5. Director’s Duties
Director’s Duties are part of the idea of risk management; because they take risks all the time, they require a certain element of regulation. The law must provide a way of mitigating against the risk, so creditors and shareholders can have potential recourse. This is all done indirectly; the company will recover in the event of a breach of duty arising. If the company recovers and suffers no harm, then that protects shareholders and makes sure their investments are secure. It also protects the creditors, who are more likely to get paid. The Directors owe their duties to the legal entity- the company. This is intended as a protective requirement for both shareholders and creditors. When the director pays back or compensates the company, the creditors have a pool for recovery and the shareholders do not count the loss directly. The person who takes the case for a director’s breach is the company, not a shareholder or creditor, subject to some exceptions. See Dawson International v Zouts Patton, where a company was subject to a takeover bid and the Shs wanted to dispose of shares. The directors, however, felt that this was not in the best interests of the company. It was found that the Directors are allowed to act in a way if that way is in the best interests of the company, even if it is against the interests of the shareholders. See also Re Frederick Inns, where a company became insolvent. When this happens, the directors duties are transferred to the creditors. They have a duty to the creditors not to dissipate the company’s assets. This has been criticised by Fehily as a very vague judgment. Seems more a creation of a new duty rather than a transfer. Courtney has criticised the 1990 Act at s52, where Directors owe a duty to the company to take into account the interests of employees and shareholders. Obligation not to make a secret profit
Directors are not allowed to appropriate or direct business ooportunities to themselves where they were potentially opportunities to the company. If a Director carries out his duties as a director, in order to prevent conflict of interests, the director cannot make an undisclosed profit. The reason for this is that the director might take decisions more in his own personal interest than in the interest of the company. The law categorises directors as fiduciaries, people in a position of trust for whom duties arise and to whom rules and regulations apply. Fiduciaries are not allowed to make undisclosed profits; this goes back to the law of trusts (two key cases on page 4). Bray v Ford- Lord Herschell’s quote on handout. The rule regarding fiduciaries is very inflexible, and he expressly says this. A fiduciary can be released from the obligation, and there can be times when a fiduciary can make a personal profit. Other than these, he is not allowed to put himself in a position where his duty and his personal interests conflict. Keech v Sandford- not a company case, but a trust case. A trustee who held a leasehold interest in a market on behalf of an infant. The lease expired and when that happened, the owner of the market refused to renew the lease in favour of the infant, but he offered the lease to the trustee in a personal capacity. The trustee took that up but it was held by the court that in doing this, the trustee created a conflict of interest. He acted in his own benefit instead of in the benefit of the trustee, and he was in breach of his fiduciary duties to the infant. The consequence of this was that he had to take all profits he had earned, and give them to the infant. These cases show how this issue applies in the law of trusts. In the intervening hundreds of years, what’s happened is that those principles have been applied to the new concept of company law and company directors. Is it appropriate to take something from a different context and use it in the company director’s portfolio of law? The fact that it has been applied has been very...
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