Company Law- Directors Duties
Types of Director:
1. Managing Director
2. Executive and non-executive directors
3. De facto directos
4. Shadow directors
5. Alternate directors
Thomas Courtney stated in his article that “one of the most far reaching reforms
introduced by the Companies Act 2014 is the codification of the duties of directors”
Directors Duties under Section 228 of the CA 2014: (NB)
228 (1) A director of a company shall—
(a) act in good faith in what the director considers to be the interests of the company;
(b) act honestly and responsibly in relation to the conduct of the affairs of the
company;
(c) act in accordance with the company’s constitution and exercise his or her
powers only for the purposes allowed by law……
(d) not use the company’s property, information or opportunities for his or her own or
anyone else’s benefit
(e) not agree to restrict the director’s power to exercise an independent judgment
(f) avoid any conflict between the director’s duties to the company and the
director’s other (including personal) interests
(g) exercise care, skill and diligence
Note that the duties under s.228 are fiduciary duties. Directors owe their duties to the
company as a whole and not the individual members
Duties are Owed to the Company:
In Dawson international plc v Coats Paton plc it was stated that there was “no good
reason why it should be supposed that directors are, in general, under a fiduciary
duty to the shareholders… directors have but one master, the company”.
S 227 (1) CA 2014 “a director shall owe the duties set out in s228 to the company
(and the company alone)”
227 (2) “The breach by a director of the relevant duties shall not of itself affect—
(a) the validity of any contract or other transaction, or
(b) the enforceability, other than by the director in breach of that duty, of any
contract or other transaction by any person,”
,S 227(2) – “but nothing in this subsection affects the principles of liability of a third
party where he or she has been an accessory to a breach of duty or has knowingly
received a benefit therefrom.”
S 227(5) - “The relevant duties (other than those set out in section 228 (1)(b) and (h))
shall be interpreted, and the provisions concerned of section 228 shall be applied, in
the same way as common law rules or equitable principles; regard shall be had to the
corresponding common law rules and equitable principles in interpreting those duties
and applying those provisions”
Duties to Shareholders:
Directors owe their duties to the company but no rule exists preventing them from
also owing duties to shareholders. Directors may owe a duty to shareholders if they
represent themselves as acting as agents for the shareholders – in Allan v Hyatt
(1914) the directors of a company induced the shareholders to give them options for
the purchase of their shares so that the directors could negotiate for the sale of the
shares to another company. Instead of selling the shares directly to the other company,
the directors used the options to purchase the shares themselves and then resold them
to the other company. It was held that the directors had made themselves agents for
the shareholders in the sale of the shares and must therefore account to them for the
profit they had made on the sale. It also depends on the circumstances. Their fiduciary
responsibilities are owed to the company alone. As was held in Crindle investments et
al v Wymes [1998] “There can be no doubt that, in general, although directors of a
company occupy a fiduciary position in relation to the company, they do not owe a
fiduciary duty, merely by virtue of their offices, to the individual members. That was
the effect of the decision in the leading case of Percival v. Wright [1902] 2 Ch. 421,
but it has been emphasised in subsequent decisions that, in particular circumstances,
a company director may indeed be in a position where he owes a fiduciary duty to
individual shareholders”
Duties to Creditors:
Directors of insolvent companies owe duties to creditors to preserve the assets until
the company is properly wound up – The case of Re Frederick Inns Ltd is a good
example of where the interests of creditors may intrude on the duties of directors. In
this case the directors made payments to the Revenue Commissioners not only for the
company’s debt but also for the debts of other companies within the group. The court
held that such a payment was in breach of the directors’ duties to the general creditors
of these insolvent companies and the directors incurred personal liability accordingly.
Also a duty owed to creditors when the company is “approaching insolvency”
Duties to Employees:
Section 224 CA 2014
Employees: No duty at common law –
S 224. (1) The matters to which the directors of a company are to have regard in the
performance of their functions shall include the interests of the company's employees
in general, as well as the interests of its members.
,(2) the duty imposed by this section on the directors shall be owed by them to the
company (and the company alone) and shall be enforceable in the same way as any
other fiduciary duty owed to a company by its directors.
