5/13/2011 Company Law I Lecture 8: Directors(Part 1) Directors Functions of the board What does a director do? Requirement for directors: Public companies:minimum of 2(s 153) Private companies:minimum of 1(s 153A) N
5/13/2011 1 1 Company Law I Lecture 8: Directors (Part 1) 2 Directors • Functions of the board What does a director do? • Requirement for directors: Public companies: minimum of 2 (s 153) Private companies: minimum of 1 (s 153A)
5/13/2011 Appointment First directors:ss 14A,153(2),153A(2);Table A reg 77 Subsequent directors-appointment by: Members:regs 94,99 Directors:reg 97 Notification to registrar:ss 14A,158(4) Registrar's index of directors:s 158C Company's register of directors:s 158(1) Qualifications ·Age:s157C Bodies corporate:s 154A Undischarged bankrupt:s 156 Disqualified persons:Pt IVA Articles:eg Table A regs 79,90 2
5/13/2011 2 3 Appointment • First directors: ss 14A, 153(2), 153A(2); Table A reg 77 • Subsequent directors - appointment by: - Members: regs 94, 99 - Directors: reg 97 • Notification to registrar: ss 14A, 158(4) - Registrar’s index of directors: s 158C • Company’s register of directors: s 158(1) 4 Qualifications • Age: s 157C • Bodies corporate: s 154A • Undischarged bankrupt: s 156 • Disqualified persons: Pt IVA • Articles: eg Table A regs 79, 90
5/13/2011 Disqualification orders:Pt IVA Operative provision:s 168D Grounds for disqualification: 168E:certain indictable offences -168F:persistent breaches of Ordinance 168G:fraud or breach of duties 168H:unfit to manage companies 168L:fraudulent trading Who is a director? Implications of being deemed as a director Corporate Affairs Commission v Drysdale(1978)141 CLR 236 Validly appointed directors Executive and non-executive directors ·Section2 definition including de facto directors Alternate directors ·Shadow directors Reserve directors:s 153A 3
5/13/2011 3 5 Disqualification orders: Pt IVA • Operative provision: s 168D • Grounds for disqualification: - 168E: certain indictable offences - 168F: persistent breaches of Ordinance - 168G: fraud or breach of duties - 168H: unfit to manage companies - 168L: fraudulent trading 6 Who is a director? • Implications of being deemed as a director Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 • Validly appointed directors Executive and non-executive directors • Section 2 definition including de facto directors Alternate directors • Shadow directors • Reserve directors: s 153A
5/13/2011 Directors'duties:scenario X Ltd is a financial investment co. Its executive officers are highly paid. But the co has been incurring losses as a result of poor business and investment decisions,combined with a general down-turn in the market. The losses are hidden from the co accounts though. The non-executive directors are therefore not aware of the problems. Eventually the auditors suspect corporate wrongdoing,and a liquidator is appointed.The extent of the co losses are now revealed. ·Who suffers? Shareholders,creditors,employees,clients. Should the executive directors be held responsible?The non- executive directors? Directors'duties-an introduction ·Rules vs.Principles Key duties owed by directors At the most general level,UK company law imposes on directors the duties to be loyal to the co and to be competent when acting as a director 2 sub-duties of the core duty of loyalty:duty to act in good faith in the best interest of the company(#the duty to promote the success of the co)and duty to avoid conflicts of interests Duty of competence to do a good job(articulated through the duty of care,skill and diligence) 8 4
5/13/2011 4 7 Directors’ duties: scenario • X Ltd is a financial investment co. • Its executive officers are highly paid. • But the co has been incurring losses as a result of poor business and investment decisions, combined with a general down-turn in the market. • The losses are hidden from the co accounts though. • The non-executive directors are therefore not aware of the problems. • Eventually the auditors suspect corporate wrongdoing, and a liquidator is appointed. The extent of the co losses are now revealed. • Who suffers? • Shareholders, creditors, employees, clients. • Should the executive directors be held responsible? The nonexecutive directors? 8 Directors’ duties – an introduction • Rules vs. Principles • Key duties owed by directors At the most general level, UK company law imposes on directors the duties to be loyal to the co and to be competent when acting as a director 2 sub-duties of the core duty of loyalty: duty to act in good faith in the best interest of the company (≠ the duty to promote the success of the co) and duty to avoid conflicts of interests Duty of competence = to do a good job (articulated through the duty of care, skill and diligence)
