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Concentrate Questions and Answers Company Law: Law Q&A Revision and Study
Guide (3rd edn)
Imogen Moore
● ● ●
5. Directors’ Duties
Imogen Moore, Associate Professor in Law University of Bristol
https://doi.org/10.1093/he/9780198856726.003.0005
Published in print: 06 August 2020
Published online: September 2020
Abstract
The Concentrate Questions and Answers series offers the best preparation for tackling exam questions and coursework. Each
book includes typical questions, suggested answers with commentary, illustrative diagrams, guidance on how to develop your
answer, suggestions for further reading, and advice on exams and coursework. This chapter examines the very important topic
of directors’ duties. The chapter considers the main duties, as codified in the Companies Act 2006, including: the duty to act
within powers (the proper purposes rule); the duty to promote the success of the company; the duty to exercise independent
judgment; the duty to exercise reasonable care, skill, and diligence; the duty to avoid conflicts of interest; and the duty to
disclose an interest in a proposed transaction with the company. Related areas such as substantial property transactions and
liability for breach are considered. This chapter considers who is a ‘director’, examining the concepts of de facto and shadow
directors and how far they owe duties to the company.
Keywords: de facto director, shadow director, proper purposes, conflict of interest, shareholder primacy, enlightened
shareholder value, remedies, breach, liability, substantial property transaction
Are You Ready?
In order to attempt the questions in this chapter you will need to have covered the following topics:
Directors’ duties: purpose, origins, and codification
De facto and shadow directors
Duty to act within constitution and powers
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● ● ● ● ● ● ● ● ●
Duty to promote the success of the company; shareholder primacy and stakeholding
Duty to exercise independent judgment
Duty to exercise reasonable care, skill, and diligence
Duty to avoid conflicts of interest
Duty not to accept benefits from third parties
Duty to declare interest in proposed transaction or arrangement; substantial property
transactions, loans, and quasi-loans
Consequences of breach of duty
Ratification and relief from liability
Connections (in particular) with: management and governance, company contracts,
shareholder remedies, capital, corporate insolvency. Most courses will expect you to be able to link
duties with enforcement of duties by shareholders: see further Chapters 7 and 12
Key Debates
Debate: to whom should directors owe their duties?
This debate is particularly expansive, stretching from questions such as whether individual
shareholders should be owed duties by directors, to creditor interests and directors’ obligations on
insolvency, to notions of stakeholding and shareholder primacy. The proposals of the Company
Law ↵ Review and the introduction of CA 2006, s. 172, were catalysts for a great deal of
discussion on these points. The literature is extensive, with much of interest, but the work of
Andrew Keay, both on creditor interests and the ‘corporate objective’, is both readable and
stimulating.
Debate: how strict should the law be in regulating conflicts of interest?
Differing attitudes to liability for conflict of interest can be seen in both cases and academic
commentary. While some argue that a strict prophylactic rule (as exemplified by older authorities)
is appropriate, others argue strongly for a more nuanced and flexible approach. There is still
discussion as to what level of flexibility CA 2006, s. 175 incorporates, and whether the ability to
authorize breaches goes too far.
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■ ■
Question 1
Taking into account Companies Act 2006, s. 172, is it true to say that a director owes his duties to
the company alone?
Caution!
For this question you will need to have an appreciation of the difference between shareholder
primacy and stakeholding approaches, and the concept of ‘enlightened shareholder value’ from CA
2006
The focus of this question is to whom duties are owed rather than CA 2006, s. 172 itself, so don’t
provide a lengthy discussion of all aspects of the section (such as the ‘good faith’ point) that would
be relevant in a more general analysis of s. 172
Diagram Answer Plan
5. Directors’ Duties
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Suggested Answer
Companies Act 2006 (CA 2006), s. 170(1) states that a director owes his general duties (ss. 171–7)
to the company. Even nominee directors owe their duties to the company1 rather than the person
appointing them (Hawkes v Cuddy [2009] 2 BCLC 427).
1 Nominee directors are an interesting group when it comes to directors’ duties, but there is
too much else to fit into this particular essay to explore this further
CA 2006, s. 170(1) confirms the approach taken at common law prior to codification of directors’
duties in the CA 2006 (following the Company Law Review) but does not elaborate on the meaning
of ‘the company’ in this context. The company is both a separate entity (Salomon v A. Salomon & Co
Ltd [1897] AC 22) and an association of its members, while relying and impacting on myriad other
stakeholders, from employees to the environment. This essay will explore whether a director owes
duties only to the company and what this means, considering the impact of CA 2006, s. 172 in this
area.2
2 Having established the very basic points of law that underpin the issues, it is sensible to
link explicitly to the question
At common law directors had to act bona fide in what they considered to be the interests of the
company (Re Smith & Fawcett Ltd [1942] Ch 304); the interests of the company were the interests of
the shareholders as a general body (Gaiman v National Association for Mental Health [1971] Ch 317).
In a slight change,3 s. 172 requires a director to ‘act in the way he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a whole’. This
is the fundamental duty to which directors are subject: Item Software (UK) Ltd v Fassihi [2004] EWCA
Civ 1244. Section 172(1) recognizes the dual nature of the company—first as a separate entity that
can succeed or fail, and secondly as an association of members who will benefit from the
company’s success. In so far as duties are owed to shareholders though, this is through the medium
of the company, and not in their individual capacity.
3 Show that you are contrasting the pre- and post-2006 law
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Percival v Wright [1902] 2 Ch 421 established that directors do not owe duties to shareholders
directly, whether individually or collectively. In rare cases directors may owe duties directly to
shareholders: where they act as the shareholder’s agent (Allen v Hyatt (1914) 30 TLR 444) or where
the nature of the company and director–shareholder relationship is such that directors have taken
on direct responsibilities to shareholders (Coleman v Myers [1977] 2 NZLR 225; Re Chez Nico
(Restaurants) Ltd [1992] BCLC 192). In Peskin v Anderson [2001] 1 BCLC 372, former members claimed
directors had owed them a duty to disclose details of a pending sale. The court confirmed a
director’s duty is to the company alone, other than in special relationships where directors are in
‘direct and close contact’ with shareholders. This position is not changed by CA 2006, s. 172, and
Sharp v Blank [2017] BCC 187 and Vald Nielsen Holding A/S v Baldorino [2019] EWHC 1926 (Comm)
have recently reiterated that duties arise only where there was some personal relationship or
particular dealing between the shareholders and directors.4
4 Show that you’ve thought about whether the position remains the same and are therefore
reflecting on the question
↵ Duties are thus owed to the company alone save in rare cases. But this does not mean the
interests of others are irrelevant. Section 172(1) requires directors, in fulfilling the duty to promote
success of the company for the benefit of its members, to have regard (‘amongst other matters’) to
a list of factors5 (paragraphs (a)–(f)) which includes the interests of the company’s employees; the
need to foster business relationships with suppliers, customers, and others; and the impact on the
community and the environment. However, this is a long way from directors owing a duty to any
stakeholder or other interest listed; the duty is still to the company alone. It is akin to the former
Companies Act 1985, s. 309,6 which required directors to have regard to employees’ interests,
while leaving the duty owed to the company itself.
5 It can be difficult to know how far you should set out statutory material in an answer. Here
you do need to establish the law, but it is much better to summarize the key elements than
simply copy out from a statute book
6 Not an essential point but it indicates some awareness of the pre-2006 position
The approach of s. 172 was labelled ‘enlightened shareholder value’ (ESV) by the Company Law
Review. It is fundamentally a ‘shareholder primacy’ approach in that companies should be run for
the benefit of their members, rather than a ‘stakeholder’ or ‘pluralist’ approach (for the benefit all
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those with a stake in the business). ESV recognizes taking other interests into account can enhance
the success of the company which will benefit shareholders, but under ESV these factors are
relevant so far as they achieve that aim; they are not pursued for their own merits. It is for the
directors’ judgment how far those factors are relevant, if at all, in promoting the company’s
success for the members’ benefit. Lynch thus argues s. 172 makes no meaningful difference
(‘Section 172: a ground-breaking reform of directors’ duties, or the Emperor’s New
Clothes?’ (2012) 33 Co Law 196) while a study of FTSE 100 companies concluded ESV has had little
impact on the sample companies’ operation or reporting (Keay and Iqbal, ‘The impact of
enlightened shareholder value’ [2019] JBL 304). The recently added requirement for directors of
large companies to describe in the strategic report (s. 414A) how they have had regard to the factors
(s. 414CZA) seems unlikely to make much difference.7
7 If you had time this would be a good place to explore the academic discussion in more
depth
Because the duty is owed to the company, breach of s. 172 is enforceable only through the company;
groups within the s. 172(1) list have no right of action. Even if an action was brought in respect of a
failure to take account of a s. 172(1) factor, it might be hard to establish any resultant loss to the
company. Breach of s. 172 is in any case difficult to establish because of its subjective nature,
requiring only that directors act in the way they believe is appropriate. It is hardly surprising that
the major impact of s. 172 is thought to be educative only.
