
Nominee Directors
• May be appointed by parent company, a major lender or an individual shareholder
(recall Cumbrian Newspapers)
• Duty remains owed to company not appoint (Kuwait Asia case)
• Scottish Coop Wholesale Society v Meyer (1959) AC 324: Where the interests of their
appointor and the company they direct conflict, directors must either prefer the
company’s interests or resign: Here the directors were in an impossible position when
the interests of the parent company, which appointed them, came into conflict with the
interests of the subsidiary (which they were directing).
• Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC
◦ KAB appointed two employees as directors of AICS.
◦ Per PC, they ‘were bound to ignore the interests and wishes of their employer, th
e bank. They could not plead any instruction from the bank as an excuse for brea
ch of their duties...’
◦ Appointor not liable unless it used its influence over them ‘to obtain an improper
advantage... or to cause harm’ to the company, in which case it would be ‘liable
for its own misconduct’. Seems to be referring to some kind of fraud or bad faith
◦ Note that there could also now potentially be shadow director liability on a
nominator
• Bennetts v Fire Commissioners - nominee director must only consider interests of
company for which he is a director and must be preferred in any conflict with interests
of nominating company
• Charterbridge - nominee may take account of the interests of the nominator provided
his final decisions or actions are made solely to promote best interests of company for
which he is a director
Past directors
• s170(2) applies duty to avoid conflicts, third party benefits to former directors
