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Company Law Concentrate: Law Revision and Study Guide (6th edn)
Lee Roach
● ● ● ● ● ●
4. Directors
Lee Roach, Senior Lecturer in Law, School of Law, University of Portsmouth
https://doi.org/10.1093/he/9780198855019.003.0004
Published in print: 06 August 2020
Published online: September 2020
Abstract
Each Concentrate revision guide is packed with essential information, key cases, revision tips, exam Q&As, and more.
Concentrates show you what to expect in a law exam, what examiners are looking for, and how to achieve extra marks. This
chapter focuses on company directors. Every private company must have at least one director, while every public company
must have at least two. Directorsʼ duties are now found in the Companies Act 2006, which provides for seven general duties
that directors owe to the company. A directorʼs term of office can terminate in several ways including resignation, retirement,
or removal. The courts can also disqualify a person from acting as director.
Keywords: definition of director, Companies Act 2006, board of directors, duties, termination, disqualification
Key facts
Every private company must have at least one director and every public company must have at least two
directors.
The power to manage the company is initially vested in the members, but is usually delegated to the
directors by the articles.
Directors’ duties are now found in the Companies Act 2006, which provides for seven general duties
that directors owe to the company.
The general duties are based on prior common law duties, so pre-2006 case law will remain relevant.
Certain types of transaction involving directors will only be valid if authorized by a resolution of the
members.
A director’s term of office can terminate in several ways including resignation, retirement, or removal.
Additionally, the courts can disqualify a person from acting as director.
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Chapter overview
What is a ‘director?’
A company may be run by persons who call themselves ‘governors’ or ‘managers’ and, increasingly,
persons not involved in management at board level are called ‘directors’. Are such persons actually
directors?
Revision tip
Many provisions of the CA 2006 apply solely to directors. It may therefore be crucial, especially in
problem questions, that you correctly determine whether or not the persons concerned are actually
directors. Do not forget that a person may legally be regarded as a director, even though he has not
been formally appointed as such.
The CA 2006 does not define what a director is. Rather, it states who is included within the office of
director with s 250 of the CA 2006 providing that a director ‘includes any person occupying the position of
director, by whatever name called’. This broad formulation will cover those who have been validly
appointed to the office of director (known as de jure (‘in law’) directors), but will also cover persons who
p. 62
p. 63
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have not been validly appointed, but who act as directors (known as de facto (‘in fact’) directors). De facto
directors, although not validly appointed, are therefore directors under the Act and subject to the relevant
provisions (e.g. the general duties discussed later in this chapter at p 69, ‘Directors’ duties’).
Looking for extra marks?
There is little doubt that the courts have, over time, notably expanded the types of person who can
be classified as a de facto director. For an account of the history of the law relating to de facto
directors and how the breadth of the office has been expanded, see the judgment of Lord Collins in
Commissioners of HM Revenue and Customs v Holland [2010], especially [58]–[93]. A useful
summary of the authorities in this area was provided by Hacon J in Popely v Popely [2019], notably
paras [78]–[88].
The word ‘person’ in s 250 indicates that a director can be a natural person or a body corporate, but
concerns arose regarding the use of corporate directors and it was argued by the government that:
[c]orporate directors can bring about a lack of transparency and accountability with respect to the
individuals influencing the company. A person’s details and relationship to the company can be
challenging to identify, which, among other consequences, can hinder law enforcement
investigations. Even when they are identifiable, there may be no legal route to holding these
individuals to account. More broadly, a company acting as a director, instead of an accountable
individual, could suggest the potential for a deficit in corporate governance and oversight.
Looking for extra marks?
For an example of a case that demonstrates the issues that arise with establishing liability in cases
involving corporate directors, see Revenue and Customs Commissioners v Holland [2010], in which
the defendant was able to avoid liability through a complex web of forty-two companies, all of
which had one common corporate director.
↵ Accordingly, the SBEEA 2015 largely abolishes corporate directors by inserting a new s 156A into the
CA 2006, which provides that ‘[a] person may not be appointed a director of a company unless the person
is a natural person’. However, at the time of writing, s 156A is not yet in force as the government is still
seeking to determine what exceptions will exist to s 156A.
p. 64
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Looking for extra marks?
For a more detailed discussion of the government’s rationale behind the prohibition on corporate
directors, see BIS, ‘Transparency and Trust: Enhancing the Transparency of UK Company
Ownership and Increasing Trust in UK Businesses: Government Response’ (BIS, 2014) 44–6. More
information on the proposed exceptions to the prohibition can be found at BIS, ‘Corporate
Directors: Scope of Exceptions to the Prohibition of Corporate Directors’ (BIS, 2014).
Shadow directors
A person who has neither been appointed a director, nor acts as a director, may be treated as a director if he
is ‘a person in accordance with whose directions or instructions the directors of the company are
accustomed to act’ (CA 2006, s 251(1)), other than where that advice is given in a professional capacity (CA
2006, s 251(2)). Such a person is known as a ‘shadow director’.
Revision tip
It is important that you are aware of how to identify a shadow director as not all provisions in the
CA 2006 that apply to directors will apply to shadow directors. Often, the CA 2006 will expressly
state that a particular duty or obligation is imposed upon shadow directors. For example, in
relation to the rules concerning directorial transactions that require member approval (discussed
later in this chapter at p 84, ‘Transactions requiring member approval’), a shadow director is to be
treated as a director (CA 2006, s 223(1)).
In practice, determining whether a person is a shadow director can be difficult. Accordingly, in several
cases (of which the two most important are Secretary of State for Trade and Industry v Deverell [2001] and
Ultraframe (UK) Ltd v Fielding [2005]), the courts sought to provide guidance, which is summarized as
follows:
it is not necessary for the shadow director to give directions/instructions over the whole field of the
company’s activities;
whether a communication amounts to a direction/instruction is to be determined objectively;
it is not necessary to show that the de jure directors acted in a subservient manner;
it is insufficient that some of the de jure directors follow the directions/instructions—it must be
demonstrated that a governing majority of the board were accustomed to following the directions/
instructions;
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as the de jure directors must be accustomed to the directions/instructions, it follows that, initially, a
person who gives directions/instructions will not be a shadow director; and
the mere giving of directions/instructions is insufficient—it must also be shown that the directors
acted on such directions/instructions.