The position becomes a bit more complex with regard to creditors. Directors do not owe duties to
creditors, whether individually or collectively (Multinational Gas and Petrochemical Co v
Multinational Gas and Petrochemical Services Ltd [1983] Ch 258; Kuwait Asia Bank EC v National
Mutual Life Nominees Ltd [1991] 1 AC 187). However, in West Mercia Safetywear v Dodd [1988] BCLC
250 the ↵ court adopted the statement in Kinsela v Russell Kinsela Pty Ltd [1986] 4 NSWR 722
(Kinsela) that where a company is insolvent directors must have regard to creditors’ interests. This
does not mean that a duty is owed to creditors directly (BTI 2014 LLC v Sequana SA [2019] EWCA Civ
112 (Sequana)); instead creditors’ interests displace those of the members: ‘It is in a practical sense
their assets and not the shareholders’ assets that, through the medium of the company, are under
the management of the directors’ (Street CJ in Kinsela). This is triggered by insolvency, ‘doubtful
solvency or . . . the verge of insolvency’ (Colin Gwyer and Associates Ltd v London Wharf (Limehouse)
Ltd [2003] 2 BCLC 153), or where directors know or should know that the company is or is likely to
become insolvent (Sequana). Further, Insolvency Act 1986, s. 214 imposes liability on a director8
who permits the company to continue to trade beyond the point when s/he knew or ought to have
known there was no reasonable prospect of avoiding insolvent liquidation. This is enforced through
the liquidator and benefits unsecured creditors generally, rather than specific creditors.
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8 Be careful not to spend time going into IA 1986, s. 214 in depth—its relevance here is in its
overlap with duties to creditors
The developing state of the law relating to creditors is reflected in s. 172(3). This provides that the
s. 172 duty has effect subject to ‘any enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of the company’, allowing further
development of these principles in the future.
To conclude, it remains the case that a director owes his duties to the company alone, other than in
very limited circumstances where a direct duty to an individual shareholder arises. However, in
exercising the overriding duty to act in good faith to promote the success of the company for the
benefit of the members, the director must take into account all relevant matters, which will include
the interests of a range of stakeholders and other considerations. Section 172 thus provides
important guidance to directors but does not give rise to a duty owed to anyone other than the
company. Furthermore, since duties are enforceable by the company, any action taken in respect of
any breach must be through the company, either through the directors or, more likely, the
members in a derivative action under CA 2006, ss. 260–4. This means that even if s. 172 is
breached, action is unlikely, and even if a claim were brought successfully, any remedy would
benefit the company rather than the aggrieved stakeholder.
The changes wrought by s. 172 thus do not change the law in terms of to whom the duties are owed
but reflect a more general cultural change in recognizing wider interests and responsibilities.9 This
can also be seen in the strategic report required under CA 2006, s. 414A (other than for small
companies), and a growing emphasis on corporate social responsibility. But the increasing
awareness of the importance of corporate responsibility for both social and economic gain has not
yet altered the fundamental legal position that duties are owed to the company alone.10
9 Quite how far s. 172 does this is a matter for debate that you could look at in more depth
10 This finishes off the essay by tying the conclusion back to the question itself

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Looking For Extra Marks?
Develop the discussions on stakeholding and corporate responsibility, engaging with the
academic debates, but remember to link this back into s. 172 as the question demands.
Consideration of other approaches such as Keay’s ‘entity maximisation and sustainability model’
could also provide scope for critiquing the current legal approach
Show an awareness of the reform process (the Company Law Review) that resulted in s. 172
arguably being more than a straightforward ‘codification’ of existing law, and of ongoing reform
proposals
Question 2
‘A director must use his or her powers only for proper purposes.’
Discuss.
Caution!
Make sure you are familiar with both the new and old terminology with respect to directors’
duties—here the reference to ‘proper purposes’ relates to what is now CA 2006, s. 171(b)
Don’t just describe the current law or its origins; you need to provide some explanation but
more importantly you need to assess how the law operates and any problems/benefits
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Diagram Answer Plan
Suggested Answer
The ‘proper purposes’ doctrine is an important part of the duties imposed by law on directors. The
articles of association invariably give directors power to manage the company (eg Article 3 of the
Model Articles for Private Companies (Companies (Model Articles) Regulations 2008, Sch 1)) and
leave little power in shareholders’ hands.1 To balance directors’ extensive power, the law imposes
duties on directors—now codified as the ‘general duties of directors’ in Companies Act 2006 (CA
2006), ss. 171–7.
1 This briefly recognizes the link between duties, governance, and division of powers
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CA 2006, s. 171(b) requires a director to ‘only exercise powers for the purposes for which they are
conferred’. This is based on the long-established fiduciary duty to act only for ‘proper purposes’2
or not for any ulterior purpose (eg to benefit themselves). Accordingly, when exercising a power, a
director must exercise it only for its proper purpose. If they fail to do so they will be in breach of
duty and the exercise of the power will be invalid, although the company in general meeting can
choose to affirm the exercise of power and/or ratify the director’s breach (CA 2006, s. 239). The
duty has been applied in areas as diverse as entering into agreements (Lee Panavision Ltd v Lee
Lighting Ltd [1992] BCLC 22) and dealing with company assets (Extrasure Travel Insurances Ltd v
Scattergood [2003] 1 BCLC 598), and the Supreme Court indicated in Eclairs Group Ltd v JKX Oil plc
[2015] UKSC 71 (Eclairs Group) that it continues to apply over the full range of directors’ powers.3
2 Show early on that you understand where the current law deals with the ‘proper purposes’
doctrine
3 This was important as the majority of the Court of Appeal in this case had indicated the
duty did not apply to the exercise of all powers in all circumstances
At common law the proper purpose duty was combined with the duty to act bona fide in the
interests of the company.4 For example, in Re Smith and Fawcett Ltd [1942] Ch 304 it was said
directors must act: ‘bona fide in what they consider—not what a court may consider—is in the
interests of the company, and not for any collateral purpose’ (Lord Greene MR). However,
codification in the CA 2006 has split them with the ‘bona fide’ duty, reformulated as the duty to
promote the success of the company for the benefit of its members, found in s. 172. It is clear that
this split does not allow a director to escape liability by saying that only one of the duties has been
breached, and there are still clear links between the two duties, as will be discussed later. The duty
in s. 171(b) also overlaps with s. 171(a) as a director who fails to ‘act in accordance with the
company’s constitution’ may also, depending on the purpose for which they were was exceeding
their authority, be in breach of s. 171(b). A director may also be at risk of breaching s. 171(b) when
considering other directors’ duties, such as s. 175 (conflict of interest) as ‘more than one of the
general duties may apply in any given case’ (s. 179).
4 This paragraph takes the opportunity offered by needing to explain how s. 171(b) differs
from the previous law to consider the extent to which s. 171(b) relates to or overlaps with
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↵ Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (Howard Smith) established that in
assessing the proper purposes duty the first stage is to ascertain the nature of the power and, ‘in
the light of modern conditions’ the limits within which it may be exercised. In Eclairs Group, Lord
Sumption indicated that ascertaining the purpose of the power depends on an inference from the
mischief of the provision, including the court’s understanding of the business context.5 The power
may be specific (as in Howard Smith) or general (the general power of management: CAS
(Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613) and the limits of the power will depend
upon the breadth of the power itself. On this point the interrelation of s. 171 and s. 172 may be
relevant, as if a director is to avoid breaching s. 172 (the duty to promote the success of the
company for the benefit of the members as a whole) then they must exercise powers for the
ultimate purpose of promoting the success of the company as well as any more specific, narrower
purpose.
5 You could consider whether the most recent formulation is identical to, or subtly different
from the earlier test
The limits to the exercise of a power are not necessarily narrow. In Howard Smith, it was held that
the power to allot shares could properly be exercised not just to raise capital for the company but
also to foster business connections, ensure the requisite number of shareholders, and to reach the
best commercial agreement for the company. However, it could not be exercised in order to alter
the majority shareholding, even though done without any intention of personal gain on the part of
the directors. In Extrasure Travel Insurances Ltd v Scattergood6 the court considered that in
transferring company assets to another company within the group, the directors were exercising
their power to deal with the assets of the company in the course of trading. The purpose for which
such a power was conferred was the broad notion of promoting the company’s commercial
interests, but this meant that exercising the power to enable the other company to meet its
liabilities was not a proper exercise of that power.