Either one of the most incompetent or one of the most cynical pieces of legislative
drafting on record” – Len Sealy, ‘Directors’ Wider Responsibilities’ (1987) 13
Monash University Law Review 164 at 177. - describing an identical provision from
the UK (s 309 of the UK Companies Act 1985)
Section 228(1)(a)
228 (1)(a) A director of a company shall act in good faith in what the director
considers to be the interests of the company
Acting in good faith means acting honestly – s 228(1)(a) is a duty of loyalty not
competence
Subjective duty – “in what the director considers”
“will, therefore, restate the existing legal position which is that two individual
directors may hold diametrically opposing views as to which course of action is in the
best interests of their company and both be acting in accordance with their duty. This
is in recognition of the fact that there is rarely one right answer and that people can
genuinely hold opposing views as to what course is in the best interests of someone
else”
Interpretation – shareholder value?
What does it mean to act in the interests of the company?
G & S Doherty v Doherty is still being used as persuasive authority on this subject.
For the first time, through the Companies Act 2014, Irish law, encodes directors’
fiduciary duties.
It was stated in this case that‘directors are in a fiduciary position, and must exercise
their power bona fide for the benefit of the company as a whole, that is to say, the
shareholders as a whole’. In Irish Press Plc v Ingersoll Irish Publications Ltd the court
found nothing wrong with the appointing body or party having a view as to where the
interests of the company lie and ensuring that its nominees follow that discretion
provided that in so doing they are not seeking to damage anybody else’s interest in the
company. - ‘acting in the interests of the company is no more than acting in the
interests of all its shareholders’
Focus on the Company as an Entity:
In Re BSB Holdings Ltd Protection of minority shareholders was not to be used to
impede the proper management of a company’s affairs. Directors must act in the
company’s overall best interests despite prejudice to one class of shareholders. Arden J
stated ‘As respects the potential conflict between the interests of the members and the
interests of the company, it seems to me….. the interests of the company prevail’.
In Dawson International Plc v Coats Platon plc they said that directors owe it to their
shareholders to ensure any information given to them is not misleading. [11]
So therefore it could be said that any director who does anything contrary to what is
stated in section 3 of the code, misleading its shareholders, is in fact acting for his own
personal benefit and not for the good for the good of the company as a whole. Such a
director breaches his fiduciary duties to the
, shareholders. It was held that ‘What is in the interests of current shareholders who are
sellers of their shares may not necessarily coincide with what is in the interests of the
company. The creation of parallel duties could lead to conflict. Directors have but one
master, the company’.
The Corporate Objective:
Shareholder value – US, Ireland
Stakeholder theory
Enlightened shareholder value – s 172(1) UK CA 2006 - Directors required to
prioritise members but “have regard to” the environment, employees, the local
community, suppliers, customers
The duty to the wider public interest? Mere pious aspirations?
Section 172(1) UK CA 2006
A director of a company must act in the way he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a
whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers
and others,
(d) the impact of the company's operations on the community and the environment
Context changing in Ireland?