Historically, the courts held that a shadow director could not also be a de facto director and vice versa.
However, the courts have now acknowledged that a person can be both a de facto director and shadow
director (Secretary of State for Business, Innovation and Skills v Chohan [2013]).
Appointment
Every private company must have at least one director and every public company must have at least two
directors (CA 2006, s 154). The proposed directors of the company will become its directors officially upon
successful incorporation. Thereafter, the power to appoint directors is a matter for the articles, but where
the articles are silent on this issue, the power to appoint directors is vested in the members (Worcester
Corsetry Ltd v Witting [1936]) and is usually exercised by passing an ordinary resolution. The model articles
for private companies limited by shares and the model articles for public companies provide that directors
may be appointed by an ordinary resolution of the members, or by a decision of the directors.
Looking for extra marks?
Should you be required to discuss the appointment of directors, it is worth noting that Provision 17
of the UK Corporate Code recommends that the appointment of directors should be led by a
nomination committee, consisting predominantly of independent non-executive directors. These
committees were introduced to combat the perception of the ‘old boys’ network’ that many
believed operated in larger public companies. Sadly, there remains significant doubt about the
effectiveness of nomination committees. Grant Thornton’s 2019 Corporate Governance Review
noted that nomination committee reporting lags behind that of the audit and remuneration
committees, and that nomination committees meet less (with some companies having no meetings
at all). The nomination committee still does appear to be the least developed board committee,
even though it is arguably the most important.
↵ Whilst generally anyone can act as a director, certain types of person are prohibited by statute from
being appointed (e.g. a company’s auditor cannot be appointed as its director (CA 2006, s 1214)).
Once appointed, directors may be required to be periodically re-elected by the members (known as
‘retirement by rotation’) in order to remain in office. The 2016 UK Corporate Governance Code stated that
all directors should submit to re-election at regular intervals, with FTSE 350 directors having to face rep. 66
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election every year. Provision 18 of the 2018 Code now states that all directors should be subject to annual
re-election. The model articles for public companies also establish rules that require a director to submit
himself for re-election at least every three years.
Looking for extra marks?
The 2016 Code’s statement that FTSE 350 directors should face annual re-election was extremely
controversial, with many directors fearing that it would lead to a short-termist approach and less
stable boards. This does not appear to have been the case and annual re-election is now an accepted
practice (as evidenced by the fact that the 2018 Code extends it to all companies subject to the
Code), with almost all FTSE 350 companies subjecting their directors to annual re-election.
Board diversity
The need to improve board diversity has been recognized among larger companies for some time. Despite
this, it was only with the publication of Lord Davies’ 2011 report entitled Women on Boards that the topic
gained the prominence it deserved. This report recommended that FTSE 100 companies should aim for a
minimum of 25 per cent female representation by 2015. This 25 per cent goal was successfully reached
(although the number of women in prominent executive roles is still disappointingly low) and a new
voluntary goal has been set by the Hampton-Alexander Review (the successor to Lord Davies’ review),
namely that FTSE 350 companies should aim for 33 per cent female representation by the end of 2020.
Although the Hampton-Alexander Review is aimed at FTSE 350 companies, its recommendations can be
relevant to other companies, as the guidance of Principle Two of the Wates Corporate Governance
Principles states that a company’s diversity policy should consider targets promoted by government and
industry initiatives or expert reviews, with the Hampton-Alexander Review cited as an example.
There is strong disagreement over how greater diversity can be achieved. The UK clearly favours a
voluntary approach but, in November 2013, the European Parliament adopted a draft directive that will, if
enacted, require at least 40 per cent of non-executive directors of listed companies to be women (although
the UK will obviously not be bound to implement this Directive once it leaves the EU). It is clear that gender
diversity within the boardroom is a highly prominent and developing topic and one that you should stay
abreast of. The best source of statistics on board diversity are the annual Female FTSE Board Reports
published by Cranfield University and the Hampton-Alexander Review’s annual update reports.
↵ The 2019 Hampton-Alexander Review report indicates that the FTSE 100 is well on course to meet the
33 per cent target (32.4 per cent of FTSE 100 directors), but the FTSE 250 is still lagging behind slightly
(29.6 per cent of FTSE 250 directors are women).
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Looking for extra marks?
Be aware of how the diversity debate is evolving. The debate has largely focused on gender
diversity, but this is starting to change. In October 2017, the Parker Review Committee published its
final report into ethnic diversity and put forward voluntary goals for FTSE 350 companies
regarding increasing the number of directors of colour on their boards. That the concept of
diversity is broadening is also evident in Principle J of the UK Corporate Governance Code, which
provides that board appointments should promote ‘diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths’.
The board of directors
Collectively, the directors of a company are referred to as the ‘board’. Much of a company’s power is
concentrated in its board, which exercises its powers via board meetings (not to be confused with general
meetings of the company). The procedures relating to board meetings are a matter for the company’s
articles and decisions of directors are only valid if made at a board meeting, unless all the directors agree
to, or acquiesce to, a decision (Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986]). The law does
not require that all the directors must be present at a board meeting, but decisions of board meetings will
only be valid if a quorum can be obtained. The model articles set the quorum at two (unless the company is
private and only has one director, in which case, it will be one), and decisions taken at a meeting that lacks
a quorum (such meetings are said to be ‘inquorate’) are invalid.
Powers of management
A company, being a legal person, can only be run through human intermediaries, which leads us to ask,
who has the power to run the company? The power to run a company is initially vested in its members.
However, in all but the smallest private companies (where the directors and members are usually the same
persons), it is impractical for the members to exercise day-to-day control over the company’s affairs.
Accordingly, the members’ powers are usually delegated to the company’s directors via the articles, but
who has the ultimate right to manage the company: the members or the directors?