6 In an exam you need to be sparing with case facts to leave enough time to discuss the law
and address the question, but this paragraph shows sometimes case facts are essential to
support the point being made
A problem arises where a power is exercised for more than one purpose, one of which is ‘proper’
and one of which is not—when should this be regarded as exercising the power for the purpose for
which it was conferred? In Howard Smith, the House of Lords determined that once the power had
been identified and its limits ascertained, it was necessary to establish the ‘substantial purpose’ for
which it was exercised, and then address whether that substantial purpose was within the
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previously identified limits of the power. If so, then the power was exercised properly even if there
were other ‘improper’ purposes; if not, the directors were in breach of duty (even if they had acted
in good faith, and even if there was a proper subordinate purpose). In Eclairs Group, the Supreme
Court confirmed that the ‘substantial purpose’ test continues to apply under s. 171(b): the statutory
codification reflects the previous law (ss. 170(3)–(4)).7
7 This sentence fulfils two purposes—it shows your awareness of the case, and explicitly
compares the old and new law
↵ In assessing the ‘substantial purpose’, Howard Smith requires the court to engage in an
objective assessment of the situation, considering the directors’ subjective motives. By assessing
objectively how ‘critical or pressing’ a particular issue might have been, the court can evaluate the
assertions of directors as to the importance of this factor in their minds when exercising the power,
although the directors’ judgment on matters of management should be respected. Where directors
are primarily motivated by aims other than the purpose for which the power was conferred, they
will be in breach of duty and the exercise of power will be invalid. This can be seen in several cases,
eg Hogg v Cramphorn Ltd [1966] 3 All ER 420 where the directors’ allotment of shares was
invalidated when made primarily to retain control of the company for the directors and their
supporters (and see also Punt v Symons & Co Ltd [1903] 2 Ch 506 and Bamford v Bamford [1970] Ch
212). In Eclairs Group, Lord Sumption indicated that the critical point in determining whether the
purpose is ‘substantial’ is whether it was causative of the power being exercised, but this point was
not adopted by all the Justices.
The fact that directors have acted in good faith and in what they honestly believed to be the best
interests of the company will not prevent a breach of CA 2006, s. 171(b).8 This can be seen in Lee
Panavision Ltd v Lee Lighting Ltd, where directors were in breach of duty for committing the
company to a management agreement, even though they thought it in the company’s interests to
do so, and similarly in Eclairs Group, where the bona fides of the directors was not in doubt. While
good faith does not prevent a breach of duty, it may still be relevant to a director in seeking relief
from liability as, if a director acted ‘honestly, reasonably and ought fairly to be excused’, then they
may seek relief from the court under CA 2006, s. 1157.
8 An important point that should be made expressly
In conclusion, a director must indeed exercise their powers only for the purpose for which they
have been conferred, even if otherwise complying with their duties. The duty has received some
criticism, notably that it allows courts to replace directors’ business judgment with their own
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■ ■ ■
judgment (eg Sealy, ‘Directors’ duties revisited’ (2001) 22 Co Law 79). Furthermore, directors do
not have clear boundaries as it has been declared ‘impossible’ to ‘define in advance exact limits
beyond which directors must not pass’ (Howard Smith).9 Nonetheless, s. 171(b) provides an
important objective protection, contrasting with the largely subjective nature of s. 172 under which
a director only needs to act in the way he considers in good faith will promote the success of the
company. Eclairs Group shows the importance of the duty in protecting the balance of power
between directors and shareholders. Accordingly, following codification of the law on directors’
duties, directors must still exercise their powers only for ‘proper purposes’ and this is as it should
be.10
9 It is fine to make the point in your own words if you can’t remember a quote in an exam
10 The final sentence both links back to the question and reminds the examiner that you’ve
done your best to evaluate and not simply describe the law
Looking For Extra Marks?
Although your focus must be on s. 171(b), don’t look at it entirely in isolation—show that you
recognize links between s. 171(b) and other aspects of directors’ duties, and use this to explore the
significance of the proper purpose doctrine
Recognize how CA 2006 separated the previously ‘composite’ duty into two duties—s. 171(b)
and s. 172. You could consider the Company Law Review approach to this if you wanted to explore
this further
Explore the cases and academic commentary to add depth to your discussion
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Question 3
Gatto Ltd, a property development company, has four directors: Honey, Cherry, Florentine, and
Victoria. Honey and Cherry are the children of the original founder of the business, Madeleine, who
is now retired. Honey and Cherry promised Madeleine, who has a passion for local environmental
issues, that they would never take any action that affects the wildlife reserve based on nearby
Maryland Meadow.
Last year, the board decided that the company should pursue new developments in the local area
and asked Victoria to investigate possible new development sites. She identified two possible
options: (i) Holly Wood, a brownfield site (previously developed land), and (ii) Berry Park, a
greenfield site (undeveloped land) situated on the edge of Maryland Meadow. Holly Wood required
decontamination prior to development and so offered lower profits than development at Berry
Park, but development at Berry Park would inevitably have a negative impact on the wildlife
reserve. At board discussions, Honey and Cherry refused to consider Berry Park because of their
promise to Madeleine, and Victoria went along with their preference. Florentine was not present at
the discussions: since last year when she became director of another company, Torta Ltd, also in
the construction industry, she has rarely attended Gatto Ltd’s board meetings. Decontamination of
the Holly Wood site has proved very expensive and Gatto Ltd is set to lose money on the
development.
Advise Gatto Ltd.
Caution!
Don’t work through each duty in order—this wastes time and indicates to the examiner that you
are struggling to identify the relevant law. Although more than one duty can (and often does) apply,
you should work out the most relevant duties and start with those
Try to balance explanation of the law with applying the law to the facts
Read the question carefully—as you are told to advise the company, you don’t need to worry
about shareholder remedies
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Diagram Answer Plan
Suggested Answer
↵ The general duties the directors owe to Gatto Ltd (Companies Act 2006 (CA 2006), s. 170) are
set out in CA 2006, ss. 171–7 and are of both fiduciary and common law origin. There have been
several possible breaches of duty1 relating to the purchase of Holly Wood and involvement with
Torta Ltd. These, and the consequences of breach, will be considered, bearing in mind that more
than one duty may apply at any time (CA 2006, s. 179).
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1 You could set out in the introduction which particular duties will be most relevant, but
don’t go into too much detail in the introduction as you risk repeating yourself later
Holly Wood
The first issue to consider in relation to the Holly Wood purchase is Honey and Cherry’s promise to
Madeleine, which led to their refusal to consider the other (more profitable) alternative, Berry Park.
Under CA 2006, s. 173 a director ‘must exercise independent judgment’,2 which originates in the
fiduciary duty on a director not to fetter his judgment. This prevents a director entering into an
agreement preventing later consideration of his duties (Boulting v Association of Cinematograph,
Television and Allied Technicians [1963] 2 QB 606), although it does not prevent a director, in the
proper exercise of his powers, making a decision to bind the company to a future course of action
p. 81 even though this restricts future decisions (Fulham ↵ Football Club Ltd v Cabra Estates plc [1994]
1 BCLC 363). While Honey and Cherry have not contractually committed themselves to acting in
accordance with Madeleine’s wishes, by following a pre-agreed policy rather than considering the
issue on its merits, they are clearly not exercising independent judgment. As this appears not to be
a decision made at the time for the benefit of the company, but for family reasons, it is probable
that s. 173 has been breached. The consequences of breach3 are the same as if the corresponding
equitable principle applied (CA 2006, s. 178), which would include rescission of a contract made in
breach of duty or equitable compensation for loss.
2 This duty doesn’t come up often in problem questions, but do keep all the duties in mind
when assessing the facts to make sure you don’t miss any relevant ones
3 Use your own course as a guide to how much depth you will be expected to go into on
remedies
The directors may also have breached CA 2006, s. 172, which is the ‘fundamental’ duty of directors
(Item Software (UK) Ltd v Fassihi [2005] 2 BCLC 91). It requires directors to act in the way they
consider, in good faith, to be most likely to promote the success of the company for the benefit of
the members as a whole. In most cases this will mean the most profitable course of action, but the
potential for damage to a company’s reputation will be relevant as it could harm the longer-term
interests of the members.

