Directors Duties - Problem Question
Supermarcheplc runs a chain of supermarkets. The company’s directors are Alice,
who is an accountant, Brian and Clarissa.
Pamela owns 40 per cent of Supermarche’s shares. She is the mother of Brian
and Clarissa, and often tells them what decisions she thinks they should take at
board meetings.
In 2020, the directors voted to sell only free-range eggs and poultry in the
company’s supermarkets.
They did this because they felt it was ethically right.
Their decision reduced the company’s profits by £200,000.
In January 2021, Brian began working as a consultant for Thriftiness plc, which
also runs a chain of supermarkets.
Brian’s contract with Thriftiness says it will pay him £250,000 a year for his
work, but this will be reduced to £100,000 if he ceases to be a director of
Supermarche.
In February 2021, Supermarche purchased, for £300,000, three stores from
Martwallplc, another supermarket chain.
Supermarche’s board spent 10 minutes discussing the purchase.
Alice voted in favour because she had looked at the accounts produced for these
three stores and thought the stores looked very profitable. In fact, the stores
had been trading at a loss for several years, as the accounts showed, and were
accordingly worth far less than the price paid by Supermarche.
Brian and Clarissa approved the purchase because Pamela had told them to do
so.
Supermarche has recently appointed a number of new directors.
, a) Advise them whether Supermarche could take any action in respect of the
foregoing events.
b) How would your answer differ if Brian owned 25 per cent of the shares in
Martwallplc?
Introduction
There are several issues to be discussed in the above question. Among them are
as follows:
1) The directors of the company have decided to only sell free range eggs and
poultry in the company’s supermarket.
This is so as it is considered ethical to do so, this has led to the drop of income
of £200,000.
- S 172 CA 2006
- S 174 CA 2006.
2) Brian is a director of SupermachePlc and Thriftiness Plc, both companies
are in the same line of business, as they run a chain of supermarkets.
B also receives a benefit of £250,000 a year from Thriftiness for his work.
And this will be reduced to £100,000 if he ceases to be a director of
Supermarche.
- S 175 CA 2006 = Duty to avoid conflict of interest
-
- S 176 CA 2006. = Duty Not to Accept benefits from Third Parties by reason
, of being company Director
3) Alice, who is an accountant, voted in favour because she had looked at the
accounts produced for these three stores and thought the stores looked
very profitable. In fact, the stores had been trading at a loss for several
years, as the accounts showed, and were accordingly worth far less than
the price paid by Supermarche.
A misevaluated the price of Martwall
she had the sum paid was to be far lesser than the evaluation given by Alice.
Alice is an accountant
- S 174 CA 2006 = Care , skill and diligence Exercised by a reasonably diligent
person.
a)General knowledge, skill and experience that may reasonably be
expected of a person carrying out the duties of a director( General)
→ objective test = would have any other director behave in the same way
b)The general knowledge skill and experience that the director has.
(Specific)
→ subjective test = would a director of that relevant skill and experience
behave in the similar manner
→ doctor and director of a private hospital
→ the more experience, you are the higher the burden, the less
experienced, you are the less of the burden
, 4) Brian and Clarissa approved the purchase of Martwell because Pamela had
told them to do so.
As directors, B & C had not acted independently,
S 173 = Duty to exercise independent judgment in accordance with agreement
duly entered into by the company that restricts = future exercise of
discretion by its directors.
= you must not be subservient to any form of restriction, you've got the right to
fetter your discretion
S 174 = Care , skill and diligence Exercised by a reasonably diligent person.
a)General knowledge, skill and experience that may reasonably be
expected of a person carrying out the duties of a director( General)
→ objective test = would have any other director behave in the same way
b)The general knowledge skill and experience that the director has.
(Specific)
→ subjective test = would a director of that relevant skill and experience
behave in the similar manner
→ doctor and director of a private hospital
→ the more experience, you are the higher the burden, the less
experienced, you are the less of the burden
Supermarcheplc runs a chain of supermarkets. The company’s directors are Alice,
who is an accountant, Brian and Clarissa.