The directors have only such power as is delegated to them by the members, with most companies having a
provision in their articles that delegates day-to-day management of the company to the directors. In such
cases, the power to manage is vested in the directors and the members have no right to interfere in the
company’s management, unless such a power has been reserved to the members via the articles or statute.
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Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame
[1906] 2 Ch 34 (CA)
Facts: The articles of a company conferred general powers of management upon its directors and
provided that they could sell any property of the company on such terms as they deemed fit. The
members passed an ordinary resolution resolving to sell the company’s assets and undertakings,
but the directors did not believe that such a sale was in the interests of the company and so refused
to proceed with the sale.
Held: The right to manage the company and the right to determine which property to sell was
vested in the directors. Accordingly, the directors were not required to comply with the resolution,
unless the articles so provided.
↵ Article 3 of both the model articles for private companies limited by shares and the model articles for
public companies provides that ‘[s]ubject to the articles, the directors of the company are responsible for
the management of the company’s business, for which purpose they may exercise all the powers of the
company’. Clearly, this vests considerable powers in the directors but, as it is ‘subject to the articles’,
provisions can be inserted into the articles that affect the balance of power, as the following case
demonstrates.
Salmon v Quin & Axtens Ltd [1909] AC 442 (HL)
Facts: The company’s articles conferred general powers of management upon the directors, but
such powers were subject to the articles. Article 80 provided that decisions of the directors relating
to the acquisition of certain properties would be invalid if either of the company’s two managing
directors (who were also members) were to dissent. The directors decided to acquire such property,
but one of the managing directors vetoed the decision. An extraordinary meeting was called and the
members passed an ordinary resolution resolving to acquire the property. The managing director
who vetoed the decision sought an injunction to restrain the property acquisition.
Held: Whilst the directors had a general power of management, it was subject to the articles.
Accordingly, the veto exercised by the managing director was valid and the company could not
override it by passing an ordinary resolution. The House therefore granted an injunction
restraining the acquisition.
In both Automatic Self-Cleansing and Salmon, ordinary resolutions passed by the members could not affect
the powers conferred by the articles, as this would permit the members to alter the articles indirectly by
ordinary resolution and, as noted at p 54, ‘Alteration of the articles’, an alteration of the articles requires a
p. 68
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special resolution. It follows from this that a direction from the members passed by special resolution
should be valid, and this is reflected in art 4(1) of the model articles, which states that ‘[t]he members
may, by special resolution, direct the directors to take, or refrain from taking, specified action’.
Accordingly, whilst general power is vested in the directors, the members retain a specific statutory
supervisory power exercisable by passing a special resolution (providing that art 4(1) forms part of the
company’s articles).
↵ Finally, it should be noted that where the directors are unable or unwilling to exercise the powers of
management conferred by the articles, then the general powers of management revert back to the
members (Barron v Potter [1914]).
Revision tip
Exam questions discussing the powers of directors, especially in relation to the powers of
members, are popular. Be prepared to discuss the powers of management of the directors and the
balance of power within a company. In problem questions, be mindful of companies with article
provisions that affect the balance of power between the directors and the members.
Directors’ duties
The problem with having such a concentration of power vested in the directors is that they might be
tempted to use their powers to benefit themselves, or to engage in acts that are not in the company’s
interests. The law aims to discourage such behaviour in several ways, with the principal method being the
imposition upon directors of a number of legal duties.
Revision tip
Questions on directors’ duties arise commonly in exams (in fact, it would be unusual for directors’
duties to not feature in an exam). Essays tend to focus on the scope or effectiveness of the duties (or
the effectiveness of a single duty) or require a discussion of how the CA 2006 has reformed
directors’ duties (therefore, you should pay particular attention to those duties that have been
substantially reformed by the 2006 Act, such as the duty found in s 172). Problem questions usually
require you to discuss whether or not the directors involved have committed a breach of their
duties. Given the pervasiveness of directors’ duties, it is common for directors’ duties to feature in
problem questions concerning other areas of company law.
p. 69
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Codification
Historically, the duties of directors were set out in a mass of case law spanning several centuries that was
based on the common law of negligence and equitable duties analogous to those imposed on trustees. The
result was that the law was unclear, inaccessible, and out of date, and, in order to obtain a clear
understanding of the duties imposed upon them, directors would need to read through this mass of case
law and statute or obtain costly legal advice. It was therefore decided that the law relating to directors’
duties should be collected and set out in statute (this is known as ‘codification’), thereby providing an
authoritative, accessible, and more modern statement of directors’ duties. Accordingly, the common law
duties have been abolished (although as is discussed, the case law remains very relevant) and replaced by
the duties found in ss 171–177 of the CA 2006. The law relating to director transactions that require
member approval has also been restated in ss 188–226. Figure 4.1 sets out the duties as imposed by the CA
2006. ↵
Figure 4.1 Directorsʼ duties
p. 70
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Looking for extra marks?
An exam question may require you to discuss whether or not codification was a worthwhile reform.
For a detailed yet clear discussion of the advantages and disadvantages of codifying the law relating
to directors’ duties, see the Law Commission Report entitled Company Directors: Regulating Conflicts
of Interest and Formulating a Statement of Directors’ Duties (Law Com No 261, 1999) and the
consultation documents of the Company Law Review Steering Group entitled Developing the
Framework (2000) and Completing the Structure (2000).
The general duties
The CA 2006 refers to the newly codified duties as the ‘general duties’ and provides that they are ‘based on
certain common law rules and equitable principles as they apply in relation to directors’ (CA 2006, s
170(3)). This makes clear the fact that codification has not radically altered the content of the duties, but
has merely restated them in a more appropriate manner (although notable reforms have been made). The
lack of change ensures that the significant and authoritative pre-2006 body of case law that exists will
remain relevant—a fact backed ↵ up by s 170(4), which provides that ‘regard shall be had to the
corresponding common law rules and equitable principles in interpreting and applying the general duties’.