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Under s. 172 directors are required to have regard, ‘amongst other things’, to a list of factors, which
includes the long-term consequences of any decision (s. 172(1)(a)) and the ‘impact of the
company’s operations on the community and the environment’ (s. 172(1)(d)). This ‘enlightened
shareholder value’ approach maintains shareholder primacy, whereby companies are run in the
interests of shareholders, not other stakeholders. Accordingly directors must have regard to
environmental issues only in order to promote the success of the company.4 It appears that Cherry
and Honey have breached s. 172 if they are taking this factor into account because of the promise to
Madeleine, and not because they honestly believe this to be in the best interests of the company.
Victoria will also be in breach if she has failed to consider the question for herself.
4 Don’t just explain the ESV approach—apply it to the facts
Nonetheless Gatto Ltd might have difficulty in proving breach, as the duty is subjective (what the
director thinks is best, not what is, objectively, best)5 and the directors might convince the court
they genuinely believed Holly Wood was best for the company. It can also be difficult to establish
loss if a director properly fulfilling the duty could reasonably have reached the same decision (as
could be the case if Berry Park would cause damage to the company’s reputation). This effectively
brings in an objective element to s. 172, allowing the court to judge the director’s own decision
against that of an ‘intelligent and honest man’ (Charterbridge Corporation Ltd v Lloyds Bank Ltd
[1970] Ch 62). It would therefore be difficult to establish breach of s. 172.
5 Remember the duty only requires a director to act in good faith in what they consider to be
the best interests of the company
Florentine’s Position
It seems that Florentine has not met the standard of care, skill, and diligence expected of a director.
This requires a director to act with ↵ ‘reasonable care, skill and diligence’ as measured by a dual
objective/subjective test—an objective minimum of the standard reasonably expected of someone
in that position in that company, increased by any general knowledge, skill, or experience of the
particular individual (CA 2006, s. 174). Although early cases indicated a director’s duties were only
of an ‘intermittent nature’ (Re City Equitable Fire Assurance Co Ltd [1925] Ch 407),6 later cases show
a director must pay adequate attention to the company’s affairs (eg Dorchester Finance Co Ltd v
Stebbing [1989] BCLC 498). Ongoing failures to attend meetings and take any interest in the
company, as here,7 would be a breach of duty. The other directors could also be in breach of this
duty by allowing Florentine to pay no attention to the company, as all directors have ongoing
monitoring and supervisory obligations (Re Barings plc (No. 5) [2000] 1 BCLC 523).
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6 Don’t be tempted to give too much description of the earlier cases and the development of
the duty, there simply isn’t time and it is more important to apply the law to the facts
7 Make the link to the facts explicitly
The origins of the duty of care, skill, and diligence in s. 174 lie in the common law duty of care, and
the consequences of breach are the same as if the corresponding common law rule applied (CA
2006, s. 178). This would be common law damages as compensation for loss. However it might be
difficult for Gatto Ltd to establish causation and loss as it is hard to say that Berry Park would
necessarily have been favoured even if Florentine had been present at the meeting. Even if the
matter had been discussed properly between all four directors, Honey and Cherry’s view might still
have prevailed, or they might have all concluded that Holly Wood was the right option.
There is a further possibility that Florentine has breached her duty to avoid a conflict of interest
(CA 2006, s. 175) by joining the board of Torta Ltd.8 In London and Mashonaland Exploration
Company Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165 (Mashonaland), Chitty J held
there was no prohibition on a director acting as a director of a rival company, but he approached
this on the basis of contractual restraints and confidentiality, rather than fiduciary duties. This
decision was cited with approval in Bell v Lever Bros [1932] AC 161, but questioned in later cases. In
Plus Group Ltd v Pyke [2002] EWCA Civ 370, [2002] 2 BCLC 201, the Court of Appeal indicated that, in
general, the holding of competing directorships would require the approval of the companies in
question, but stressed the situation was ‘fact specific’. The Scottish courts in Commonwealth Oil &
Gas Co Ltd v Baxter [2009] CSIH 75 have also cast doubt on the judgment in Mashonaland and limited
the case to its own facts.
8 The law on breach of duty through the holding of more than one directorship is still not
entirely clear so requires a reasonable amount of consideration
The codification of the conflict duty in CA 2006, s. 175 makes explicit that the duty applies equally
to a conflict of duty and duty as to a conflict of interests (or interest and duty) (s. 175(7)). A breach
of s. 175 can thus arise if Florentine is acting for two companies, because the duties owed to two
different companies will in all likelihood pull in two different directions. Accordingly, while
Mashonaland suggests ↵ there would not appear to be a breach by merely joining the board of a
rival company, by acting in that position Florentine is highly likely to be in breach of s. 175. She
could avoid this by ensuring that both companies are fully aware of the position and agree to it but
in this case there seems to have been neither formal authorization of the board (s. 175(4)), nor
p. 83
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prior approval of the shareholders (Sharma v Sharma [2013] EWCA Civ 1287). On balance it seems
likely that Florentine is in breach of duty in acting as director of Torta Ltd, and would accordingly
be liable to account for any profits made from this position.
Conclusion
To conclude,9 there are potential breaches of ss. 172–5 by the directors, although there could be
some problems in proving breach, causation, and loss, particularly in relation to s. 172 and s. 174.
The directors might also seek relief under CA 2006, s. 1157, claiming they acted honestly and
reasonably and ought fairly to be excused, although it must be doubted whether they acted
reasonably on the facts, particularly as reasonableness is measured objectively: Bairstow v Queens
Moat Houses plc [2001] 2 BCLC 531. Accordingly, Gatto Ltd might be better advised not to throw good
money after bad in pursuing its directors, and instead should consider refreshing its management
team by removing some or all of its directors by ordinary resolution under CA 2006, s. 168. In any
event, action against the directors will be very difficult while they remain in power because of the
rule in Foss v Harbottle (1843) 2 Ha 461 and the difficulties for shareholders in bringing a derivative
claim.10
9 As conclusions have been made on each point as they appeared, this final conclusion can be
short and the opportunity can be taken to provide more general and pragmatic advice
10 This shows you understand the practical difficulties of bringing a claim, even though the
question doesn’t call on you to address this aspect
Looking For Extra Marks?
Remember to consider the consequences of breach (and, if relevant, avoidance of or relief from
liability), using your own course as a guide to how much time to allocate to these elements of the
question
A recognition of wider debates or connected issues, even in a problem question, will impress the
examiner, but don’t go too far off point

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Question 4
‘The formulation of the duty of skill and care in the Companies Act 2006 shows an important
change in the law’s expectations of directors.’
Discuss.
Caution!
It is tempting to approach the law chronologically as the simplest way of explaining the
position, but this may well encourage a descriptive approach. Instead try starting with the current
law, and consider the extent to which it reflects the pre-existing common law
Remember that there had already been important developments in the common law prior to the
2006 Act
Diagram Answer Plan
p. 84
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Suggested Answer
The ‘duty of skill and care’ is now found within the general duties of directors in Companies Act
2006 (CA 2006), ss. 171–7, as the ‘duty of care, skill and diligence’: s. 174. As the general duties are
based on the common law rules and equitable principles and have effect in their place (s. 170(3)),
this would indicate there has been no change in the law in this area.1 However CA 2006 is not a true
‘codification’ of the law, as some duties have been developed (eg s. 172), some aspects have not
been codified (eg remedies, s. 178), and the common law is explicitly retained as a guide to
interpreting and applying the duties (s. 170(4)).
1 This pulls in broader understanding of how the general duties operate while showing a
focus on the question
This essay will argue that s. 174 does not itself change the law, but merely reflects pre-2006
common law development.2 However that development, and so s. 174, results from a more modern
view of the role of a director and is stricter than early judicial formulations of the duty. The essay
will assess the current statutory duty, and compare this with the pre-existing common law, to
evaluate the significance of the statutory formulation and its merits.
2 If you have planned your essay sufficiently to know where you are going, it can be very
effective to indicate your argument within your introduction
Section 174
Under CA 2006, s. 174 a director must exercise ‘reasonable care, skill and diligence’: that exercised
by a ‘reasonably diligent person’ with both (a) the general knowledge, skill, and experience
reasonably expected of someone carrying out the functions of that individual in that company, and
(b) the general knowledge, skill, and experience that the individual has. The formulation is
modelled on Insolvency Act 1986 (IA 1986), s. 214(4) which relates to the knowledge required for
liability for wrongful trading,3 and, as will be seen, had already been adopted in some common law
cases before CA 2006.
