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s.173 Duty to exercise independent judgement - Coggle Diagram
s.173 Duty to exercise independent judgement
Directors are required to exercise independent judgement (s.173(1) CA 2006).
This means that the director must act independently of control or influence by another person. A director cannot argue that they were simply following instructions from another person.
The obligation to exercise independent judgement does not restrict a director’s ability to take advice or to relay to take advice or to rely on advice (to the extent permissible under the duty of care and skill, as discussed) nor does it require the director himself to be independent (HC Official Report, SC D (Company Law Reform Bill), 11 July 2006, col 598).
A requirement to exercise independent judgement does not mean that directors may not honestly and reasonably defer to one of their number with greater experience or expertise (in the absence of grounds of suspicion and provided their conduct does not amount to a total abrogation of responsibility) and trust his views as to the interests of the company (Madoff Securities International Ltd v Raven [2013] EWHC 3147 at [220], [235], [237], per Popplewell J).
In Central Bank of Ecuador v Conticorp [2016] 1 BCLC 26, PC. the Privy Council considered the position of a nominee director of an investment company which had raised significant funds from investors and then paid them away in irrecoverable loans to companies associated with the controlling shareholder of the investment company. The director’s defence was that he was paid only a very small amount per annum for acting as director and that he was merely acting on instructions from the shareholders who had nominated him. The Privy Council found that, in breach of his fiduciary duty, the director had blindly and ignorantly following the shareholders’ instructions without further thought when his duty was to understand the company’s interests and apply his own mind to the company’s interests ([2016] 1 BCLC 26 at [45]).
The duty to exercise independent judgement is not infringed by a director acting in a way authorised by the company’s constitution (For example delegation under Art 5 MAPC): CA 2006, s 173(2)(b) (and ‘constitution’ is as defined in s 257).
To the extent that the articles allow for delegation, and subject to the need to exercise a residual duty of supervision, as already discussed, directors can be relieved of the obligation to exercise independent judgement with respect to the delegated task.
However, this duty requires the directors to exercise residual supervision where they delegate to senior managers below board level
Will often overlap with s174 duty of care, residual duty to supervise.
When supervising the marketing director for instance you need to be forming an independent judgement as regards to whether you can trust the person to do the job properly. Overlap if responsibility has been delegated.
The duty to exercise independent judgement is not infringed where directors enter into a contract which restricts their future discretion (s.173(2)(a) CA 2006).
For example, the company could enter into an agreement with another company to develop some flats. The contract may stipulate that all issues regarding the structural plans should be left to company B.
Section 173(2)(a) reflects long-standing common law authorities on the directors’ obligation not to fetter their discretion.
Fulham Football Club Ltd v Cabra Estates plc [1994] 1 BCLC 363; noted Griffiths [1993] JBL 576.
In this case, the directors of a company had entered into undertakings to support, and to refrain from opposing, planning applications by another party for the development of certain land in return for the receipt by the company of large sums of money. The directors subsequently wanted to give evidence to a planning inquiry opposing the development and sought a declaration that they were not bound by the undertakings and were entitled to give such evidence to the inquiry as they considered to be in the interests of the company.
The Court of Appeal held that they were bound by the undertakings. As the undertakings given by the directors were part of contractual arrangements which conferred substantial benefits on the company, the directors had not improperly fettered the future exercise of their discretion by giving those undertakings. Nor was there any scope for the implication of a term into those undertakings that the directors would not be required to do anything that would be inconsistent with their fiduciary duties to the company.
The distinction which must be drawn, the court said, is between directors fettering their discretion (which is prohibited) and directors exercising their discretion in a way which restricts their future conduct (which is permissible). The directors had exercised their independent judgement at the time when they gave the undertakings not to oppose the planning application and therefore it was not a case of fettering their discretion, but rather a case that they had already exercised it.
Certainly there will be many transactions where the proper time for the exercise of the directors’ judgement is the time of the negotiation of the contract rather than the time when the contract is to be performed (Thorby v Goldberg (1964) 112 CLR 597 at 605–6).
Remedies
s178(1): ‘The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.’
For a breach of one of the fiduciary duties we have access to the full range of equitable remedies.
Fiduciary duties: constructive trust, account of profits (court order that the directors must account to the company for the profits generated by the breach), equitable compensation, injunction (to prevent further breaches).