• S 228(1)(b) – New duty to act honestly and responsibly
• ODCE
• S 228(1)(b) Borrowed from Restriction and disqualification regime which is
designed to protect the public interest
The La Moselle test
Re: La Moselle Clothing [1998] 2 ILRM 345
a) The extent to which the director has complied with the requirements of the
Companies Acts
b)The extent to which his conduct was so incompetent as to amount to
irresponsibility
c)The extent of his responsibility for insolvency
d)The extent of his responsibility for shortfall in a winding up
e)The extent to which he has displayed a lack of commercial probity and proper
standards
Section 228(1)(c)
“A director of a company shall act in accordance with the company’s constitution and
exercise his or her powers only for the purposes allowed by law”
In Nash v Lancegaye Safety Glass ltd, the plaintiff sought an order reversing a
decision of the company’s board of firectors allotting additional shares to a minority
shareholder so that he and his familt would have control of the company. Two
meetings were held; the first at which the shares were allotted and the second at which
a resolution was passed ratifying the earlier allotment. The tranferee was permitted to
exercise his voting rights at the second meeting in favour of ratifying
Types of Director:
1. Managing Director
2. Executive and non-executive directors
3. De facto directos
4. Shadow directors
5. Alternate directors
Thomas Courtney stated in his article that “one of the most far reaching reforms
introduced by the Companies Act 2014 is the codification of the duties of directors”
Directors Duties under Section 228 of the CA 2014: (NB)
228 (1) A director of a company shall—
(a) act in good faith in what the director considers to be the interests of the company;
(b) act honestly and responsibly in relation to the conduct of the affairs of the
company;
(c) act in accordance with the company’s constitution and exercise his or her
powers only for the purposes allowed by law……
(d) not use the company’s property, information or opportunities for his or her own or
anyone else’s benefit
(e) not agree to restrict the director’s power to exercise an independent judgment
(f) avoid any conflict between the director’s duties to the company and the
director’s other (including personal) interests
(g) exercise care, skill and diligence
Note that the duties under s.228 are fiduciary duties. Directors owe their duties to the
company as a whole and not the individual members
Duties are Owed to the Company:
In Dawson international plc v Coats Paton plc it was stated that there was “no good
reason why it should be supposed that directors are, in general, under a fiduciary
duty to the shareholders… directors have but one master, the company”.
S 227 (1) CA 2014 “a director shall owe the duties set out in s228 to the company
(and the company alone)”
227 (2) “The breach by a director of the relevant duties shall not of itself affect—
(a) the validity of any contract or other transaction, or
(b) the enforceability, other than by the director in breach of that duty, of any
contract or other transaction by any person,”
,S 227(2) – “but nothing in this subsection affects the principles of liability of a third
party where he or she has been an accessory to a breach of duty or has knowingly
received a benefit therefrom.”
S 227(5) - “The relevant duties (other than those set out in section 228 (1)(b) and (h))
shall be interpreted, and the provisions concerned of section 228 shall be applied, in
the same way as common law rules or equitable principles; regard shall be had to the
corresponding common law rules and equitable principles in interpreting those duties
and applying those provisions”
Duties to Shareholders:
Directors owe their duties to the company but no rule exists preventing them from
also owing duties to shareholders. Directors may owe a duty to shareholders if they
represent themselves as acting as agents for the shareholders – in Allan v Hyatt
(1914) the directors of a company induced the shareholders to give them options for
the purchase of their shares so that the directors could negotiate for the sale of the
shares to another company. Instead of selling the shares directly to the other company,
the directors used the options to purchase the shares themselves and then resold them
to the other company. It was held that the directors had made themselves agents for
the shareholders in the sale of the shares and must therefore account to them for the
profit they had made on the sale. It also depends on the circumstances. Their fiduciary
responsibilities are owed to the company alone. As was held in Crindle investments et
al v Wymes [1998] “There can be no doubt that, in general, although directors of a
company occupy a fiduciary position in relation to the company, they do not owe a
fiduciary duty, merely by virtue of their offices, to the individual members. That was
the effect of the decision in the leading case of Percival v. Wright [1902] 2 Ch. 421,
but it has been emphasised in subsequent decisions that, in particular circumstances,
a company director may indeed be in a position where he owes a fiduciary duty to
individual shareholders”
Duties to Creditors:
Directors of insolvent companies owe duties to creditors to preserve the assets until
the company is properly wound up – The case of Re Frederick Inns Ltd is a good
example of where the interests of creditors may intrude on the duties of directors. In
this case the directors made payments to the Revenue Commissioners not only for the
company’s debt but also for the debts of other companies within the group. The court
held that such a payment was in breach of the directors’ duties to the general creditors
of these insolvent companies and the directors incurred personal liability accordingly.
Also a duty owed to creditors when the company is “approaching insolvency”
Duties to Employees:
Section 224 CA 2014
Employees: No duty at common law –
S 224. (1) The matters to which the directors of a company are to have regard in the
performance of their functions shall include the interests of the company's employees
in general, as well as the interests of its members.
,(2) the duty imposed by this section on the directors shall be owed by them to the
company (and the company alone) and shall be enforceable in the same way as any
other fiduciary duty owed to a company by its directors.
