General View Of Director’s Duties Under S.172 Companies Act 2006.

A director’s capacity will originate from the company’s articles. Articles are vital in that they manage the division of intensity among investors and directors, and the composition, structure and activity of the board of directors. Articles shape an agreement between the company and its individuals. Both parties can in this way implement consistence with the constitution against the other. In any case, not all terms of the constitution can be implemented: just terms that identify with participation rights will shape some portion of the agreement and individuals must acquire their case the limit of a part.[1] In Beattie v E and F Beattie Limited the defendant director (additionally a member) drew a salary without authorisation from the company members. The director guaranteed that as he was a part he could depend on a condition taking into account intervention is such conditions. Notwithstanding, the Court of Appeal rejected his argument as he was depending on the articles in his situation as director, not as a member. Thusly, legal action could continue against him for his unapproved payment. This is a great case of the law attempting to take a look at self-serving director’s act.[2]

However, the utility of articles in policing director power has been dissolved with the presentation of the Companies Act 2006. Before the enactment of the 2006 Act companies were required to express their articles and purposes in their memorandum – this constrained the legally binding limit of the organization as acting outside of these objects was held to be ultra vires. Companies are currently allowed to have unlimited objects. S.40 (1) Companies Act 2006 raises a point that in the event of any director makes an unauthorized contract with a third person, The director’s commitment to the company is accepted without any limitation under the company’s constitution. Therefore, when the power has been exceeded, in other words, “ultra vires ”, this event will not evaluated as“ ultra vires” .For example;  In practice, directors can use their authority for many things. some of them may not be appropriate. In the Howard Smith Ltd v Ampol Petroleum Ltd the Privy Council, the court examined the dominant issue and examined whether or not there was ultra vires. If the dominant subject is appropriate, it was decided that there would be no ultravires.[3] But in some cases, if the interests of the company require the disclosure of exceeding of duty by director, then this situation is disclosed. For example in an one of the decision of the Court of Appeal; for a director who exceeds the duty definition, if the act of exceeding this duty is required to be revealed for the interests of the company, then it shall be revealed.[4]

At the same time some jurists describe this issue as the erosion of the rule of power exceeding and they also thinking it can damage the law. However, this argument is not a satisfactory answer in itself and not always considered this way. This is seen in Consultant v Colley (1972). The director abandoned his position in the company and established a new company and signed a large scale contract. Because of this attitude of the director, the court said that the director violated the duty of the fiduciary since the director prioritized his personal interests from the interests of the company.[5] When a company’s directors exceed the authority, this behavior can be assessed by a new legal regulation, apart from the power given by the constitution.

Importance Of The Good Faith

In good faith, in fulfilling their duty, directors as a whole should pay attention to the following factors among other members:

• the likely outcomes of any choice in the long haul;
• the interests of the organization’s workers;
• the need to cultivate the organization’s business associations with providers, clients and others;
• the effect of the organization’s tasks on the network and the earth;
• the allure of the organization keeping up a notoriety for elevated expectations of business direct; and
• the need to act reasonably as between individuals from the organization.

It would be sensible for directors to choose which partners or issues are of adequate significance to the organization’s long haul achievement that the directors ought to draw in with them straightforwardly. The directors ought to likewise think about whether, and what, data they may require from the partners, how broadly they have to draw in with the partners and the most ideal approach to do as such.[6]

As the quote in the question says in defining this task; what the director believes for the company’s interests is more important than what the court will decide.[7] This has always been one of the principal assurance duties of a director in a company and is valid for all managers. As held in Hogg v Cramphorn (1967);  the appropriate purpose rule allows the director to act in accordance with the correct objectives. It wants the existence of a goodfaith principle while fulfilling its duties rather than personal purposes. [8]

“Act in the way he considers, in good faith” unmistakably shows an abstract test which pursues Re Smith and Fawcett[9] and the 2000, 2001 and 2005 variants, despite the fact that the verb in those forms changed from ‘believes’, to ‘decides’ to ‘considers’. Contrasted with accepting at any rate, considering implies cognizant concentrating on the issue, however maybe not as unequivocally as choosing. That could imply that in a future case like Charterbridge Corporation Ltd v Lloyds Bank Ltd[10] where the directors did not consider each different company’s advantage by any stretch of the imagination, the directors could in fact be observed to be in rupture of their obligations, however what harms could be asserted if the non-considered act was still impartially sensible is difficult to see. In any case, what is much more dangerous is the thing that must be considered.[11]

Given the assumption against change made by section 170(3) and (4) with the new Companies Act 2006, different commentators have taken a desperate view. For instance, Professor Birds has stated:“On the whole it is thought that the effect of s 172 is more likely to be educational rather than in any sense restrictive and that business decisions taken in good faith will not be any more easily challengeable than they were before this provision existed”[12]

 In determining whether a director is acting in good faith, the courts will conduct a test that is subjective to the director.[13] In other words, they will consider that the director acts on the best interests of the company. Subjective testing is measured by the discretionary power of the honest and reasonable person in the face of the same situation.[14] As Pennycuick J said: “must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the show of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company” [15] This test includes the existence of the good faith of the director and the fact that director believes in this good faith in his action.[16] The fact that the director proves to be in good faith in his behavior can save him from some kind of judicial responsibility. As mentioned before, it is very important that the director believes that the move he take has good faith in it, even though he has good faith in his action. However, when a company is damaged in the face of an action which the director sees in good faith, in some cases the court can be suspicious of the existence of goodfaith. Such as if the task of the previous common law is completely subjective; there can be a lunatic director who manages the business of the company on the basis of goodfaith, but at the same time shows unremarkable work. Therefore, the court ascertains the existence of the evidence of the belief in honesty.[17]

