Business Law
Directors’ Duties are owed to the company itself
Section 170
■ S 170 states that (1) The general duties specified in sections 171 to 177 are owed by
a director of a company to the company… and
■ (3) The general duties are based on certain common law rules and equitable
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.
■ (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.
To whom do the directors owe their duties?
■ Potentially a number of individuals or bodies to whom the directors might owe
duties: the company, the members, the employees, the creditors for example.
■ General rule: directors owe their duties to the company as a whole. ie to the
shareholders as a collective body including present and future shareholders.
■ The company: what is the company for these purposes? ie
■ “the phrase, "the company as a whole", does not …mean the company as a
commercial entity, distinct from the corporators: it means the corporators as a
general body.”
■ Duties are not owed to individual shareholders but to the collective
■ Statutory Duties
■ Under CA 2006 directors’ existing duties common law and equitable are codified and
placed on a statutory footing
■ S 178 makes clear the statutory duties are fiduciary duties (except duty to exercise
care, skill and diligence, which remains a duty in tort).
■ S 170 (3) stat duties are based on, and have effect in place of certain common law
rules and equitable principles.
The duties: Section 171
Duty to act within powers
A director of a company must–
(a) act in accordance with the company's constitution, and
(b) only exercise powers for the purposes for which they are conferred.
In other words:
Directors must exercise their powers for proper purposes. Directors must decide how to
exercise their powers but may only do so for the purposes for which the powers were given
S 171
proper purposes
■ Examples of cases on improper use of powers:
■ Shares: where directors issue shares to prevent a takeover bid which might oust
them from power. Adversely affect voting rights of existing shareholders . Refuse to
register transfer
, ■ Howard Smith Ltd v Ampol Petroleum Ltd (1974)**
■ Hogg v Cramphorn (1967)
■ Re Smith & Fawcett (1942) about refusal to register share transfer
■ Power to call for a disclosure notice: Eclairs Group Ltd v JKK (2015) SC
(causation/multiple purposes)(corporate raid-public company)
S 171: The proper purposes doctrine
■ Re Smith & Fawcett (1942) about refusal to register share transfer per articles
■ Lord Greene MR “[Directors] must exercise their discretion (under the articles) bona
fide in what they consider - not what a court may consider - is in the interests of the
company, and not for any collateral purpose”
■ This has both subjective and objective elements
■ The proper purposes doctrine involves an objective approach
■ Therefore it not enough that directors believe they are acting in the best interests of
the company if they use a power for improper purposes
Howard Smith Ltd v Ampol Petroleum Ltd 1974
■ Rival takeover bids and directors used share issuing powers to favour one bidder
against others. Breach of duty even though directors of the opinion that it was
better for the company. Lord Wilberforce:
■ “It is necessary to start with a consideration of the power whose exercise is in
question, in this case a power to issue shares. Having ascertained, on a fair view, the
nature of this power, and having defined as can best be done in the light of modern
conditions the, or some, limits within which it may be exercised, it is then necessary
for the court, if a particular exercise of it is challenged, to examine the substantial
purpose for which it was exercised, and to reach a conclusion whether that purpose
was proper or not. “
S 172 Duty to promote the success of the company
■ Director must exercise his duties in a way that he considers in good faith would be
most likely to promote the success of the company for the benefit of the members
as a whole.
■ Replaces duty to act bona fide in the interests of the company as a whole..many
many cases –test is subjective-in what the director considers to be in the best
interest ….not for a collateral purpose.
■ No reasonable ground for being a benefit to the company-court may find lack of
good faith: Shuttleworth v Cox Brothers 91927)
■ Breach if no reasonable person would consider… Re Charterhouse Capital Ltd (2015)
■ S 172 duty promotes principle of “enlightened shareholder value” Aim of CA 2006
Lord Goldsmith: What is success?... What members collectively want the company to
achieve…
■ S 172(1) lists factors directors must have regard to:
■ https://www.legislation.gov.uk/ukpga/2006/46/section/172
■ (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,
Directors’ Duties are owed to the company itself
Section 170
■ S 170 states that (1) The general duties specified in sections 171 to 177 are owed by
a director of a company to the company… and
■ (3) The general duties are based on certain common law rules and equitable
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.