5/13/2011 Directors'duties:policy issues Why might it be important to impose duties on directors? What might be a problem if the duties imposed are too strict? Directors'duties ·Equity Including fiduciary duties ·Common law Contract ·Negligence Directors as fiduciaries:owe duties to company Directors are not trustees:lower standards imposed on directors compared with trustees 10 夕
5/13/2011 5 9 Directors’ duties: policy issues • Why might it be important to impose duties on directors? • What might be a problem if the duties imposed are too strict? 10 Directors’ duties • Equity lncluding fiduciary duties • Common law Contract Negligence • Directors as fiduciaries: owe duties to company Directors are not trustees: lower standards imposed on directors compared with trustees
5/13/2011 Directors'duties ·Some labels: Care,skill and diligence Act in good faith in best interests of company Exercise powers for proper purposes Avoid conflicts of interest 11 Directors'duties ·Sources of duties: Equitable duty ■Contract ■Tort of negligence 6
5/13/2011 6 11 Directors’ duties • Some labels: Care, skill and diligence Act in good faith in best interests of company Exercise powers for proper purposes Avoid conflicts of interest 12 Directors’ duties • Sources of duties: Equitable duty Contract Tort of negligence
5/13/2011 Directors'duties ·Who owes the duties? ■Directors Non-executive directors Managers(if they are de facto directors) ■Shadow director? To whom are the duties owed? To the company the directors are serving But not to the s/ers,individually or collectively,or any other constituency or group that has a r/ship with co Duties between directors and shareholders may arise they are the product of special circumstances,eg.,Peskin v Anderson [2000]All ER (D)2278 13 Re Cardiff Savings Bank [1892]Ch 100 The President was appointed at the age of 6 months old,turned up to only one meeting as an adult Was not found liable for breach of duty following the failure of the bank Jessel MR:"neglect or omission to attend meetings is not the same thing as neglect or omission of a duty which ought to be performed at those meetings" 14
5/13/2011 7 13 Directors’ duties • Who owes the duties? Directors Non-executive directors Managers (if they are de facto directors) Shadow director? • To whom are the duties owed? To the company the directors are serving But not to the s/ers, individually or collectively, or any other constituency or group that has a r/ship with co Duties between directors and shareholders may arise they are the product of special circumstances, eg., Peskin v Anderson [2000] All ER (D) 2278 14 Re Cardiff Savings Bank [1892] Ch 100 • The President was appointed at the age of 6 months old, turned up to only one meeting as an adult • Was not found liable for breach of duty following the failure of the bank • Jessel MR: “neglect or omission to attend meetings is not the same thing as neglect or omission of a duty which ought to be performed at those meetings
5/13/2011 Re Brazilian Rubber Plantations and Estates Ltd [1911]1 Ch 425 Neville J:"A director's duty has been laid down as requiring him to act with such care as is reasonably as be expected from him,having regard to his knowledge and experience.He is not bound to bring any special qualifications to his office." Neville J:"Such reasonable care must be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf." Neville's judgment is really confusing. 15 Re City Equitable Fire Insurance Co Ltd [1925]Ch 407(Chancery Division) One article exempted the directors from liability apart from losses caused by "their own wilful neglect or default" ·"directors are trustees'"？ How to ascertain the duties of a director? Duties will depend on circumstances of director's position and nature of company Directors must exercise reasonable care that an ordinary man would exercise on his own behalf Neville J's "reasonable care"test in Re Brazilian Rubber Plantations and Estates Ltd [1911]1 Ch 435 16 8
5/13/2011 8 15 Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425 • Neville J: “A director’s duty has been laid down as requiring him to act with such care as is reasonably as be expected from him, having regard to his knowledge and experience. He is not bound to bring any special qualifications to his office.” • Neville J: “Such reasonable care must be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf.” • Neville’s judgment is really confusing. 16 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (Chancery Division) • One article exempted the directors from liability apart from losses caused by “their own wilful neglect or default” • “directors are trustees”? • How to ascertain the duties of a director? Duties will depend on circumstances of director’s position and nature of company • Directors must exercise reasonable care that an ordinary man would exercise on his own behalf Neville J’s “reasonable care” test in Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 435