3 Show you understand what IA 1986, s. 214(4) relates to, but don’t be sidetracked into
discussion of wrongful trading more generally
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The minimum objective standard provided in paragraph (a) cleverly4 varies according to the nature
of the company and the position of the director, ensuring the law imposes higher standards on
directors with greatest responsibility, thus reflecting modern expectations on directorial
behaviour, particularly in larger companies. Paragraph (b) adds a further subjective layer where a
director has skills or experience beyond that expected in their position. This operates only to
increase the expectations on directors in relevant cases, it does not take the standard below the
objective minimum. Although the level of skill, care, and diligence thus differs according to the
director and the company, judges need not set out the precise knowledge, skills, and experience
expected in a particular case: Weavering Capital (UK) Ltd v Dabhia and Platt [2013] EWCA Civ 71,
reducing the scope for appeals.
4 This is a limited but very concise way of indicating some personal evaluation of the law
The Common Law Standard
By way of contrast5 with the fundamentally objective nature of s. 174, the common law as
established by Romer J in Re City Equitable Fire Assurance Co Ltd [1925] Ch 407 (City Equitable)
appears to be much more subjective and imposed fairly lax expectations on directors. City Equitable
established three principles. The first required a director only to show that degree of skill that ‘may
reasonably be expected from a person of his knowledge and experience’. The second held that a
director was ‘not bound to give continuous attention to the affairs of his company’ with duties only
of ‘an intermittent nature’. Thirdly, directors were entitled to trust in officials to whom duties had
been (justifiably) entrusted.
These propositions reflected the generous attitude of the time towards ‘gentlemen-directors’. For
example, in Re Cardiff Savings Bank, Marquis of Bute’s Case [1892] 2 Ch 100 the Marquis became
chairman at the age of six months and attended only one board meeting in 38 years but was not in
breach of duty. Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425 held that directors
need not ‘bring any special qualifications to their business’; and need have no awareness of the
nature of the company’s business.
5 By starting with the modern law, the discussion of the previous law now appears to be
much more thoughtful and directed, as it is no longer a simple chronological account of legal
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Comparing the Standards
That might suggest s. 174 does show a change in the law—from a lax subjective approach, to a
strict objective one. However, the common view of the City Equitable standard has been challenged,
as it does arguably incorporate an objective element based on the reasonable director.6 More
importantly, even if one accepted that the City Equitable standards were lax and entirely subjective,
in fact the law had evolved even before CA 2006 and so the new law is not truly a change in
approach.7
6 You could engage with the academic discussion on this point if you had time to do so
7 Explicitly using the language of the question (and making interim conclusions) throughout
the essay can be an effective technique to reassure the examiner that you are continuing to
focus on the question
In Norman v Theodore Goddard (A Firm) [1991] BCLC 1028, Hoffmann J was willing to assume that
the test of the director’s duty of care should be based on the dual objective/subjective test imposed
in respect of wrongful trading under the Insolvency Act 1986 (IA 1986), s. 214(4). He restated this
as the law in Re D’Jan of London Ltd [1994] 1 BCLC 561 (Re D’Jan).
The second and third propositions of City Equitable had also been qualified prior to CA 2006. In Re
Barings plc (No 5) [2000] 1 BCLC 523, Jonathan Parker J highlighted the ‘inescapable, personal
duties’ of a director, holding that directors must acquire and maintain a sufficient knowledge and
understanding of the company’s business to enable them properly to discharge their duties as
directors, and that while functions can be delegated, there is an ongoing obligation to supervise
delegated functions (see also Re Westmid Packing Services Ltd, Secretary of State for Trade and
Industry v Griffiths [1998] 2 All ER 124 (Westmid)). Cases such as Dorchester Finance Co Ltd v Stebbing
[1989] BCLC 498 and Lexi Holdings (In Administration) v Luqman and Ors [2009] EWCA Civ 117 show
that directors cannot escape liability for the consequences of another director’s fraud, where their
own inactivity has enabled that fraud to take place.
A major influence in the development of the duty of skill and care at common law was
disqualification of directors for unfitness8 under Company Directors Disqualification Act 1986
(CDDA 1986), ss. 6 and 8, where breach of duty by the director is relevant in determining unfitness
(CDDA 1986, Sch 1). The courts have explicitly acknowledged that the main purpose of
disqualification under CDDA 1986 is to protect the public, and part of this protection is by raising
standards of conduct among directors generally: Westmid. In Bishopsgate Investment Management
Ltd v Maxwell (No. 2) [1994] 1 All ER 261, Hoffmann LJ linked the evolution of directors’ duties with
p. 86

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changing public attitudes as reflected in CDDA 1986. In Re Landhurst Leasing plc [1999] 1 BCLC 286,
Hart J appeared to align the standard of the duty at common law and the standard for unfitness
under the CDDA 1986 with the Re D’Jan test (as now accepted in s. 174), although it should be
remembered that breach of the duty of care and skill is not a prerequisite for a finding of unfitness
(eg Cohen v Selby [2001] 1 BCLC 176).
8 This is an interesting area where directors’ duties and liability on insolvency interlink—it
could be relevant both in questions on directors’ duties and in questions on corporate
insolvency
Conclusion: Development or Change?9
9 The conclusion contains a fair amount of evaluation of the question, so this has been made
clear in the sub heading
Section 174 thus reflects a developing jurisprudence, rather than itself effecting change. The choice
was made to resolve any conflict between City Equitable and Re D’Jan in favour of the latter,
increasing the expectations on directors in line with modern views on director responsibility and
making it easier to establish liability. But it is highly probable that the courts would have favoured
the later authorities in any event and continued to develop the law in this direction, even without
statutory involvement. This trend had been seen in relation to all three of the basic propositions
regarding a director’s duty of care, skill, and diligence. The formulation in s. 174 makes clear that
incompetence, inactivity, or abrogation of responsibility (however honest, and however limited the
director’s own ability) are no longer acceptable, if they ever were. It brings the old common law
into line with more modern concepts such as wrongful trading and disqualification, ensuring
consistency of approach.
It could be argued10 that an objective approach is potentially unfair when no qualification is
expected of directors—the law permits individuals to become directors however ill-suited they
might be, and even though potentially incapable of meeting the objective standards set for them.
This contrasts with other professions where qualifications are required, ensuring a level of
competence. However the modern approach reflects public expectations and growing awareness of
the power of directors, whose decisions and competence can impact on whole communities and
economies, not just shareholders. Similar attitudes can be seen in other areas of directors’ duties,
particularly s. 172, where the opportunity was taken to develop and not simply codify the law. The
potential for unfairness is reduced through s. 174’s variable objective standard, which allows the
court to set expectations at appropriate levels for different companies, and through s. 1157 which
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offers the possibility of relief where a director has acted ‘honestly and reasonably’ even when in
breach of the duty of care and skill (Re D’Jan). The importance of s. 174 thus lies not in a change in
the law but in ensuring modern values and practice are properly reflected and balanced in the law.
10 This paragraph raises some points that challenge the approach of the law, providing some
additional analysis to strengthen the overall response to the question
Looking For Extra Marks?
Show that you understand how the duty of care, skill, and diligence is linked with wrongful
trading and disqualification
Consider the reasons for the change in approach, and also whether the modern approach has
any downsides
Consideration of the Company Law Review deliberations can add value to discussion of
directors’ duties, particularly where the law has developed during the codification process
Question 5
Brianna, Alvin, Dilip, and Clara are the directors of Tweedy Ltd, manufacturers of traditional cloth.
A fifth director, Joella, left the company in August, having been released from her post following a
period of ill health.
In October, the directors discovered that Joella is now working with one of their former customers,
Megacrush plc, developing an innovative new fabric from recycled plastics. Megacrush plc had
discussed this project with Tweedy Ltd in March (all the directors being present at the meetings)
but the directors had concluded this would be a distraction from Tweedy Ltd’s core business and so
decided not the pursue the project further. It now appears that Joella commenced work on the
project with Megacrush plc very soon after her departure from Tweedy Ltd in August. Industry
rumours suggest the project is likely to be very profitable.
In November, the directors agreed to place a large order for computer supplies (worth £50,000)
with Futurco Ltd, and this contract has now been completed. All the directors have been aware
throughout that Clara and her husband are the only shareholders of Futurco Ltd.
p. 88
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Advise Tweedy Ltd.
Caution!