■ (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.
To whom do the directors owe their duties?
■ Potentially a number of individuals or bodies to whom the directors might owe
duties: the company, the members, the employees, the creditors for example.
■ General rule: directors owe their duties to the company as a whole. ie to the
shareholders as a collective body including present and future shareholders.
■ The company: what is the company for these purposes? ie
■ “the phrase, "the company as a whole", does not …mean the company as a
commercial entity, distinct from the corporators: it means the corporators as a
general body.”
■ Duties are not owed to individual shareholders but to the collective
■ Statutory Duties
■ Under CA 2006 directors’ existing duties common law and equitable are codified and
placed on a statutory footing
■ S 178 makes clear the statutory duties are fiduciary duties (except duty to exercise
care, skill and diligence, which remains a duty in tort).
■ S 170 (3) stat duties are based on, and have effect in place of certain common law
rules and equitable principles.
The duties: Section 171
Duty to act within powers
A director of a company must–
(a) act in accordance with the company's constitution, and
(b) only exercise powers for the purposes for which they are conferred.
In other words:
Directors must exercise their powers for proper purposes. Directors must decide how to
exercise their powers but may only do so for the purposes for which the powers were given
S 171
proper purposes
■ Examples of cases on improper use of powers:
■ Shares: where directors issue shares to prevent a takeover bid which might oust
them from power. Adversely affect voting rights of existing shareholders . Refuse to
register transfer
, ■ Howard Smith Ltd v Ampol Petroleum Ltd (1974)**
■ Hogg v Cramphorn (1967)
■ Re Smith & Fawcett (1942) about refusal to register share transfer
■ Power to call for a disclosure notice: Eclairs Group Ltd v JKK (2015) SC
(causation/multiple purposes)(corporate raid-public company)
S 171: The proper purposes doctrine
■ Re Smith & Fawcett (1942) about refusal to register share transfer per articles
■ Lord Greene MR “[Directors] must exercise their discretion (under the articles) bona
fide in what they consider - not what a court may consider - is in the interests of the
company, and not for any collateral purpose”
■ This has both subjective and objective elements
■ The proper purposes doctrine involves an objective approach
■ Therefore it not enough that directors believe they are acting in the best interests of
the company if they use a power for improper purposes
Howard Smith Ltd v Ampol Petroleum Ltd 1974
■ Rival takeover bids and directors used share issuing powers to favour one bidder
against others. Breach of duty even though directors of the opinion that it was
better for the company. Lord Wilberforce:
■ “It is necessary to start with a consideration of the power whose exercise is in
question, in this case a power to issue shares. Having ascertained, on a fair view, the
nature of this power, and having defined as can best be done in the light of modern
conditions the, or some, limits within which it may be exercised, it is then necessary
for the court, if a particular exercise of it is challenged, to examine the substantial
purpose for which it was exercised, and to reach a conclusion whether that purpose
was proper or not. “
S 172 Duty to promote the success of the company
■ Director must exercise his duties in a way that he considers in good faith would be
most likely to promote the success of the company for the benefit of the members
as a whole.
■ Replaces duty to act bona fide in the interests of the company as a whole..many
many cases –test is subjective-in what the director considers to be in the best
interest ….not for a collateral purpose.
■ No reasonable ground for being a benefit to the company-court may find lack of
good faith: Shuttleworth v Cox Brothers 91927)
■ Breach if no reasonable person would consider… Re Charterhouse Capital Ltd (2015)
■ S 172 duty promotes principle of “enlightened shareholder value” Aim of CA 2006
Lord Goldsmith: What is success?... What members collectively want the company to
achieve…
■ S 172(1) lists factors directors must have regard to:
■ https://www.legislation.gov.uk/ukpga/2006/46/section/172
■ (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,