Accordingly, you should not ignore case law simply because it was decided under the common law duties,
especially as the CA 2006 does not specify what remedies can be ordered for breach of the various duties,
but simply provides that the remedies under the common law will continue to apply to their statutory
successors (CA 2006, s 178(1)).
Looking for extra marks?
It would not have been unduly burdensome for Parliament to set out in the CA 2006 what remedies
are available for breach of the general duties, but it chose not to. Setting out the remedies would
have made the law clearer and more accessible, but by preserving the remedies already set out in
case law, the law remains flexible as the courts can continue to develop existing case law in a way
that would not have been possible if the remedies had been set out in statute. By not setting the
remedies out in statute, do you think the statutory statement of directors’ duties is incomplete or
lacks the clarity that it should have had?
The general duties are ‘owed by a director of a company to the company’ (CA 2006, s 170(1)). Accordingly:
p. 71
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(a)
(b)
As the directors owe their duties to the company, they do not generally owe their duties to members,
creditors, employees, or anyone else. The result is that generally only the company itself can
commence proceedings to remedy a breach of the directors’ duties, although in some cases the
members might be able to commence proceedings via a derivative claim (discussed at p 155, ‘The
derivative claim’).
Although the general duties are ‘owed by a director’, it is clear that they can also be owed by other
persons in certain situations (e.g. the duties in ss 175 and 176 can apply to former directors).
Directors continue to owe general duties to the company, even if the company is in administration or
a creditors’ voluntary liquidation (Re System Building Services Group Ltd [2020]).
The courts have struggled to clearly and consistently articulate what duties shadow directors are subject
to. A new s 170(5) of the CA 2006 now provides that the general duties apply to a shadow director ‘where
and to the extent that they are capable of so applying’, with the 2015 Act’s Explanatory Notes stating that
this means that the general duties will apply to shadow directors unless they are not capable of so
applying. In addition, s 89(2) of the SBEEA 2015 empowers the Secretary of State to make regulations
setting out which general duties do, and do not, apply to shadow directors. At the time of writing, no such
regulations have been made. A useful summary of the relevant law was provided by Trower J in Standish v
Royal Bank of Scotland plc [2019], paras 50–65.
Sections 171–177 of the CA 2006 provide for seven general duties (with a supplementary duty found in s
182) and you should ensure that you are familiar with them all.
Revision tip
It is important to note that the general duties discussed below do not exist in isolation and they are
not mutually exclusive—a point emphasized by s 179 which provides that ‘[e]xcept as otherwise
provided, more than one of the general duties may apply in any given case’. In a problem question,
a single act of a director may therefore involve multiple general duties being breached. Likely
overlaps are discussed below.
Duty to act within the company’s powers
The first general duty can be found in s 171 and is an amalgam of two prior common law duties, namely:
the duty to act in accordance with the company’s constitution, and
the duty to exercise powers only for the purposes for which they are conferred.
As is discussed at p 51, ‘The capacity of a company’, the powers of the company are predominantly set out
in the company’s articles, and the default position is that companies created under the CA 2006 will have
unrestricted objects. However, it is common for companies to impose some form of limitation on the
p. 72
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directors’ power and directors who breach such limitations (e.g. by acting ultra vires) will likely breach the
duty found in s 171(a). A director who breaches the duty found in s 171(a) is liable to account for any gains
made and to indemnify the company for any losses resulting from the breach.
Whilst the duty to act in accordance with the company’s constitution is important, it is the second strand
of the s 171 duty that is arguably the more important. This strand is based on the common law ‘proper
purpose’ doctrine and provides that directors must exercise their powers only for the purposes for which
they are conferred.
Revision tip
The duty found in s 171(b) is a wide-ranging one and applies to all the powers of a director.
However, much of the case law in relation to the proper purpose doctrine concerns the directors’
power to allot shares (discussed at p 131, ‘The power to allot shares’), or the extent to which the
directors can act to frustrate a takeover bid. Should you face a problem question involving either of
these situations, do not forget to consider whether or not the directors have used their powers for a
proper purpose. If the directors have acted for the dominant purpose of maintaining themselves in
office, manipulating voting power, or benefiting themselves financially, the duty will likely have
been breached.
The problem that arises is that directors will often exercise their powers for several purposes, some of
which are proper and others improper. The approach taken by the courts in such instances was established
in the following case.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)
Facts: Ampol Petroleum Ltd (‘Ampol’) controlled 55 per cent of shares in RW Miller (Holdings) Ltd
(‘Miller’) and wanted to take it over. Howard Smith Ltd (‘HS’) made a rival bid which was rejected
by Miller’s majority shareholder, namely Ampol. Miller’s directors favoured HS’s bid, but this bid
could not succeed so long as Ampol was the majority shareholder. Accordingly, Miller’s directors
allotted a batch of shares and issued them to HS. The purpose of the share allotment was (i) to raise
capital to purchase a new oil tanker and (ii) to reduce Ampol’s shareholding to 37 per cent, thereby
preventing it from rejecting HS’s bid. Ampol alleged that the allotment of shares was for an
improper purpose.
Held: Where the directors exercise their powers for several purposes, the court should objectively
determine what is the dominant purpose. If the dominant purpose is proper, no breach of duty will
occur, even though subservient improper purposes might exist and vice versa. Applying this, the
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1.
2.
3.
4.
court held that the dominant purpose of the share issue was to relegate Ampol to the status of
minority shareholder. This was unsurprisingly deemed to be an improper purpose and so Miller’s
directors had breached their duty to act for a proper purpose.
↵ In Extrasure Travel Insurances Ltd v Scattergood [2003], it was stated that the test in Howard Smith
involves four parts:
the court will determine what power is being exercised;
the court will determine the proper purpose for which that power was delegated to the directors;
the court will determine the substantial purpose for which the power was in fact exercised; and
the court will determine whether that substantial purpose was proper.
Further guidance was provided in the following Supreme Court case. Whilst the Justices unanimously
agreed that the duty had been breached, the opinions advanced by Lord Sumption do leave some questions
unanswered.
Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71
Facts: The board of JKX Oil & Gas plc (‘JKX’) believed that JKX was the target of a ‘corporate raid’
under which two minority shareholders (Eclairs and Glengary) would seek to obtain control of JKX.
Section 793 of the CA 2006 allows a company to issue a notice upon a person, requiring that person
to disclose certain information regarding their shares. Article 42 of JKX’s articles provided that if a
s 793 notice was not complied with, JKX could place restrictions upon the non-complying party,
including disenfranchising that party’s shares. JKX issued a s 793 notice to Eclairs and Glengary,
but was not satisfied with the information received. Accordingly, the directors exercised the power
under art 42, thereby preventing Eclairs and Glengary from voting at the upcoming AGM (Eclairs
and Glengary planned to vote against a number of resolutions tabled by the board of JKX). Eclairs
and Glengary stated that the board of JKX had exercised this power for an improper purpose. At first
instance, it was held that the disenfranchisement of Eclairs and Glengary was invalid as the
directors of JKX exercised the power in art 42 in order to ensure that their resolutions passed at the
upcoming AGM, and this was clearly an improper purpose. On appeal, the Court of Appeal held that,
when determining the validity of restrictions imposed under the articles following a breach of s
793, the purpose behind those restrictions was immaterial and so the disenfranchisement of Eclairs
and Glengary was valid. Eclairs and Glengary appealed.
Held: The Supreme Court allowed the appeal and restored the first instance decision. The Court
held that the proper purpose rule did apply to art 42. Lord Sumption went on to state that ‘a battle
for control of the company is probably the one in which the proper purpose rule has the most
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valuable part to play’. The Court agreed with the first instance decision and held that the exercise of
art 42 was for an improper purpose. Accordingly, the disenfranchisement of Eclairs and Glengary
was invalid and the votes of these companies would count (resulting in two resolutions not being
passed at the AGM).
Looking for extra marks?
Be prepared to discuss this case and the lack of clarity exhibited. Lord Sumption (with whom Lord
Hodge agreed) gave the leading judgment. He appeared to move away from Howard Smith
somewhat by stating that the s 171(b) duty provides that directors should exercise their powers
‘only’ for the purposes for which they are conferred and, therefore, ‘[t]hat duty is broken if they
allow themselves to be influenced by any improper purpose’. However, Lord Mance disagreed with
this and the other two Justices declined to express a view on this point, leaving the scope of the
duty in a slightly unclear state (although it is likely that the traditional view in Howard Smith
remains good law), especially where a director acts based on several concurrent purposes.
↵ Any agreement entered into in breach of s 171(b) is voidable at the company’s instance, but a third
party may be able to enforce the agreement against the company if the director had authority to enter into
it (Criterion Properties plc v Stratford UK Properties LLC [2004]). The directors in question may be required to
compensate the company for any loss sustained. However, both consequences can be avoided if the
members ratify the breach of duty (Hogg v Cramphorn [1967]).
Duty to promote the success of the company
The second general duty can be found in s 172 and is a reformulation of the common law duty to act bona
fide in the interests of the company (Re Smith and Fawcett Ltd [1942]). Section 172 provides that a director
must ‘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’.
Revision tip
The duty found in s 172 is arguably the most important general duty and is the duty that has
undergone most change as a result of codification. Be prepared to discuss how the s 172 duty differs
from its common law predecessor, the rationale behind the changes, and the extent to which the
reforms encourage a more stakeholder-orientated approach. Numerous articles have been written
on s 172, so there is a wealth of academic analysis available.
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↵ The phrase ‘act in the way he considers’ clearly indicates that the duty is subjective, meaning that
what matters is what the directors honestly believed would promote the success of the company. It is not
the court’s place to substitute its views for those of the directors. Accordingly, providing that the decision
of the directors was honest, it does not matter that it was unreasonable (Extrasure Travel Insurance Ltd v
Scattergood [2003]). However, there are limits on the subjectivity of the duty. In Hutton v West Cork Rly Co
(1883), Bowen LJ stated that if the duty was entirely subjective then ‘you might have a lunatic conducting
the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet
perfectly irrational’. Accordingly, the courts will closely examine the evidence and try to determine
whether or not the directors honestly believed that their actions were designed to promote the success of
the company for the benefit of its members. Where a director’s act or omission causes the company harm,
the court will not be easily persuaded that the director honestly believed his actions to be in the company’s
interest (Regentcrest plc v Cohen [2001]). There is little doubt that where the evidence does not provide a
conclusive answer, the courts will temper the subjective test with an objective examination, but the test
still remains primarily subjective.
Revision tip
What if the director in question has not considered whether his act or omission will promote the
success of the company for the benefit of its members? In such a case, a subjective test will be of
little use. In Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970], Pennycuick J stated that, in such
cases, the proper test would be ‘whether an intelligent and honest man in the position of the
director of the company concerned, could … have reasonably believed that the transaction was for
the benefit of the company’. Accordingly, in such cases, the duty becomes primarily objective.
However, this approach has been criticized, with some academics (e.g. Rosemary Teele Langford
and Ian M Ramsay, ‘Directors’ Duty to Act in the Interests of the Company—Subjective or
Objective?’ [2015] JBL 173) arguing that a director who fails to consider whether his act or omission
promotes the success of the company should be held in breach of s 172. Pennycuick J in
Charterbridge stated that such an approach was ‘unduly stringent’ and could result in a breach of s
172 even where the director’s act benefitted the company.
The phrase ‘promote the success of the company for the benefit of its members’ is interesting, but the Act
does not indicate how the success of the company is to be measured. Parliamentary debate in Hansard
indicates that success should be measured in terms of long-term shareholder value. In many cases, the
interests of the company and its members will align, so no problem arises. However, this will not always be
the case and, in some cases, the interests of the company and its members may conflict. The following case
indicates that where the interests of the company and part of its membership conflict, preference should
be given to the interests of the company. Whether the directors can favour the company over the members
as a whole is unclear.