It is very easy in the panic of an exam to muddle CA 2006, ss. 175 and 177 or forget about one of
them. They both deal with conflicts of interest but deal with different factual matrices, and
approach the issue in a different way, so keep a clear head. Remember that s. 177 concerns
transactions with the company itself, and if s. 177 applies, s. 175 doesn’t.
Where you have a transaction with the company, remember to consider the possibility that it is
a substantial property transaction under CA 2006, s. 190.
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Diagram Answer Plan
Suggested Answer
↵ To advise Tweedy Ltd, the fiduciary duties of ‘no conflict’ and ‘no profit’ should be
considered—a director cannot (without the company’s agreement) have an interest that conflicts
(or may conflict) with the interests of the company, nor profit from their position.1 These duties
have traditionally been strictly applied to ensure a director is not tempted to further their own
interests at the expense of the company (Bray v Ford [1896] AC 44). The duties are now codified in
p. 89

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Companies Act 2006 (CA 2006), ss. 175–7 but the case law remains relevant in interpreting and
applying them (CA 2006, s. 170(3)–(4)). Additional specific duties also need to be considered,
particularly that relating to substantial property transactions (CA 2006, s. 190).
1 A very brief summary of the key duties is all that is required in the introduction
Joella
By working with Megacrush plc on the project discussed with Tweedy Ltd, Joella may be in breach
of CA 2006, s. 175.2 This section requires a director to avoid a situation in which they have a conflict
of interest between their own interest and that of the company (s. 175(1)) and applies in particular
to the exploitation of ‘any property, information or opportunity’ (s. 175(2)). Joella may be
exploiting information or an opportunity of Tweedy Ltd in moving on to work with Megacrush plc.
↵ Although Joella has left the company, the duty continues to apply even after her departure in
relation to information or opportunities of which she became aware when she was a director (s.
170(2)(a)).
2 Focus immediately on the current law, ie the codified duty, and bring the case law into this,
rather than establishing the pre-2006 law and only then moving on to CA 2006
There would be no breach of s. 175 had the directors authorized the potential conflict (s. 175(4),
reflecting Queensland Mines v Hudson (1978) 52 ALJR 379), but the facts do not indicate any
authorization.3 It is therefore necessary to see how the courts have applied the duty to cases such as
this to determine whether Joella is in breach.
3 This is a way of getting in knowledge that you want to show off, but isn’t actually relevant
to the question. However, you must be careful in doing this as it is very easy to spend too
much time establishing law that isn’t pertinent to the problem
The key authority indicates a strict approach to conflicts of interest. In Regal (Hastings) Ltd v
Gulliver [1942] 1 All ER 378 (Regal Hastings), the House of Lords found directors in breach of duty
even though acting in good faith and where the company could not take up the opportunity itself.
This is supported by Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, where (not
unlike the present case)4 a director was released from his position (claiming ill health) and then
took up an opportunity that he was aware of only through his previous directorship—it was
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considered irrelevant that the company was highly unlikely ever to have been able to take up the
opportunity itself. Section 175(2) now expressly states that it is immaterial whether the company
could take advantage of the information or opportunity. On this basis Joella would be liable as she
was only aware of the opportunity through Tweedy Ltd. Nonetheless, a softer line is present in
other cases—making use of information or an opportunity post-resignation is not invariably a
breach—and s. 175(4)(a) recognizes there is no breach if the situation cannot reasonably be
regarded as likely to give rise to a conflict of interest.
4 This is a simple and very quick way of linking your discussion of the law to the facts of the
problem, without having to follow a strict IRAC process
Commonwealth courts in particular have taken a more flexible line, for example Canadian Aero
Service Ltd v O’Malley (1973) 40 DLR (3d) 371 indicated liability depends on whether all the facts
reveal adoption of a ‘maturing business opportunity’. A similar approach was taken in the UK in
Island Export Finance Ltd v Umunna [1986] BCLC 460. The flexible approach has been welcomed by
some academics (eg Lowry and Edmunds ‘The corporate opportunity doctrine: the shifting
boundaries’ (1998) 61 MLR 515).5 In relation to Joella, a potentially important point is that the
opportunity was apparently rejected in good faith by the company’s board. In Peso Silver Mines Ltd v
Cropper [1966] SCR 673, a director was not liable when he took up a mining opportunity that had
been rejected bona fide by the company. On this basis, Joella would not be in breach.
5 Recognizing academic discussion can add interest to a problem question, although there is
usually not much scope for exploring the arguments in depth
Although English courts have largely taken a stricter approach, exemplified by Regal Hastings and
more recent cases such as Bhullar v Bhullar [2003] 2 BCLC 241 and O’Donnell v Shanahan [2009] 2
BCLC 666, there is greater willingness to engage in a balancing exercise in cases of post-resignation
p. 91 conflict (as is the case here).6 In Balston Ltd v Headline Filters Ltd [1990] ↵ FSR 385, there was no
breach in setting up a business post-resignation to supply a former customer of the director’s
previous company, as no competitive activity had taken place prior to departure. This more
nuanced approach with greater flexibility has been welcomed by writers such as Lowry and Sloszar
(‘Judicial pragmatism: directors’ duties and post-resignation conflicts of duty’ [2008] JBL 83). As
recognized explicitly in Foster Bryant Surveying Ltd v Bryant [2007] BCC 804, the area is ‘highly fact
sensitive’ and based on common sense. Much may therefore depend on quite what steps, if any,
Joella took towards working with Megacrush plc prior to her departure.7

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6 Indicate expressly why you are discussing a particular line of cases—the examiner may not
be willing to assume you are considering the facts and understand why they are relevant
7 It is fine to indicate that you need more information to be able to reach a firm conclusion,
provided you indicate the area in which the facts are deficient and what difference they would
make
If Joella were liable under s. 175 (and was not relieved under CA 2006, s. 1157 on the ground she
acted honestly and reasonably and ought fairly to be excused), she would be liable for an account of
profits. This shows the duty can operate somewhat unfairly and provide a windfall (as in Regal
Hastings): it would effectively give Tweedy Ltd the benefit of an opportunity it would not have
secured. On balance though, at least on the limited facts provided, Joella is unlikely to be liable for
breach of duty, because the company rejected the opportunity in good faith before she took it up,
and she appears to have left the company on genuine rather than manufactured grounds without
(as far as we can tell) taking active steps to take up the opportunity prior to her departure.
Clara
The contract with Futurco Ltd reveals a conflict of interest for Clara. However, in this case s. 175
does not apply as the conflict arises in relation to a transaction with the company (s. 175(3)).8 Other
duties should be considered.
8 Considering s. 175 rather than s. 177 when a director has an interest in a transaction with
the company is a very common error in exams
Under s. 177 a director with an interest (direct or indirect) in a proposed transaction with the
company must disclose that interest to the other directors, normally at a meeting or by notice (s.
177(2)). However, there is no obligation to declare an interest where the other directors are already
aware of it (s. 177(6)(b)), and this is the case here. Accordingly there was no breach of s. 177 in
failing to make a declaration prior to the transaction, neither is there any breach of CA 2006, s. 182
in not making a declaration after the transaction has been entered into.
However, in this particular case there may still be a breach of duty. Under CA 2006, s. 190 a
company may not acquire a ‘substantial non-cash asset’ from a director or a person connected with
a director unless this is approved by a resolution of the company’s members. Futurco Ltd is
connected with Clara, as she and her husband own all the shares in the company (CA 2006, ss. 252–

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4). The asset is clearly ‘non-cash’ (defined s. 1163) and will be ‘substantial’ if its value exceeds
£100,000 (which is not the case here), or if it exceeds both £5,000 and 10 per cent of the company’s
asset value (s. 191). ↵ Accordingly, whether or not Tweedy Ltd should have obtained members’
approval depends on whether its asset value (by reference to its most recent statutory accounts) is
above or below £500,000. If above there is no breach of s. 190, but if below then the failure to
obtain members’ approval means that the transaction is voidable at the instance of the company,
and the directors (and Futurco Ltd) are liable to account for any gains made and indemnify the
company for any losses resulting (s. 195).9 This can have major consequences; for example, in Re
Duckwari plc [1999] Ch 253, losses included those caused by a market fall in the value of the asset.
9 As you are not given the necessary financial information you have no choice but to give
both alternatives
Conclusion10
10 The conclusion can be brief as the points are concluded within the main text, but it is still
worthwhile to draw everything together
If the traditional strict approach to conflicts of interest is followed, Joella appears to be in breach of
s. 175. If so, Tweedy Ltd could claim an account of profits from her. However, the more balanced
approach in the post-resignation cases indicates Joella would escape liability. That conclusion
would change if more damning evidence about her plans and activities prior to departure came to
light.
