The in Regal case,[9] Lord Porter held that

The Company Act
2006 has codified the doctrines on directors from the old law.1
The objective of the reform was to increase certainty and clarify the rules of
the directors.2
This essay focus on the debates, journals and cases regarding to Directors
duties. In addition, it covers the concept on the members of the company in
relation to the Directors. Which seeks to scrutinize the nature of the reform
in comparison to the old law. Although there has not been much difference with
the Director Duties in CA 2006. However, it has established a foundation in the
company.3.

The common issue is
concerned to the extent of the directors’ statutory duties in the new act.
Prior to CA 2006, director duties are based on common law rules and equitable
principles.4
Sealy has stated that the origin concept of a director acted as a trustee in
the company.5
It was known in a case that the corporation directors has breached the trust in
full technical sense.6 It
could be argued that this concept was known in the early time whereby companies
were unincorporated, and settlement is made by deed.7

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Due to the practice,
the court naturally formed that directors were considered as ‘constructive
trustees’.8 However,
in Regal case,9
Lord Porter held that director cannot be a trustee although they are in a
fiduciary relationship to the company.10 Directors
are subjected to perform their duty of care and skill for the company.11 It
was shown in Extrasure Travel Insurances Ltd v Scattergood,12
fiduciary duties create a difference in quality to common law, which focus
towards on loyalty instead of incompetence.13 The
new act does not provide a definition for “director”, which can be confusing
and vague to identify the role of the person. However, s. 250 of CA 2006 has included the position of director
in a company.14
Although Romer J has described that it was impossible to list every directors’
duties in the provisions since it accommodates to the circumstances.15

Due to the absence
on the definition of director,16
it created uncertainty in making the law comprehensible.17
The DTI has mentioned that certain rules in the current act is regarded as out
of date.18
However, the origin principles were established by the common law rules and
equitable principles, section 170(5) has stated that the court must interpret
and comply with the inherit legal doctrines and it is now codified into the
legislations that apply to all directors.19

Although there is
no definition on the term, but it can be seen in the case that Directors are
imposed with duties and common law to protect the interest of the shareholders
of the company.20
Arguably, the Law Commission has deliberately put it in a wide definition to
ensure that the law on directors’ duties to be applicable not only to the whom
the person is but also to those who do not have the title.21
Which is known as De Facto Directors, the CA 2006 does not only take into
account of the De jure Directors, but it also determines whether the person whom
is not duly appointed is exercising his legal rights of a director .22
Hence, it showed the flexibility in the wide term of a director that allowed a
person whom has legal functions to fulfil their role in the decision-making
process for the company.23
Moreover, there is less rigidity on the role since it depends on the nature and
circumstances of the duty.24

Unlike
the above mentioned, shadow director is regulated by section 251 of CA 2006, which
means that the person will be given instructions to act by the directors of the
company. However, it can be confusing as de facto director has a common role to
a shadow director. The real distinction is that the term de facto director is
not regulated by an Act. Moreover, shadow director does not do all the work but
will be acting as a director in the external influence of the company.25

However,
a shareholder can manipulate the action of a shadow director, whereby they can
be replaced if instruction is not follow although it can bring disadvantages to
the company. In Vivendi case,26 a
shareholder was having financial issue and he has influenced a director to use
the company fund to pay him salary while the company was insolvent. The
question is whether the shadow director can still be liable as a normal
director? At first the court stated that the shadow directors are not subjected
to same fiduciary duties as de jure directors. However, the decision was
reversed, and the shareholder interest was prejudiced towards the company.27

However,
in Ultrafame (UK) Ltd case,28 Lewison
J has stated that shadow director owes a fiduciary duty to the company, but companies
usually find them to be incompetent on responsibility. It can be argued that Lewison
J view was one sided on shadow directors, therefore DD Prentice has criticized
that it is imbalance to placed shadow directors’ fiduciary duties apart from the
other directors.29
Furthermore, in Commissioner of HM Revenue and Customs v Holland,30
the Supreme Court held that the law must be fair and just to treat all the
directors equally.31 The
shareholder can bring up a derivative claim,32 the
court will intervene by petition when unfair prejudice to the interests of the
members and company.33
The court will view it in a broad perspective whether it is unfair as a
bystander will consider it as well.34