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Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985]
BCLC 11 (Ch)
Facts: Rank Organisation Ltd issued 20 million shares, half of which were made available, on
preferential terms, to existing shareholders. However, existing shareholders in the USA and Canada
were excluded from this offer on the ground that to include them would require the company to
comply with complex legislation in those countries, which would prove costly and therefore would
not be in the company’s interests. Mutual Life Insurance Co of New York (an organization acting on
behalf of a number of Rank’s American shareholders) objected to the exclusion.
Held: Rank’s directors had exercised their powers in the interest of the company, and so, in
favouring the company over some part of the shareholders, they had not breached their duty.
↵ The duty imposed by s 172 is a broad one and can impact upon other duties. In Item Software (UK) Ltd
v Fassihi [2004], the Court held that a director who breaches a fiduciary duty will be required to disclose
that breach of duty to the company if the duty to act in the interests of the company requires such
disclosure. The Court in British Midland Tool Ltd v Midland International Tooling Ltd [2003] held that this
obligation extends to disclosing the breaches of fellow directors. In keeping with the subjective nature of
this duty, the key factor is whether the director honestly considers that it is in the company’s interest to
know about the breach (Fulham Football Club (1987) Ltd v Tigana [2004]). Clearly, disclosure of a breach of
duty will usually be in the company’s interests and a failure to do so might result in a breach of s 172, in
addition to a breach of the original duty. In GHLM Trading Ltd v Maroo [2012], Newey J went further and
stated, obiter, that this duty of disclosure could extend to disclosing matters other than wrongdoing and
that disclosure might be justified to a person other than a board member. A failure to disclose can result in
a loss of employment benefits (e.g. share options or certain employment rights) and may provide a
justification for summary dismissal (Tesco Stores Ltd v Pook [2003]). The obligation upon a director to
disclose his own breaches of duty and those of his fellow directors is a controversial and developing area of
the law. For more, see Alan Berg, ‘Fiduciary Duties: A Director’s Duty to Disclose his Own
Misconduct’ (2005) 121 LQR 213.
A common criticism levelled at the previous common law duty was that it overly prioritized the interests of
members and failed to acknowledge the effect that the directors’ actions can have on other constituents,
such as employees, creditors, or the environment. To remedy this, the Company Law Review Steering
Group recommended the adoption of the ‘enlightened shareholder value approach’, under which the
interests of the members would retain priority, but the directors would also be required to take into
account wider factors.
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Looking for extra marks?
The other approach considered by the Company Law Review Steering Group was the ‘pluralist
approach’, which provided that the members’ interests would not have priority and the company
would be required to equally balance the interests of all stakeholders. In a discussion of s 172, be
prepared to discuss why the Company Law Review Steering Group rejected the pluralist approach
(on this, see the consultation document entitled The Strategic Framework (1999)), and whether you
think it was right to do so.
↵ Parliament accepted the Company Law Review Steering Group’s recommendation and so s 172(1)
provides that when directors are considering what would promote the success of the company for the
benefit of its members, regard must be had (amongst other things) to:
The likely consequences of any decision in the long term. The White Paper Company Law Reform (Cm
6456, 2005) recommended that the directors should be required to consider the short-term and
long-term impact of their actions—that Parliament chose to remove the reference to short-term
impacts clearly indicates that it considers the long-term well-being of the company to be more
important. This is noteworthy as a common criticism of our system of company law was that it took
an overly short-term approach.
The interests of the company’s employees.
The need to foster the company’s business relationships with suppliers, customers, and others.
The impact of the company’s operation on the community and the environment.
The desirability of the company maintaining a reputation for high standards of business conduct.
The need to act fairly as between members of the company.
There is one group that is notably absent, namely the creditors (although, of course, suppliers, customers,
and employees may be creditors). Prior to the 2006 Act, there were several notable dicta requiring the
directors to take into account the interests of creditors when the company neared insolvency (see e.g. West
Mercia Safetywear Ltd v Dodd [1988]). Section 172(3) preserves these principles by stating that s 172 ‘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’. However, the courts have struggled to establish exactly
when directors must take into account the interests of creditors. On this, see BAT Industries plc v Sequana
SA [2019], but note that permission to appeal to the Supreme Court has been granted. For more on the duty
towards creditors, see Andrew Keay, ‘Directors’ Duties and Creditors’ Interests’ (2014) 130 LQR 443.
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Looking for extra marks?
To what extent does s 172 provide a more stakeholder-friendly duty? The non-exhaustive list of
factors contained in s 172(1) is welcome, but the directors are only required to ‘have regard’ to
these factors. The phrase ‘have regard’ was used in s 309 of the CA 1985, which imposed a duty on
directors to have regard to the interests of employees, but it was universally acknowledged that this
duty was extremely weak. What s 172 does not clearly state is whether the directors are free to
subordinate the interests of the members to the interests stated in s 172(1), although Lord
Goldsmith, a former Attorney General, stated in Hansard that the list of factors in s 172(1) was
subordinate to the overall duty imposed by s 172. For an excellent discussion of the common law
predecessor to s 172, and the extent to which s 172 changes the law, see David Kershaw, Company
Law in Context: Text and Materials (2nd edn, OUP, 2012) ch 10.
↵ Where a director acts in a manner that breaches s 172, that act is voidable at the company’s instance.
Where the act also causes the company to sustain loss, those directors in breach will be required to
indemnify the company for such loss. Given the breadth of the duty found in s 172, it can be difficult for the
members to determine whether or not the directors have breached the s 172 duty. Accordingly, s 414A of
the CA 2006 places a duty on the directors to prepare a strategic report for each financial year. Section
414C goes on to state that ‘[t]he purpose of the strategic report is to inform members of the company and
help them assess how the directors have performed their duty under section 172 … ’. Section 414C then
goes on to state what information must be contained within the strategic report. The government, as part
of its corporate governance review, has also stated that it will introduce subordinate legislation to require
all companies of a significant size to explain how their directors comply with s 172 to have regard to
employee and other interests.