Although Clara has an interest in the transaction between Futurco Ltd and Tweedy Ltd, there has
been no breach of s. 177 or s. 182. However, there may have been a breach of s. 190 in failing to get
the approval of Tweedy Ltd’s members. This depends on Tweedy Ltd’s asset value, as this will
determine whether the acquisition was of a substantial non-cash asset. If there has been a breach
of s. 190, then the contract is voidable (unless one of the exceptions in s. 195 applies). In addition,
Clara, the other directors, and Futurco Ltd will be liable for any gains they have made or losses the
company suffers under s. 195(3)–(4).
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■ ■ ■
Looking For Extra Marks?
Demonstrate you are confident with both the statutory provisions and the case law, and can
combine and apply them effectively
Show an awareness of academic discussion about the duty to avoid conflicts of interest and the
requirement to declare interests in transactions with the company
Question 6
Fitshop Ltd, which ran a successful sports shop in Oldentown, was founded in 1995 by Mo. He was
the main shareholder and only director, with his wife, Jessica, holding a single share. In 2012 Mo
decided to hand over to the next generation. His daughter Anya and son-in-law Lewis became
shareholders (Mo and Jessica retaining their own shares) and were appointed directors in place of
Mo.
↵ After Mo’s retirement he continued to help in the shop when it was busy, and would negotiate
with Fitshop’s suppliers. He continued to meet with the company’s accountants and afterwards
would instruct Anya and Lewis on what they should do. Although Mo did not attend most board
meetings, Anya and Lewis would always follow his advice on any major decision.
Last year the family was approached by Sportzworld plc, which wanted to expand into Oldentown.
Sportzworld made a good offer for all the shares in Fitshop, and the family decided to sell up. Sadly,
not long afterwards Anya and Lewis were killed in a car accident.
Fitshop (under its new ownership) is now threatening legal action against Mo. Fitshop claims that
Mo, Anya, and Lewis were negligent when they sold Fitshop’s warehouse to a neighbour a few years
previously for £200,000 when its true value was nearly £300,000. Mo doesn’t dispute the figures
but says he set the price honestly by looking at past property values on the internet, and Anya and
Lewis agreed. Jessica was not consulted but Mo says she would have agreed if asked.
Advise Mo on his potential liability.
Caution!
Don’t spend too long looking at specific directors’ duties and speculating on facts that aren’t
there. The main focus of this question is on de facto and shadow directors and the application of
duties to them
p. 93
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■ Remember to consider whether there are any ways liability could be avoided
Diagram Answer Plan
Suggested Answer
Fitshop’s claim relies on Mo in fact owing the company duties at the time of the property sale. To
advise Mo, the alleged breach of duty will be considered briefly before considering whether he in
fact owed such a duty1 by looking at whether he was a de facto or shadow director of Fitshop. The
answer will then consider whether, if Mo is potentially in breach of duty, he might nonetheless
avoid liability.
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1 It would be fine to deal with M’s position first, and then the alleged breach. In some ways
that would be more logical but the order used here makes it easier to relate the discussion of
duties owed by de facto/shadow directors directly to the relevant duty
Breach of duty
The facts disclose a likely breach of Companies Act 2006 (CA 2006), s. 1742 by the directors of
Fitshop. Directors must exercise ‘reasonable care, skill and diligence’ with a minimum objective
standard (s. 174(2)(a)) that increases if a director has particular knowledge, skill, and experience
(s. 174(2)(b)). A reasonably diligent person in the position of Fitshop’s directors should have
appreciated that an expert valuation should be obtained. So failing to get a proper valuation was
almost certainly a breach of this duty, causing loss to Fitshop. Other potential breaches3 (such as s.
172 if not acting in a way they believed would promote Fitshop’s success) will not be considered as
Fitshop’s claim seems to be limited to negligence.
2 The lack of facts given on the breach would mean long discussion of the duty would be very
descriptive so deal with breach concisely
3 You could consider other duties but this would be speculative and would take time you need
for the main issues arising on the facts
Fitshop will be unable to pursue Anya and Lewis for their likely breach of s. 174 as they have died.
The issue is therefore whether Mo was subject to s. 174 as a de facto or shadow director.
De facto/Shadow Directorship
The concepts of de facto and shadow directorship were once considered distinct and largely
mutually exclusive (Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 (Hydrodam)) although both relating
to governance of the company (Re Kaytech International plc [1999] 2 BCLC 351 (Kaytech)). This could
have answered Fitshop’s claim, as Mo’s position has elements of both. Unfortunately for Mo,
Holland v Commissioners for Revenue & Customs; Re Paycheck Services 3 Ltd [2010] UKSC 51 (Paycheck)
recognized the distinction between the concepts was eroded, and an individual could fulfil both
roles, consecutively or simultaneously. Although the erosion has been criticized (Noonan and
Watson, ‘The nature of shadow directorship: ad hoc statutory intervention or core company

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principle?’ [2006] JBL 763),4 it means someone exercising power sometimes directly and
sometimes indirectly, like Mo, could be both a de facto and shadow director: Secretary of State v
Chohan [2013] EWHC 680 (Chohan); Popely v Popely [2019] EWHC 1507.
4 It is always worth showing your understanding of academic work, although you may not
have time in a problem question to engage with it deeply
The test for de facto directorship originally focused on whether an individual was held out and
claimed to be a director, and undertook functions only a director could properly discharge
(Hydrodam). That is not entirely the case for Mo.5 But Paycheck held there is no ↵ single test and
all relevant factors should be considered, including access to proper information and taking major
decisions: Secretary of State for Trade and Industry v Tjolle [1998] BCC 282 (Tjolle). In Kaytech the
Court of Appeal asked: had the individual assumed the status and functions of a director? This
seems to have been true for Mo some, but not all, of the time. Decision-making does not make an
individual a de facto director, if referable to another capacity (Smithton Ltd v Naggar [2014] BCC
482) so Mo might argue he was acting as shareholder, or parent, although this won’t protect an
individual entirely: Chohan.
5 To show you are addressing the question, link to the facts as you go, rather than
establishing all the law and only then applying it to the facts
Rather than taking decisions himself, Mo more commonly advised Anya and Lewis, suggesting his
position was closer to a shadow than de facto director. This is someone ‘in accordance with whose
directions or instructions the directors of the company are accustomed to act’, excluding those
giving advice in a professional capacity6 (CA 2006, s. 251). Earlier cases such as Hydrodam required
a high and sustained degree of control but later cases retreated slightly. Secretary of State for Trade
and Industry v Deverell [2000] 2 WLR 907 (Deverell) held instructions/directions did not need to
extend over all/most corporate activities, and could include advice; a shadow director need not be a
‘puppet master’ (per Re Unisoft Group Ltd [1994] 1 BCLC 609). So Mo’s habit of instructing Anya and
Lewis following meetings with the accountant, and their always following his advice on important
matters could amount to shadow directorship. It doesn’t matter that Mo was acting openly and
didn’t ‘lurk in the shadows’ (per Hydrodam): Deverell.
6 It is impossible to avoid setting out the statutory provision to some extent, but
summarizing it at least in part indicates more personal thought than simply copying it out
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Duties Owed by Mo
If Mo is held to be a de facto or shadow director, or both, does this mean he was subject to the same
duties as Anya and Lewis as de jure directors?
Duties applying to de jure directors (including the general duties under CA 2006, ss. 171–7) will
apply to de facto directors. It can be argued that de facto directors fall within the definition of
‘director’ in CA 2006, s. 2507 and it would be illogical for duties not to apply to those in fact acting
as directors. But what if Mo is held to be a shadow director, not a de facto director, for some or all of
the time? Shadow directors do not fall within s. 250, and in Paycheck the Supreme Court indicated
(obiter) they are subject only to obligations explicitly extended to them, such as wrongful trading
(Insolvency Act 1986, s. 214). However, although the law is not entirely settled (Sukhoruchkin v Van
Bekestein [2014] EWCA Civ 399), CA 2006, s. 170(5), as amended in 2015, states that the general
duties apply to shadow directors ‘where and to the extent that they are capable of so applying’ and
it now seems largely accepted that a shadow director does owe duties to the company (Vivendi SA v
p. 96 Richards [2013] ↵ EWHC 3006), although probably only relating to those areas where they gave
directions or instructions (Standish v Royal Bank of Scotland plc [2019] EWHC 3116). Since Mo was
clearly directly involved in the situation that gives rise to the claim against him, it follows that
whether he is found to be a de facto or shadow director (or both at different times), he will most
likely be found to be subject to s. 174.8
7 ‘Director’ includes ‘any person occupying the position of a director, by whatever name
called’. This obviously includes those properly appointed but using a different title, but also
arguably includes those not appointed but nonetheless fulfilling a director’s role
8 Remember to follow through with your conclusion on the point
Avoiding Liability
Mo would not be liable if the breach were ratified (or authorized) by the company. Except where
statute provides otherwise (eg CA 2006, s. 175), authorization/ratification is by the company, ie the
members, not the directors.