It
is sensible for directors to know their duty to act bona fide in the interest
of the company and not for other matter. In Re Smith & Fawcett, Lord Greene
MR has stated that the company must act in bona fide, not based on the court
consideration.35
The interest of the company is a subjective test, directors must act reasonably
in making decision and, the decision can be set aside if it is not in the
interest of the members and company.36
It was criticized that the lack of intervention by the court, the subjective
test has reached to an unfavorable position to manage in the company.37

The
codification of the director duties has make it clearer for the court to apply
an objective test on whether the director is acting in good faith towards the
company.38
Arden LJ has mentioned that the duty to act in good faith is known as duty of
loyalty in the best interest of the company.39
The reform has emphasized that a director must take into account of the
interest of the members and the company on any situations such as company that
has went insolvent.40

The
common law duty of bona fide is codified under section 172 of the Companies Act
2006, whereby there is a duty to promote the success of the company. It could
be argued that the fiduciary duties on director to perform for the best
interest of the company is subjected to several criticisms.41 During
the financial catastrophe in 2007 to 2009, the underlying cause is the high
demands of shareholders to increase their earnings has created a complicated relationship
between the directors and shareholders in the company.42Moreover,
the failure in managing the company has affected the business in the economy.43CA
2006 does not state the legal definition of a share, but in Borlands case,44
Farwell J has stated that the shareholders interest in a company that can be
measured by value of money is known as share.45

Prior
to the enactment of CA 2006, the directors are obliged to act in good faith to
carry out the interests of the company in maximizing the interest of
shareholders and profits.46
However, S.309 of CA 1985 has been replaced by S. 172 of CA 2006, whereby
directors are required to follow the interest of the shareholders and
stakeholders in the company.47.

In
trite law, directors owe duties to the company but not towards the shareholders
and stakeholders.48
S.172 did not mention to whom directors should consider but only ‘for the
interest of the company’. Aforesaid that the Law Commission has created such a
wide but vague definition on its reform. it deemed to be as a company façade for
directors to exploit the shareholders’ interests.49 In
practice, directors can abuse it power to pursue their objective while hiding
behind a veil in the company.50 Individuals
abused their power through illegal method such as fraud. In Adams v Cape
Industries. Co, the court has stated that the director has breached it duties by
being involved with wrongful trading.51

The
locus classicus on Salomon case has set out a principle for separate legal
entity,52 Lord
MacNaughten held that the company is not an agent to control the shareholders
although in theory, it is an economic form of association of individuals.53 Hence
in practice, it has facilitated manipulation in the business capital.54
Therefore, the HOL has detached the understanding of the company from it theory
and it is more divorced now in the economic realities.55
In regarding to a parent company to be ‘shadow director’, they are equally
responsible.56

To
manage the director’s action, the article of association governed how the
company is control.57
Under section 33(1),58
the article of association has given the shareholder’s rights to have
contractual effect towards the board of directors.59 Whereby
in SI 2008/3229, authority is given to directors by articles of association.60

It
will be a huge advantage for the shareholders in a limited liability company,61
as they will not be responsible for the debts and obligations in the company.62 Under
ss.549 to 551 CA 2006, shareholders can use this as an advantage to remove the
director through a meeting or voting.63 Since
the arrangement of the board of directors are determined by the shareholders at
general meeting.64

In
private companies, shareholders may remove a director through written
resolution which requires more than 50% votes,65
whereby it is passed by the general meeting in the company.66 There
must be a notice at least 14 days before the meeting is pass.67 In
practice, minority shareholders can be left out without knowing the situation
and be unsatisfied regarding to the decision made by the majority.68 Arguably,
it can be stated that there is discrimination between the majority and minority
shareholders in the business policy.69
Minority shareholders can pass a special resolution, which requires at least
75% of shareholders’ votes, perhaps it is the most effective way to discuss the
issues thoroughly with their consent.70
It alters the article of association to increase the voting rights, as long as the
special resolution was made in good faith for the interest of the company.71
Court may intervene when the power of the shareholders were not exercised bona
fide in the interest of the company.72

