------------------------------------------------- business and company law

Section 228(1) of the Companies Act 2014 details the eight fiduciary duties directors of companies are obliged and compelled by law to comply with. The question is why it is necessary through the application of law to limit director’s decision making responsibility. The potential for directors to abuse their positions of power with regards to company’s assets in the daily running of the company seems limitless even when directors are in their own perception acting bona fides with regards to their decisions. Section 228(1) is so important and appropriate to business law as Directors are persons who according to Callanan(2007,p207) ‘have been entrusted with powers for the benefit of others’ but the potential to damage one person or persons to benefit another is so highly possible that the law is compelled to control directors decisions.
Section 228(1) (d) addresses a directors duties ‘to not use the company’s property, information or opportunities for his or her own or anyone else’s benefit’. The case of Regal Hastings v Gulliver (1942) is one which has involved much debate throughout the years. The directors of Regal although acting in their opinion bona fides, through holding a position as directors were privy to information that, had they not held their position as directors would not have been able to benefit from the transaction that they undertook. The key point behind this case was that directors are exposed to sensitive and sometimes exclusive information and such information can be extremely profitable to other organizations and indeed individuals themselves. The potential for abuse of such information when decisions of monetary value are concerned is indeed limitless and can only be limited by the application of law. Many directors can and have profited through knowledge obtained through their position but have not been sanctioned or held liable in the eyes of the law. In the case of Peso Silver Mines Ltd v Cropper (1966), Cropper had acted with the interest of the company first and foremost. Cropper had presented the offer to the company and the company had subsequently rejected the offer bona fide. The rejection of the proposal presented by Cropper allowed him to make the investment on his own account. In the eyes of the law, Companies Act 1948(199), he had made a disclosure to the board and was therefore entitled to proceed with his transaction. The Companies Act 2014 section 229(1)(2) permits directors to have other interests but is always dominated by section 228 of the Companies Act 2014. The courts do not put limits on how significant or insignificant a transaction may be and whether the event is discovered after a director ceases to act as a director to the company. In the case of Philip Towers v Premier Waste Management Ltd (2011) the misuse of company property came to light after Towers had ceased his directorship but was held accountable for the costs incurred during his term.
Section228 (1) (b) sets out a directors duty ‘to act honestly and responsibly in relation to the conduct of the affairs of the company’. Section 228(1) (b) is so crucially important and applicable when a company has identified that it is approaching or indeed has entered insolvency. A director that continues to acquire credit during or approaching insolvency is deemed to be carrying on trading in a reckless manner and can be held personally liable for some or all of the debts under section 297A of the Principal Act. To continue trading and acquiring credit during uncertain times could have severe knock on effects for creditors to the company and could be detrimental to such creditors ability to continue trading themselves. If a company is incurring debts and acquiring credit at times of uncertainty and there is adequate information that demonstrates a creditor will never receive a payment for such debts then according to case Re William C Leitch Bros Ltd[1932] 2 Ch 71.) ‘It is, in general, a proper inference that the company is carrying on business with intent to defraud’ Wright and Creighton (1991p162). A director’s position implies that they are persons with experience and quite usually of sound educational background that they ought to reasonably know when the threat of insolvency exists or has been realised. In the case of DKG Contractors Ltd (1990) BCC903 the breach of the director’s duties to act honestly was further enforced by the Insolvency Act 1986 under sections 211 and 214. Two further cases that highlight the contrasting actions of directors are Mond v Bowles &ors (2011) and Earp v Stevenson (inhouse lawyer .co.uk). In the Mond case the directors did everything in their power to limit the losses of the creditors while in the Stevenson case the director acted in such a reckless manner and with no regard for his creditors that he indeed breached his duty of responsibility as director. Directors ought to have an underlying ethical responsibility as they carry out their duties and should at all times take into consideration the impact their decisions have on relevant stakeholders of an organization. Complete an utter disregard for others is not only unethical it is immoral and should not be condoned in any way or form.
Section 228(c) of the companies act 2014 states that 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. Under this section director’s procedures come under scrutiny with reference to the manner in which they allocate and issue shares. The allotment of shares is controlled by the 1983 Amendment Act section 20, the Principal Act and the Articles of association of the company. So much case law focuses on the manner in which directors have abused their power to dilute majority shareholders positions to force[Howard Smith v Ampol Petroleum Ltd(1974) or fight takeover bids[Hogg vCramphorn(1966) or to cement their own position[Punt v Symons & Co Ltd (1903). In each of the above three cases the directors believed utmost that they were acting bona fide and with the best interests of the company in question. Acting in the best interests of the company does not offer immunity to directors if their procedure or purpose in the issuing of shares contradicts the companies AoA. A directors breach of their duties can however be ratified at a general meeting of the company. In the case of Hogg v Cramphorn the issue of the shares to the trustees of the employee’s pension fund was deemed to be invalid but the case Judge Buckley J. reserved judgement in the case until the directors had a chance to present their proposals at the general meeting of the company. The board ultimately ratified the breach and the takeover bid was defeated. Under the AoA shareholders can contest the manner in which directors have issued shares. The courts on the other hand can validate or invalidate the issue of shares under Section 89 of the Principal Act if they believe directors have breached their fiduciary duties in the allotment of shares even when the directors are acting bona fide.
