Please enable JavaScript.

Coggle requires JavaScript to display documents.

Directors Duties - Coggle Diagram

- - - - Someone who undertakes to act for/on behalf of another in circumstances of trust and confidence
  - - - Statute
        
        s.227(1): a director “shall owe the duties set out in s.228 to the company (and the company alone)”.
      - Foss v Harbottle (1843)
        
        Rule: the proper plaintiff in an action for wrongs done to a company is the company itself (not individual shareholders).
        
        Practical effect: misbehaving board often won’t sue itself; action usually comes via liquidator/receiver or derivative action.
      - Percival v Wright (1902) 2 Ch 421 – classic “company, not shareholders” case
        
        Facts
        
        Directors negotiated with some shareholders (P) to buy their shares.
        
        At the time, directors were in confidential negotiations to sell the company’s undertaking at a much higher effective share price.
        
        Directors did not disclose this impending sale to P, who later sued, saying the directors owed them a fiduciary duty to disclose.
        
        Held
        
        Directors owed duties to the company, not to individual shareholders in this context.
        
        No special relationship of trust/confidence had been created with the selling shareholders.
        
        Principle
        
        Default position: no fiduciary duty is owed to individual shareholders merely because they are shareholders – duties flow to the corporate entity.
      - Dawson International plc v Coats Paton plc [1989] BCLC 233 (takeover context)
        
        Facts
        
        Public company in a takeover battle. Some shareholders wanted to sell; directors took steps that frustrated those shareholders’ exit.
        
        Lord Cullen: “Directors have but one master, the company.”
        
        Principle
        
        Interests of selling shareholders may diverge from interests of the company as a whole; where they conflict, directors must prioritise the company’s interests.
- - - - Family company; directors organised a buy-out of minority shareholders.
      - Many minority shareholders were elderly/unsophisticated; they relied heavily on the directors’ advice and information.
      - Directors failed to disclose material information about the value of the company.
    - - Because of close family company context, personal relationships, and reliance, the directors owed fiduciary duties directly to the shareholders, including a duty of full and fair disclosure in the purchase of their shares.
  - - - Confirmed Percival as the general rule
      - BUT: acknowledged that “in particular circumstances, a company director may indeed be in a position where he owes a fiduciary duty to individual shareholders,” endorsing Coleman v Myers.
- - - - Group of insolvent companies with tax debts.
      - Directors used assets of some companies to pay Revenue debts owed by other companies in the group.
    - - Once company is insolvent/virtually certain to be wound up, its assets are effectively held for creditors, and directors must preserve them for pari passu distribution.
      - Using assets to discharge liabilities of other entities breached this duty; payments were misapplications of assets.
  - - - "the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them"
  - - - "where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation to displace the power of the shareholders and the directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets."
- - - - Board issued new shares.
      - Effect: preserved the controlling interest of a particular family. No genuine commercial justification beyond maintaining control.
    - - Share issue was set aside as an abuse of fiduciary powers; it was not bona fide for the benefit of the company as a whole.
- - - - Directors of a company formed to exploit rubber plantations.
      - They were spectacularly inexperienced: one was “absolutely ignorant of business” and accepted office because he was told it would give him “pleasant employment without responsibility”; another was 75 and very deaf.
      - Company made disastrous investments.
  - - - Directors must behave responsibly; they must inform themselves about the company’s affairs and their own duties.
      - Distinguish between executive and non-executive directors:
        
        Non-execs may reasonably rely more on executives, but still need to keep abreast of affairs.