The
absence of definition on Section 172 has subjected to debates on shareholders
and stakeholders,73
it was argued that the reform has regulate the relationship with stakeholders
to be inadequate.74
It should be noted that Section 170(4) on director’s general duty shall be
interpreted using the common law rules.75
Which means that the ‘interest of the company’ is interpreted as ‘promoting
success for the benefit of the members as a whole’, which does not
differentiate between the shareholders and stakeholders in section 172.76

In
determining the success of the company, it may be difficult for stakeholder
interest to promote companies that are community and charity based. In Horsley
v Weight,77
it showed that the court had to intervene by weighing on the success of the
company in comparing the member’s hierarchy of priorities.78 In
theory, Elaine Sternberg has stated that the stakeholder is unworkable in
corporation.79  Which means that if a stakeholder would
proceed a derivative claim against the company,80
it would be difficult to determine the interest of the stakeholder that has
been prejudiced.81
Since, section 260 only allowed shareholders to bring a derivative claim.82 However,
Foss v Harbottle has created the ‘proper plaintiff’ rule on derivative claim which
is only available for exceptional situations,83 whereby
it does not allowed individual to bring an action against the wrongdoing of the
company which can be solved by majority of the shareholders in a meeting.84
It can be stated that the proper plaintiff rule can bring an advantage towards
the defendant in the case.85 It
contravenes the natural justice of nemo iudex in sua causa, it means that ‘no
one should be a judge in its own cause’.

However,
it does not mean that there is no remedy for the stakeholders to rely in the
reform. Section 417 allowed the directors to arrange a business review for the
members to evaluate their performed duties that is constructed in section 172.86 As
Lynch has stated that section 172 will not be neglected by the whole members in
the company.87
 Which means that directors must consider
the importance and the best interest of the members to determine the success of
the company.88

Under
section 1(f),89
stakeholders and directors must act fairly in the company.90
This section has given the effect towards the members of the company, that they
will not be treated with preferential interest.91
Director can be justified by defending themselves under s.172(1) as to promote
success of the company for the interest of the company. However, the court will
ultimately rely on the objective test of ‘good faith’ in common law rules and
equitable principle in section 172.92

On
the other hand, Bushell case has set out the clause of weighted voting rights,
which can defeat the resolution made by the shareholders.93
Director may wish to avoid the removal of their position by following section 21
that contained the provision for entrenchment whereby it can alter and repealed
the article of association,94
but it must be made by agreements of all members in the company.95
Arguably, it undermined the sanctity of the provision in the Companies Act
2006, in addition it impeded the voting rights and company’s power to alter the
articles of association.96Although
it requires shareholder’s persistent effort in guarding the director’s decision
throughout the meeting. However, it is rather better than director breaching
his duty by having conflicting interest with the company according to s.175.97

In
conclusion, by examining the cases mentioned above, the wide definition of
section 172 does not provide the way for directors to deal with decision making
for the company.98
The directors can be justified by merely defending themselves by saying that
they have done their duty to promote for the success of the company.99
It showed that section 172 is just a general and ambiguous principle, which has
little impact on the company.100
According to a pluralist approach,101
Lord Goldsmith held that directors not only serve the shareholder’s interest
but also for the others in the company.102
This approach should not be based on the reform, the company should have
generally known the measure of doing so. It was the objective for the
government to set out this reform, that has given a wide meaning for the
directors’ duties to protect the members of the company.103

 

1
Companies Act 2006 (CA 2006)

2 Dr
Daniel Attenborough, Journal
of Business Law, ‘Publication Review Directors’ Duties’ 2005 https://www.jordanpublishing.co.uk/system/redactor_assets/documents/3089/Directors__Duties_REVIEW.pdf