Duty to exercise independent judgment
The third general duty, namely the duty to exercise independent judgment found in s 173, is a
reformulation and encapsulation of the common law duty placed upon directors not to fetter their
discretion when exercising their powers. However, this duty was not absolute and the courts recognized
that directors could fetter their discretion and bind themselves to act in a certain way if they bona fide
believed such an action to be in the interests of the company (Fulham Football Club Ltd v Cabra Estates plc
[1992]). This principle has been preserved by s 173(2)(a) which provides that the duty to exercise
independent judgment will not be breached where the directors act ‘in accordance with an agreement duly
entered into by the company that restricts the future exercise of discretion by its directors’. Additionally, s
173(2)(b) provides that the duty will not be breached where the director acts in a way that is authorized by
the company’s constitution (e.g. where the articles provide that a nominee director must follow the
instructions of the person who nominated him).
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(a)
(b)
Revision tip
Note that s 173 does not require a director to be independent. A director who lacks independence
(e.g. because he has a conflict of interest under ss 175, 176, or 177) will not be in breach of the s 173
duty as a result of his lack of independence. The s 173 duty requires the director to exercise
independent judgment. An example of this would be where a director exercises no judgment of his
own and blindly follows the instructions of another person. Note, however, that reliance upon
advice will not generally amount to a breach of the s 173 duty.
Any agreement entered into that contravenes s 173 will be voidable at the company’s instance. Any
directors in breach will also be required to account for any gains made and indemnify the company for any
losses sustained as a result of the breach.
Looking for extra marks?
If you are required to discuss the s 173 duty, an excellent analysis of the duty, together with a
discussion of its common law predecessor, can be found in Andrew Keay, ‘The Duty of Directors to
Exercise Independent Judgment’ (2008) 29 Co Law 290.
Duty to exercise reasonable care, skill, and diligence
The fourth general duty can be found in s 174 and places a duty on directors to ‘exercise reasonable care,
skill and diligence’. The common law had imposed a similar duty on directors long before the CA 2006 was
passed (Re City Equitable Fire Insurance Co Ltd [1925]), but the common law duty was heavily subjective and
based on the skills and experience that the director actually had. Accordingly, a director with little skill or
experience would be subject to an extremely low standard of care (see e.g. Re Cardiff Savings Bank [1892];
Re Brazilian Rubber Plantations and Estates Ltd [1911]).
The effect of the subjective duty was to allow unskilled, inexperienced, and incompetent directors to use
their deficiencies as a shield against liability. Accordingly, the courts added an objective element to the
duty and this dual subjective/objective test has now been incorporated into the s 174 duty. Section 174(2)
provides that the standard of care, skill, and diligence expected of a director is based on that of a
reasonably diligent person with:
the general knowledge, skill, and experience that may reasonably be expected of a person carrying
out the functions carried out by the director in relation to the company, and
the general knowledge, skill, and experience that the director actually has.
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The test found in (a) imposes an objective minimum standard of care that will apply to all directors,
irrespective of their individual capabilities. Accordingly, directors can no longer use their lack of skill or
experience as a means of lowering the standard of care. However, this standard will take into account the
functions of the director, so the standard will likely vary from director to director (e.g. the standard
imposed on a director of a small private company will likely differ from the standard imposed on a director
of a listed company), thereby providing the courts with a measure of flexibility. The test found in (b)
imposes a subjective standard that will apply where the director has some special skill, qualification, or
ability (e.g. he is a lawyer or an accountant), and will serve to raise the standard expected of the director.
Looking for extra marks?
Be prepared to critically evaluate this dual test. Imposing higher subjective standards is a
controversial issue. The rationale behind it is that such qualified persons are employed to bring
their special skills or knowledge to bear (and are likely to be paid more as a result), so the
imposition of a higher standard requires them to use such skills. The counter-argument is that the
higher standard might deter such qualified persons from undertaking directorial office.
Section 174 establishes the test the courts must use, but does not provide any guidance as to how to apply
the test, or what sort of factors will be relevant in determining whether or not a breach has occurred.
Accordingly, case law will remain highly relevant (although much of it is first instance) with the following
leading case providing an especially useful series of principles that have been widely cited by subsequent
courts.
Re Barings plc (No 5) [2000] 1 BCLC 523 (CA)
Facts: Barings Bank collapsed in 1995 following the unauthorized trading activities of a trader
named Nick Leeson, which resulted in the bank sustaining losses of £827 million. The case
concerned three of the bank’s directors who, it was alleged, had made serious errors of
management in relation to Leeson’s activities. At first instance, Jonathan-Parker J held that the
three directors should be disqualified.
Held: The Court of Appeal upheld the disqualifications and, more importantly, it affirmed a series
of principles laid down at first instance by Jonathan-Parker J in relation to the duty of skill and
care, namely:
Directors have a continuing duty to acquire and maintain a sufficient knowledge and
understanding of the company’s business to enable them properly to discharge their duties.
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Whilst directors are entitled to delegate particular functions to those below them, and to trust
their competence and integrity to a reasonable degree, such delegation will not absolve the
director of the duty to supervise the discharge of the delegated functions.
The extent of the duty, and the question as to whether it has been discharged, must depend on
the facts of each particular case, including the director’s role in the company’s management.
↵ A director who causes his company to sustain a loss due to a failure to exercise reasonable care, skill,
and diligence will be liable to compensate the company for such loss. However, obtaining compensation
for a breach of s 174 is not easy, as the claimant will need to prove that the acts of the director(s) in
question were the cause of the company’s loss. This explains why many cases involving director negligence
are not brought under s 174, but are brought under the Company Directors Disqualification Act 1986.
Duty to avoid conflicts of interest
Section 175 contains the first of several duties relating to conflicts of interest and provides that ‘[a]
director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the interests of the company’. Examples of conduct that may
(although not necessarily will) constitute a breach of s 175 include:
a director helps a competing company (e.g. by sitting on its board, or by providing it with consultancy
services);
a director learns of a business opportunity, or acquires information, whilst director of a company,
and then exploits that opportunity/information to benefit himself personally (referred to as ‘the
corporate opportunity doctrine’);
a director uses the company’s property to benefit himself financially;
a director of a company is also a major customer, supplier, or creditor of that company.