Although the aim of the statutory statement, are the correction of errors in the law and the benefit of those who run the company; this broader definition and scope, which was once again seen, made it easier for the directors to exceed their authority. In Neptune Ltd v Fitzgerald; the court did not have difficulty in understanding that the director did not act for the benefit of the company. Realizing that director was thinking of his personal interests, he concluded that when he was terminating his contract with the company, he paid himself for £ 100,000 as an ex gratia payment.[18]  Another example of an authority exceeding by directors may be given in the West Mercia Safetywear Ltd v Dodd case. The director paid the company to pay a portion of the bankrupt company’s debts. The director made a payment in the amount of £ 4000 and also organized to guarantee his personal duties by showing himself as a guarantee. As a result, the court decided that the director had ignored the interests of the general creditors of the company and that he violated and abused his duties to the company. Although the payment has been indebted to the company, the obligation to act in the interests of the creditors was violated and it was decided to pay £ 4000 by director.[19]

Interpretation Of What Is Best For The Company 

The basic principle of company law is that company has a different legal entity from the shareholders.[20] This perspective on the company is more useful than any other theory of what a company looks like and explains why shareholders can become a member of the company that mentioned, and at the same time how to initiate legal action against the company.[21] Lord Halsbury LC stated in Solomon v A Solomon & Co Ltd, (the case that sets out the separate legal entity principle): “After the company has been legally formed, it must be treated as another independent person with appropriate rights and obligations. When discussing what these rights and obligations are, the motivation of those involved in the promotion of the company is absolutely unnecessary.” [22]

The doctrine of the fact that the company is a separate legal person should be taken. According to this, the fiduciary duties of the directors are not owed to any individual shareholder or the group of shareholders, but to the company itself.[23]Considering that the company is a separate legal entity; the undisputed nature of the arguments of directors and their arguments to the company owed in favor of the shareholder value. When talking about the interests of the company, there is no legal basis for equalizing the interests of the shareholders and the interests of the company. As Attenborugh argues, what the meaning of acting in the best interests of the company has led to a broad definition in the traditional common law.[24] While proving that the interests of the directors and shareholders who choose the interests of the company are not always equal, the legal basis can be mentioned. In the case of Lonhro v Shell Petroleum, it was considered that there might be creditors rather than shareholders as the company’s beneficiaries.[25]

[1] Frederick E. Webster,’The Changing Role Of Marketing In The Corporation’ (1992) 56 Journal of Marketing p.9

[2] Beattie v E and F Beattie Limited  [1938] Ch 708 CA 720,723

[3] Howard Smith Ltd v Ampol Petroleum Ltd the Privy Council [1974] AC 821

[4] Item Software (UK) Limited v Fassihi [2004] EWCA Civ 1244

[5] Consultant v Colley [1972] 1 WLR 443

[6] Daniel Attenborough, ‘How Directors Should Act When Owing Duties to the Companies’ Shareholders: Why We Need to Stop Applying Greenhalgh’ (2009) 20(10) International Company and Commercial Law Review p.339

[7] Smith v Fawcett [1942] CH 304

[8] Hogg v Cramphorn [1967] CH 254

[9] Smith v Fawcett Ltd [1942] CH 304

[10] Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62

[11] Chris Taylor, ‘Alcock, Birds And Gale On The Companies Act 2006 (1St Edition)2013Stephen Alistair Alcock, John Birds And Steve Gale. Alcock, Birds And Gale On The Companies Act 2006 (1St Edition). Bristol: Jordan Publishing Ltd. (2010) 52 International Journal of Law and Management.

[12] Professor of Commercial Law, University of Manchester in Chapter 15[10A] of Gore-Browne on Companies, 45th edition (Jordans, as at March 2009)

[13] L. S Sealy and Sarah Worthington, Cases And Materials In Company Law (Oxford University Press 2008)   p.346

[14]Andrew Keay ‘Enlightened Shareholders Value, The Reform Of The Duties Of Company Directors And The Corporate Objective’ (2006) Lloyd’s Maritime and Commercial Law Quarterly p. 335, 359.

[15] Charterbridge Corp. Ltd V Lloyds Bank Ltd [1970] CH 62

[16] Regentcrest Plc v Cohen [2001] 2 BCLC 80

[17] Hutton v West Cork Railway Company Bowen LJ [1883] 23 Ch D 654

[18] Neptune Ltd v Fitzgerald [1995] 1 BCLC 352

[19] West Mercia Safetywear Ltd v Dodd [1998] BCLC 250

[20] Paddy Ireland, Ian Grigg-Spall and Dave Kelly, ‘The Conceptual Foundations of Modern Company Law’ (1987) 14(1) Journal of Law & Society p.149, 150.

[21] Rutherford Campbell Jr, ‘Corporate Fiduciary Principles for the Post-Contractarian Era’ (1996) 23 Florida State University law Review p.561, 589.

[22] Solomon v A Solomon & Co Ltd [1897] AC 22, 30.

[23] Smith v Cork and Bandon Railway Co [1870] 5 IR EQ 63; Percivil v Wright [1902] 2 Ch 421. Dawson International plc v Coats Platon plc [1989] BCLC 233.

[24] Daniel Attenborough, ‘How Directors Should Act When Owing Duties to the Companies’ Shareholders: Why We Need to Stop Applying Greenhalgh’ (2009) 20(10) International Company and Commercial Law Review, 339

[25] Lonhro v Shell Petroleum [1980] 1 WLR 637 HL 634