Accessed
29/12/2017

3 Companies Act 2006, s 155

4
Companies Act 2006, s 170(4)

5 Professor
Leonard Sedgwick Sealy, “The
Director as Trustee”, The Cambridge Law Journal Vol.25, No.1 1967, 83, 103

6 Charitable Corporation v Sutton (1742)
26 ER 642

7
Ibid

8 Mayor of Colchester v Lowten (1813) 1 V. & B.226

9 Regal (Hastings) v Gullier 1942 UKHL 1

10
Ibid

11 Companies Act 2006, s 174

12 Extrasure Travel Insurances Ltd v
Scattergood 2003 1 BCLC 598

13 Ibid

14
Companies Act 2006, s 250

15 Re City Equitable Fire Insurance Company Limited 1924 3 All ER 485

16 Professor
Stuart Sime, Company Law in Practice (9th edn, Oxford
University Press 2016)

17 The Law Commission and The Scottish
Law Commission, Company Directors,
(Law Com No 261 September 1999) https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage
11jsxou24uy7q/uploads/2015/03/lc261_Company_Directors.pdf  Accessed 30/12/2017

18 Ibid

19
Companies Act 2006, s 170(5)

20 Kinsela & Anor v Russell Kinsela Pty Ltd
1986 4 ACLC 215

21 Law Commission, Company Directors: Regulating Conflicts of Interest and Formulating a
Statement of Duties (Law Com No 153, Scot Law Com No 105, 1998)

22 Re Hydrodam (Corby) Limited 1994 2
BCLC 180

23 Derek
French, Mayson, French & Ryan on Company Law (26th edn, Oxford University
Press 2009)

24 Secretary of State for Trade and Industry v Tjolle and Others 1998 1 BCLC 333

25 Secretary of State for Trade and Industry v
Deverell 2000 2 WLR 907

26 Vivendi SA and Centenary Holdings Ltd v
Murray Richards and Stephen Bloch 2013 EWHC 3006

27
Ibid

28 Ultrafame (UK) Ltd v Fielding and Others 2005 EWHC 1638

29
DD Prentice and Jennifer Payne, ‘Directors’ Fiduciary Duties’ (2006) 122 LQR
558

30 Revenue and Customs Commissioners v Holland 2010 UKSC 51

31 Ibid

32 Companies Act 2006, s 260(2)(b)

33 Companies Act 2006, s 994

34 O’Neill and Another v Phillips and Others 1999 1 WLR 1092

35 Re Smith & Fawcett Limited 1942 Ch 304

36
Ibid

37 Mutual Life Insurance Co of New York v. Rank
Organization Ltd and Re BSB Holdings Ltd (No. 2) 1985 BCLC 11

38 Charter Corporation Limited v Lloyds Bank Limited
1970 1 Ch 62

39 Item Software (UK) Ltd v Fassihi and
others 2004 EWCA Civ 1244

40 Walker v Wimborne 1976 137 CLR 1

41 Andrew Keay, Section 172(1) of the Companies Act 2006: an interpretation and
assessment, (first published 2007, Routledge-Cavendish) 106-110

42 T.Kirchmaier, ‘Inject Governance,
and Not Just Cash: Some Thoughts on the Governance of Banks’, (2008) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1303202
Accessed 30/12/2017