Pamela owns 40 per cent of Supermarche’s shares. She is the mother of Brian
and Clarissa, and often tells them what decisions she thinks they should take at
board meetings.
In 2020, the directors voted to sell only free-range eggs and poultry in the
company’s supermarkets.
They did this because they felt it was ethically right.
Their decision reduced the company’s profits by £200,000.
In January 2021, Brian began working as a consultant for Thriftiness plc, which
also runs a chain of supermarkets.
Brian’s contract with Thriftiness says it will pay him £250,000 a year for his
work, but this will be reduced to £100,000 if he ceases to be a director of
Supermarche.
In February 2021, Supermarche purchased, for £300,000, three stores from
Martwallplc, another supermarket chain.
Supermarche’s board spent 10 minutes discussing the purchase.
Alice voted in favour because she had looked at the accounts produced for these
three stores and thought the stores looked very profitable. In fact, the stores
had been trading at a loss for several years, as the accounts showed, and were
accordingly worth far less than the price paid by Supermarche.
Brian and Clarissa approved the purchase because Pamela had told them to do
so.
Supermarche has recently appointed a number of new directors.
, a) Advise them whether Supermarche could take any action in respect of the
foregoing events.
b) How would your answer differ if Brian owned 25 per cent of the shares in
Martwallplc?
Introduction
There are several issues to be discussed in the above question. Among them are
as follows:
1) The directors of the company have decided to only sell free range eggs and
poultry in the company’s supermarket.
This is so as it is considered ethical to do so, this has led to the drop of income
of £200,000.
- S 172 CA 2006
- S 174 CA 2006.
2) Brian is a director of SupermachePlc and Thriftiness Plc, both companies
are in the same line of business, as they run a chain of supermarkets.
B also receives a benefit of £250,000 a year from Thriftiness for his work.
And this will be reduced to £100,000 if he ceases to be a director of
Supermarche.
- S 175 CA 2006 = Duty to avoid conflict of interest
-
- S 176 CA 2006. = Duty Not to Accept benefits from Third Parties by reason
, of being company Director
3) Alice, who is an accountant, voted in favour because she had looked at the
accounts produced for these three stores and thought the stores looked
very profitable. In fact, the stores had been trading at a loss for several
years, as the accounts showed, and were accordingly worth far less than
the price paid by Supermarche.
A misevaluated the price of Martwall
she had the sum paid was to be far lesser than the evaluation given by Alice.
Alice is an accountant
- S 174 CA 2006 = Care , skill and diligence Exercised by a reasonably diligent
person.
a)General knowledge, skill and experience that may reasonably be
expected of a person carrying out the duties of a director( General)
→ objective test = would have any other director behave in the same way
b)The general knowledge skill and experience that the director has.
(Specific)
→ subjective test = would a director of that relevant skill and experience
behave in the similar manner
→ doctor and director of a private hospital
→ the more experience, you are the higher the burden, the less
experienced, you are the less of the burden
, 4) Brian and Clarissa approved the purchase of Martwell because Pamela had
told them to do so.
As directors, B & C had not acted independently,
S 173 = Duty to exercise independent judgment in accordance with agreement
duly entered into by the company that restricts = future exercise of
discretion by its directors.
= you must not be subservient to any form of restriction, you've got the right to
fetter your discretion
S 174 = Care , skill and diligence Exercised by a reasonably diligent person.
a)General knowledge, skill and experience that may reasonably be
expected of a person carrying out the duties of a director( General)
→ objective test = would have any other director behave in the same way
b)The general knowledge skill and experience that the director has.
(Specific)
→ subjective test = would a director of that relevant skill and experience
behave in the similar manner
→ doctor and director of a private hospital
→ the more experience, you are the higher the burden, the less
experienced, you are the less of the burden