Either one of the most incompetent or one of the most cynical pieces of legislative
drafting on record” – Len Sealy, ‘Directors’ Wider Responsibilities’ (1987) 13
Monash University Law Review 164 at 177. - describing an identical provision from
the UK (s 309 of the UK Companies Act 1985)
Section 228(1)(a)
228 (1)(a) A director of a company shall act in good faith in what the director
considers to be the interests of the company
Acting in good faith means acting honestly – s 228(1)(a) is a duty of loyalty not
competence
Subjective duty – “in what the director considers”
“will, therefore, restate the existing legal position which is that two individual
directors may hold diametrically opposing views as to which course of action is in the
best interests of their company and both be acting in accordance with their duty. This
is in recognition of the fact that there is rarely one right answer and that people can
genuinely hold opposing views as to what course is in the best interests of someone
else”
Interpretation – shareholder value?
What does it mean to act in the interests of the company?
G & S Doherty v Doherty is still being used as persuasive authority on this subject.
For the first time, through the Companies Act 2014, Irish law, encodes directors’
fiduciary duties.
It was stated in this case that‘directors are in a fiduciary position, and must exercise
their power bona fide for the benefit of the company as a whole, that is to say, the
shareholders as a whole’. In Irish Press Plc v Ingersoll Irish Publications Ltd the court
found nothing wrong with the appointing body or party having a view as to where the
interests of the company lie and ensuring that its nominees follow that discretion
provided that in so doing they are not seeking to damage anybody else’s interest in the
company. - ‘acting in the interests of the company is no more than acting in the
interests of all its shareholders’
Focus on the Company as an Entity:
In Re BSB Holdings Ltd Protection of minority shareholders was not to be used to
impede the proper management of a company’s affairs. Directors must act in the
company’s overall best interests despite prejudice to one class of shareholders. Arden J
stated ‘As respects the potential conflict between the interests of the members and the
interests of the company, it seems to me….. the interests of the company prevail’.
In Dawson International Plc v Coats Platon plc they said that directors owe it to their
shareholders to ensure any information given to them is not misleading. [11]
So therefore it could be said that any director who does anything contrary to what is
stated in section 3 of the code, misleading its shareholders, is in fact acting for his own
personal benefit and not for the good for the good of the company as a whole. Such a
director breaches his fiduciary duties to the
, shareholders. It was held that ‘What is in the interests of current shareholders who are
sellers of their shares may not necessarily coincide with what is in the interests of the
company. The creation of parallel duties could lead to conflict. Directors have but one
master, the company’.
The Corporate Objective:
Shareholder value – US, Ireland
Stakeholder theory
Enlightened shareholder value – s 172(1) UK CA 2006 - Directors required to
prioritise members but “have regard to” the environment, employees, the local
community, suppliers, customers
The duty to the wider public interest? Mere pious aspirations?
Section 172(1) UK CA 2006
A director of a company must act in the way he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a
whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers
and others,
(d) the impact of the company's operations on the community and the environment
Context changing in Ireland?
• S 228(1)(b) – New duty to act honestly and responsibly
• ODCE
• S 228(1)(b) Borrowed from Restriction and disqualification regime which is
designed to protect the public interest
The La Moselle test
Re: La Moselle Clothing [1998] 2 ILRM 345
a) The extent to which the director has complied with the requirements of the
Companies Acts
b)The extent to which his conduct was so incompetent as to amount to
irresponsibility
c)The extent of his responsibility for insolvency
d)The extent of his responsibility for shortfall in a winding up
e)The extent to which he has displayed a lack of commercial probity and proper
standards
Section 228(1)(c)
“A director of a company shall act in accordance with the company’s constitution and
exercise his or her powers only for the purposes allowed by law”
In Nash v Lancegaye Safety Glass ltd, the plaintiff sought an order reversing a
decision of the company’s board of firectors allotting additional shares to a minority
shareholder so that he and his familt would have control of the company. Two
meetings were held; the first at which the shares were allotted and the second at which
a resolution was passed ratifying the earlier allotment. The tranferee was permitted to
exercise his voting rights at the second meeting in favour of ratifying