43 Ibid

44 Borland’s Trustee v Steel Brothers and Company Limited 1901 1 Ch 279

45 Ibid

46
Companes Act 1985, s 309

47 Brenda
M Hannigan, Company Law (2nd edn,
Oxford University Press 2009) 205

48 Percival v Wright 1902 2 Ch 421

49 Nicholson v Permakraft (NZ) Litmited
1985 1 NZLR 242

50 Jonas v Lipman 1962 1 WLR 832

51 Adams v Cape Industries Plc 1991 1 All ER 929

52 Salomon v Salomon and Company Limited 1897 AC 22

53 Ibid

54 Gilford Motor Ltd v Home 1933 Ch 935

55 Ibid

56 David Milman, Corporate Insolvency Law: Perspectives and Principles, (3rd
edn, Cambridge University Press 2017) 551

57 Companies Act 2006, s 18

58
Companies Act 2006, s 33(1)

59 Bligh v Brent 1837 2 Y & C Ex
268

60 The
Companies (Model Articles) Regulation, SI 2008/3229

61 Macaura v Northern Assurance Company Limited
1925 AC 619

62 Ben
Pettet, Limited Liability Company 21st century, (Vol 48, Oxford
University Press 1995)

63 Companies Act 2006, ss 549 – 551

64
Companies Act 2006, s 303

65 Companies
Act 2006, s 288(3)(b)

66 Companies
Act 2006, s 288(5)(a)

67
Companies Act 2006, s 307(1)

68 Rights and Issues Investment Trust Ltd v
Stylo Shoes Ltd 1964 All ER 628

69 Greenhalgh v Ardene Cinemas Limited 1950 2 All ER 1120

70 Clemens v Clemens Bros Limited 1976 2
ALL ER 268

71
Ibid

72 Allen v Gold Reefs of West Africa Limited 1900 1 Ch 656

73
Benedict Sheehy, ‘Scrooge the Reluctant Stakeholders: Theoretical Problems in
the Shareholder-Stakeholder Debate’ (2006) 14 University of Miami Business Law
Review 226.

74 Cynthia A Williams, ‘Corporate
Social Responsibility in an Era of Globalization’ (2002) 35 University of
California Davis Law Review 705, 720

75 Companies Act 2006, s 170(4)

76
Ibid

77 Re Horsley v Weight Limited 1982 Ch
442

78
Paul Omar, ‘In the Wake of Company Act 2006: An Assessment of Potential Impact
of Reforms to Company Law’ (2009) 20(2) International Company and Commercial
Law Review 44.

79
Elaine Sternberg, ‘The Defects
of Stakeholder Theory’, (1997), Corporate Governance: An
International Review, Vol 5, 3-6  http://onlinelibrary.wiley.com/doi/10.1111/1467-8683.00034/epdf
Accessed 10/01/2018

80 Parke v Daily News Limited 1962 Ch 927

81 D. Millon, Communitarianism in Corporate Law: Foundations and Law Reform
Strategies in L. Mitchell (ed), Progressive
Corporate Law, (Westview Press 1995) 4

82 Companies Act 2006, s 260

83 Foss v Harbottle 1843 67 ER 18

84 Companies
Act 2006, s 260(2)(b)

85
Mc Daniel, ‘Bondholders and Stockholder’, 1988, PL 309

86 Companies
Act 2006, s 417

87 Irene
Lynch-Fannon, Corporate Insolvency and Rescue (2nd
edn, Bloomsbury Professional 2012) 196

88 Ibid

89 Companies
Act 2006, s 1(f)

90 Re BSB Holding Ltd (No 2) 1996 1 BCLC
155

91 Mills v Mills
1930 60 CLR 150.

92 Chatterbridge Corporation v Lloyds Bank 1982 AC 584

93 Bushell v Faith 1970 AC 1099

94 Companies Act 2006, s 21

95 Companies
Act 2006, s 22

96 Russell v Northern Bank of Development Corporation Limited 1992 1 WLR 588

97 Companies Act 2006, s 175

98 P
Taylor, Enlightened Shareholder Value and
the Companies Act 2006 (unpublished PhD thesis, Birkbeck College,
University of London 2010), 177

99
Ibid

100
Andrew Keay, The Enlightened Shareholder
Value Principle and Corporate Governance, (first published 2013, Routledge
Taylor & Francis Group 2013) 203

101
John Lowry, ‘The Duty of Loyalty of Company Directors: Bridging the
Accountability Gap Through Efficient Disclosure’, 2009, 607-622

102
Ibid

103
Priya Gobal, The Student Journal of Law, (2010) https://sites.google.com/site/349924e64e68f035/issue-4/a-critical-examination-of-the-impact-of-section-172-of-the-companies-act-2006
Accessed 13/01/2018