Not all breaches of duty are capable of ratification:9 CA 2006, s. 239(7) retains the common law
position. Cases indicate that negligence probably is ratifiable (Pavlides v Jensen [1956] Ch 565)
provided it is not self-serving (Daniels v Daniels [1978] Ch 406). That would suggest this breach was
ratifiable, although Madoff Securities International Ltd v Raven [2011] EWHC 3102 (Comm) indicates
that only transactions in the best interests of the company can be ratified.

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9 Ratification is a complicated and interesting area that you could expand on if you have
time.
Even if the breach were ratifiable, it does not seem to have been ratified. This echoes Regal
(Hastings) Ltd v Gulliver [1942] 1 All ER 378, where the breach could have been ratified but the need
was not recognized, leaving the directors vulnerable. The unanimous agreement of the members is
effective in place of a resolution (Re Duomatic Ltd [1969] 2 Ch 365) and this can be used to ratify a
breach (s. 239(6)(a)) but it requires the assent of all members (Randhawa v Turpin [2017] EWCA Civ
1201). It is therefore not sufficient that Jessica would have agreed if she’d been asked. Since the
breach was not ratified, Mo cannot escape liability on this basis.
Another way in which liability might be avoided is if the claim is brought too long after the breach.
We are told that the sale took place ‘a few years previously’. Unfortunately for Mo, this isn’t likely
to be long enough to prevent a claim under the Limitation Act 1980: the limitation period would be
six years, by analogy with claims in tort.
A director may seek relief from the court in respect of a breach of duty on the basis s/he acted
‘honestly and reasonably and ought fairly to be excused’: CA 2006, s. 1157. This provision is not, on
its face, open to shadow directors10 but even if Mo could use it, he would likely have difficulty
showing he acted ‘reasonably’. While a negligent director can have acted reasonably (Re D’Jan of
London Ltd [1994] 1 BCLC 561), on the facts it might be hard to convince a court that it is ever
reasonable to sell valuable property without obtaining a proper valuation unless Mo has some
significant further evidence.
10 Whether the relief provision can or should apply to shadow directors is an interesting
question that you could consider further
Conclusion
If Mo is found to have been a de facto and/or shadow director, he is likely to be held to have owed
Fitshop a duty of care, skill, and diligence, and it seems likely this was breached. Unless he is
permitted to seek relief under s. 1157 and can show it was reasonable in the circumstances not to
obtain a proper valuation, he is unlikely to avoid liability. His best hope would therefore be to
convince a court that he was not a de facto or shadow director, either because his actions fall just
short of both concepts or are referable to his capacity as parent, founder, consultant, or investor.
The court might have some sympathy for his position in the circumstances.
p. 97
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■ ■ ■
Looking For Extra Marks?
Explore whether and why it matters if the concepts of de facto director and shadow director
overlap
Consider further whether de facto and shadow directors should be able to seek relief from
liability (CA 2006, s. 1157)
Engage further with the problem of determining what breaches are, or should be, ratifiable
Taking Things Further
■ Aherne, D., ‘Directors’ duties, dry ink and the accessibility agenda’ (2012) 128 LQR 114
An interesting article on the approach to (and limitations of) the CA 2006 codification of directors’ duties: ‘a sui generis
codification’ which attempts ‘to have the best of both worlds’ and engenders ‘both confusion and opposition’. See also
on the accessibility of the provisions, Hood, P., ‘Directors’ Duties under the Companies Act 2006: clarity or
confusion?’ (2013) 13 JCLS 1.
■ Ho, J. K. S., ‘Is s. 172 of the Companies Act 2006 the guidance for CSR?’ (2010) 31 Co Law 207
Considers the background to and scope of CA 2006, s. 172’s ‘enlightened shareholder value’ approach and its value in
providing guidance to companies on corporate social responsibility (CSR).
■ Keay, A., ‘The duty of directors to exercise independent judgement’ (2008) 29 Co Law 290
Examines the origins of CA 2006, s. 173 (the duty to exercise independent judgment), concluding that s. 173 is not
identical in its ambit to the pre-2006 common law.
■ Keay, A. ‘Ascertaining the corporate objective: an entity maximisation and sustainability model’ (2008) 71 MLR 663
Formulates an alternative approach to stakeholding or shareholder primacy that focuses on the company as an entity in
its own right with a need both for wealth maximization and survival. See also other work including, ‘The ultimate
objective of the company and the enforcement of the entity maximisation and sustainability model’ (2010) 10 JCLS 35.
↵ ■ Keay, A., ‘Good faith and directors’ duty to promote the success of their company’ (2011) 32 Co Law 138
An exploration of the ‘most interesting and controversial’ of the duties, s. 172, but, unlike most articles, focusing on the
good faith element of the duty rather than enlightened shareholder value. Keay reflects on enlightened shareholder
value elsewhere, including Keay, A., ‘Having regard for stakeholders in practicing enlightened shareholder value’ (2019)
19 OUCLJ 118 and Keay, A. and Iqbal, T., ‘The impact of enlightened shareholder value’ [2019] JBL 304.
■ Langford, R.T. and Ramsay, I., ‘The “creditors’ interests duty”: when does it arise and what does it require?’ (2019)
135 LQR 385
p. 98
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Welcomes the ‘clarity’ brought by Sequana as to the point at which directors’ are required to consider or act in the
interests of creditors. For an earlier examination of this issue, see Keay, A., ‘Directors taking into account creditors’
interests’ (2003) 24 Co Law 300.
■ Lim, E., ‘Directors’ fiduciary duties: a new analytical framework?’ (2013) 129 LQR 242
Examines conflicts of interest, in particular exploring when a situation ‘cannot reasonably be regarded as likely to give
rise to a conflict of interest’ under s. 175(4)(a), linking this to ‘scope of business’ and ‘maturing business opportunity’
questions.
■ Lowry, J. and Sloszar, L., ‘Judicial pragmatism: directors’ duties and post-resignation conflicts of duty’ [2008] JBL
83
Welcomes the more nuanced approach of cases such as Foster Bryant to considering conflict of interest where a director
has resigned, allowing the courts to view all the facts of the case.
■ Lynch, E., ‘Section 172: a ground-breaking reform of directors’ duties, or the emperor’s new clothes?’ (2012) 33 Co
Law 196
A critical evaluation of s. 172, viewing it as little more than a restatement of the previous legal position. Concludes it is ‘all
bark and no bite’, but that the ‘bark’ may have some value in educating directors about good corporate management
and social responsibility.
■ Moore, I., ‘Revisiting the duty to confess: a directors’ duty to disclose his own misconduct’ (2016) 384 Co LN 1
Explores and challenges the somewhat controversial notion from Item Software v Fassihi that a director may have a
positive obligation to disclose his/her own breach of duty to the company.
■ Noonan, C. and Watson, S., ‘The nature of shadow directorship: ad hoc statutory intervention or core company
principle?’ [2006] JBL 763
Argues that shadow and de factor directorship should be conceptually and factually distinct, and a clear concept of
shadow directorship is necessary to maintain a proper distinction between a director and a member. See also Yap, J. L.,
‘De facto directorships and corporate directorships’ [2012] JBL 579, which focuses on the Paycheck decision.
■ Witney, S., ‘Duties owed by shadow directors: closing in on the puppet masters?’ [2016] JBL 311
Considers the extent to which duties are and should be owed by shadow directors. See also Moore, I., ‘Duties of a shadow
director: recent developments considered’ (2013) 345 Co LN 1.
■ Worthington, S., ‘Reforming directors’ duties’ (2001) 64 MLR 439
↵ A critical review of directors’ duties reform, pre-dating the Company Law Review’s final report. Interesting to read
these thoughtful criticisms of both general approach and specific suggestions in light of the eventual reform that
appeared in CA 2006. See also Sealy, L., ‘Directors’ duties revisited’ (2001) 22 Co Law 79 for an entertaining view of trends
in directors’ duties.
p. 99
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