Section 228(g) of the Companies Act 2014 identifies a director’s duty ‘to exercise care, skill and due diligence in relation to the business affairs of a company’. These three duties are applied to both executive directors and non-executive directors. An executive director’s employment contract would usually be indicative that they show full attention to the business affairs of the company while a non-executive director would not normally be involved in all day to day matters of the company. The title of non-executive director and their limited exposure to the conduct of business of the company does not limit their liability through the excuse of ignorance based on lack of information. The extent of liability imposed on a director will depend on the degree of skill a director possesses in relation to the business environment they conduct their business affairs in. In the case of Dorchester FinanceCo. Ltd v Stebbing (1989) all of the directors were held liable for the transactions of the company both executive and non-executive due to the skills all three directors possessed in accountancy. The same applied in Re City Equitable Fire Insurance Co.Ltd however the non-executive directors were exonerated due to the companies AoA. It is a director’s duty and responsibility to inform themselves about the affairs of a company. It is a personal responsibility for a director to display due diligence in this regard. The cases of Brazilian Rubber Plantations and Estates Ltd (1911), Selangor United Rubber Estates Ltd v Craddock (1967) and Jackson v Munster Bank Ltd (1885) all highlighted this. Attendance at board meetings, evidence of action when the question of fraud arises, levels of supervision and the extent of control directors display all come under scrutiny when litigation arises. Directors that do not possess the skills required to inform themselves of the business affairs of the company may well be held negligent should they have, in appropriate circumstances obtained the opinion of an outside expert in whatever field concerned as was the case in Fry v Tapson (1884) and Re Duomatic Ltd (1969) The courts can exempt a director should they see fit if the director in question acted honestly and reasonably and cannot be held liable merely for poor decision making. The court recognises its advantage of hindsight in matters of such nature Lagunas Nitrate Co. v. Lagunas syndicate (1899).

Section 232 of the Companies Act 2014 provides for sanctions that can be imposed on Directors in breach of Section 228. The sanctions that can be imposed are the liability to account for profits made in breach of their duties (Industrial Development Consultants Ltd v. Cooley (1972) (Regal Hastings Ltd v Gulliver) (1967)) and to indemnify the company with regards to losses incurred by the company as a result of the directors actions in breach of their duty. Part 14 Chapter 3 Section 818 to 836 provides for the restrictions on directors of insolvent companies. Section 819 states that ‘for a period of 5 years a director of an insolvent company cannot be appointed a director or secretary of a company unless’ the company meets the conditions of subsections (3) through (5) of section 819. A restriction order would be adequate in most cases as directors who have breached their statutory duties would in most cases find it difficult to secure a position as a director in any company during their period of restriction and probably subsequently afterwards. Subsection (2) of section 819 allows for persons who acted honestly and responsibly, and cooperated with the liquidator, and there is no just reason to apply a restriction to. In the case of Fennell v. Carolan & Cosgrave (2005) Judge Clarke J. found a just reason to impose a restriction even though the directors acted honestly and responsibly during their term as directors. It was their subsequent actions and conduct after the winding up in respect to the liquidator that forced the learned judge to impose a restriction order on them. This case demonstrates that all aspects of the director’s conduct during and after insolvency will be scrutinised by the courts and allows for restriction orders to be imposed. The demonstration of honest and responsible after the fact was highlighted in the case of Ferngara Associates Ltd; Robinson v Forrest. The director to which the restriction order applied demonstrated his regret by contributing personally £200,000 pounds to relieve the creditors affected by his breaches. A restriction order was not placed on the director as he had met all the criteria of subsection (2) If none of the characteristics of subsection (2) are met then anyone who has a restriction order placed on them has been reckless and in the words of Shanley J’ ‘the purpose of this subsection is to protect the public from persons who by their conduct are unfit to hold the office of director and represent a danger to potential investors and traders’. If they are truly unfit and have breached their duties to such an extent then Part 14 Chapter 4 section 837 to 848 focuses on disqualification of directors. I think disqualification is appropriate where applicable. Disqualification where applied would be so detrimental to a directors livelihood that the punishment certainly would fit the crime. The only concern I would have with the terms of Section 839(2) where a person being disqualified may have a shorter term imposed on them by the courts should they see fit. I think that disqualification orders should be a mandatory minimum 5 years. To contradict myself I do however agree that where appropriate partial disqualification needs to be applied to protect the interests of employees as was the case in Re Majestic Recording Studios Ltd.