5/13/2011 Re City Equitable Fire Insurance Co Ltd [1925]Ch407 Neville just followed Overend Gurney Co.v.Gibb (2),that is, whether or not the directors exceeded the powers entrusted to them,or whether if they did not so exceed their powers they were cognisant of circumstances of such a character,so plain,so manifest,and so simple of appreciation,that no men with any. ordinary degree of prudence,acting on their own behalf,would have entered into such a transaction as they entered into." Romer J:stresses the "ordinary man acting on his own behalf,standard of care.In addition,general propositions warranted by the reported cases: Director need not exhibit a greater degree of skill than may be expected from a person of his knowledge and experience [A] A director of a life insurance co does not guarantee he has the skill of an actuary or of a physician. Director not boynd to give continuous attention to the affairs of the company B] For duties that can be left to another official,a director is usually justified in trusting that official to act honestly(unless something suspicious is going on)[C] 17 Standard of care Low subjective standard? Re City Equitable Re Cardiff Savings Bank [1892]2 Ch 100 Re Brazilian Rubber Plantations and Estates Ltd [1911]Ch 425 Was there a floor or baseline of the subjective standard (duty of care)? A Hicks,"Directors'Liabilities for Management Errors" (1994)110 Law Quarterly Review 390 A Walters,"Directors'Duties:The Impact of CDDA 1986" (2000)21 Company Lawyer 110 Would a subjective duty alone work satisfactorily? C Riley,"The Case for an Onerous but Subjective Duty of Care"(1999)63 Modern Law Review 697 9
5/13/2011 9 17 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Neville just followed Overend & Gurney Co. v. Gibb (2), that is, “whether or not the directors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into.” • Romer J: stresses the “ordinary man acting on his own behalf” standard of care. In addition, general propositions warranted by the reported cases: Director need not exhibit a greater degree of skill than may be expected from a person of his knowledge and experience [A] A director of a life insurance co does not guarantee he has the skill of an actuary or of a physician. Director not bound to give continuous attention to the affairs of the company [B] For duties that can be left to another official, a director is usually justified in trusting that official to act honestly (unless something suspicious is going on) [C] 18 Standard of care • Low subjective standard? Re City Equitable Re Cardiff Savings Bank [1892] 2 Ch 100 Re Brazilian Rubber Plantations and Estates Ltd [1911] Ch 425 • Was there a floor or baseline of the subjective standard (duty of care)? A Hicks, “‘Directors’ Liabilities for Management Errors” (1994) 110 Law Quarterly Review 390 A Walters, “Directors’ Duties: The Impact of CDDA 1986” (2000) 21 Company Lawyer 110 • Would a subjective duty alone work satisfactorily? C Riley, “The Case for an Onerous but Subjective Duty of Care” (1999) 63 Modern Law Review 697
5/13/2011 Standard of care 3 ways of interpreting the interaction of the ordinary man acting on his own behalf and Romer J's propositions about a director's degree of skill and his actual knowledge and experience? Minimum objective standard? See objective aspects to test in Re City Equitable Development of objective standards in tort law(negligence) Policy reasons:changed commercial conditions and roles of directors Higher standard today? 19 Modern English cases:examples Dorchester Finance v Stebbing [1989]BCLC 498(1977 case reported in 1989) Dorchester Finance Co Ltd had 3 directors,S,P and H S worked full time for the co and involved in the money- lending business,P and H are non-executive directors P and H(both accountants)rarely visited,did not manage, and left pre-signed cheques(which need 2 signatures) No board meetings held S used checques to lend money to other cos and individuals, and money was not recovered Held:all 3 were negligent and responsible to make good co's losses 方 10
5/13/2011 10 19 Standard of care • 3 ways of interpreting the interaction of the ordinary man acting on his own behalf and Romer J’s propositions about a director’s degree of skill and his actual knowledge and experience? • Minimum objective standard? See objective aspects to test in Re City Equitable Development of objective standards in tort law (negligence) Policy reasons: changed commercial conditions and roles of directors • Higher standard today? 20 Modern English cases: examples • Dorchester Finance v Stebbing [1989] BCLC 498 (1977 case reported in 1989) Dorchester Finance Co Ltd had 3 directors, S, P and H S worked full time for the co and involved in the moneylending business, P and H are non-executive directors P and H (both accountants) rarely visited, did not manage, and left pre-signed cheques (which need 2 signatures) No board meetings held S used checques to lend money to other cos and individuals, and money was not recovered Held: all 3 were negligent and responsible to make good co’s losses