↵ Section 175(2) provides that this duty arises in particular to ‘the exploitation of any property,
information or opportunity’ and it is irrelevant whether or not the company wishes or is able to take
advantage of the property, information, or opportunity. The fact that the profit made by the director is
negligible is also irrelevant (Towers v Premier Waste Management Ltd [2011]). Section 175(3) states that s
175 does not apply to transactions between a director and the company—where the transaction is with the
company, then the duties in ss 177 and 182 will instead be applicable. The s 175 duty is extremely strict as
can be seen in the following case.
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Bhullar v Bhullar [2003] EWCA Civ 424
Facts: For over fifty years, the families of two brothers (M and S) had run a company that let
commercial property. Following an argument, it was decided that the families would part ways. M’s
family proposed that the company should not acquire any further properties and S’s family agreed.
A director, who was part of S’s family, discovered, by chance and not whilst acting in the course of
the company’s business, a piece of property near to a piece of property owned by the company.
Through another company that they owned, S’s family acquired this property without informing
M’s family. M’s family alleged that S’s family had acted in conflict with the interests of the
company.
Held: Although S’s family acquired knowledge of the property in a ‘private’ capacity, the
opportunity to purchase the property was one that belonged to the company. Whether or not the
company could have or would have acquired the property (because it was in the process of being
wound up) was irrelevant.
Looking for extra marks?
This case has been heavily criticized, largely because the company agreed, at the behest of M’s
family, not to acquire any more properties. The Court, in effect, allowed M’s family to change their
minds opportunistically at the moment an attractive commercial opportunity arose. For a detailed
discussion of this case, see Hans C Hirt, ‘The Law on Corporate Opportunities in the Court of
Appeal: Re Bhullar Bros Ltd’ [2005] JBL 669. See also the case of Regal (Hastings) Ltd v Gulliver
[1967].
Section 175 preserves the strict and inflexible position evidenced in Bhullar and there is little doubt that the
case would be decided the same way under s 175. However, pre-CA 2006 law did mitigate the harshness of
the rule in one important respect, namely that the duty would not be breached if the director disclosed the
nature of the conflict and obtained authorization.
Section 175(5) preserves this rule, but amends the requirement of authorization. Under pre-2006 law, the
director could disclose the conflict and obtain authorization from the company in general meeting, but
companies could provide, in their articles, that disclosure and authorization from the board would be
sufficient. Under the CA 2006, where the company is private, authorization from the directors alone will
suffice unless the constitution provides otherwise (the model articles contain no such prohibition),
therefore avoiding the need to organize a general meeting. The directors of public companies can provide
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authorization, but only if the constitution so provides (the model articles do not contain a provision
allowing ↵ the directors to authorize a conflict). A director’s power to authorize a conflict must, like all
other powers, be exercised in accordance with the general duties, notably ss 171, 172, and 174.
Where a director breaches s 175, any resulting contract is voidable at the company’s instance, provided
that the third party involved had notice of the director’s breach (Hely-Hutchinson & Co Ltd v Brayhead Ltd
[1968]). In addition, the company can require the director to account for any profit made as a result of the
conflict (Aberdeen Railway Co v Blaikie Bros (1854)). These consequences can be avoided if the members
ratify the director’s breach.
Revision tip
As noted, the general duties are not mutually exclusive and a single act may breach several duties.
In Industrial Development Consultants Ltd v Cooley [1972], the court held that a director who fails to
disclose the existence of a conflict may, in addition to breaching a duty involving a conflict of
interest, also breach the duty to act in the interests of the company—it is likely that this will
continue to apply to the successor duty found in s 172.
Duty not to accept benefits from a third party
The sixth general duty can be found in s 176 and provides that a director must not accept from a third party
a benefit conferred by reason of his being a director, or by doing (or not doing) anything as a director. An
obvious example of such a benefit would be a payment made to a director to influence his decision (e.g. X
pays a bribe or a commission payment to a director if the company agrees to do business with X).
As with s 175, motive is irrelevant and it will be no defence for the director to argue that he acted in good
faith. However, the s 176 duty will not be breached where ‘the acceptance of the benefit cannot reasonably
be regarded as likely to give rise to a conflict of interest’ (CA 2006, s 176(4)). Accordingly, the duty only
arises in relation to benefits that are likely to give rise to a conflict of interest.
Revision tip
Given that the s 176 duty only arises in relation to benefits that are likely to cause a conflict, it
might be thought that the s 176 duty is irrelevant as s 175 would cover such cases. Certainly, there is
a significant overlap between ss 175 and 176, but there is a key difference. A conflict under s 175 can
be authorized by the directors, whereas a conflict under s 176 can only be authorized by the
members (this is not expressly stated, but is a consequence of s 180(4)(a) of the CA 2006, which
preserves the common law rules relating to authorization). This clearly indicates that the receipt of
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benefits from third parties constitutes a greater danger to board impartiality than the conflicts
covered solely by s 175. For an example of a conflict that fell within s 176, but not s 175, see Parr v
Keystone Healthcare Ltd [2019].
Should a director accept an unauthorized third-party benefit, the company can rescind the contract and
the benefit can be recovered (Shipway v Broadwood [1899]). Instead of recovering the benefit, the company
can claim damages in fraud from either the director ↵ in breach or the third party. In addition, the
company can summarily dismiss the director (Boston Deep Sea Fishing Co v Ansell (1888)). If the benefit
amounts to a bribe, then under agency principles, other consequences may follow (e.g. the director may
lose any right to remuneration (Andrews v Ramsay & Co [1903])). Receipt of a bribe is also a criminal
offence (Bribery Act 2010, s 2).
Duty to declare interest in transactions or arrangements
The seventh and final general duty can be found in s 177, which provides that ‘[i]f a director of a company
is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the
company, he must declare the nature and extent of that interest to the other directors’. An example of this
would be where company A is proposing to enter into a transaction with a person who has links to a
director of company A.
Guidance on what information must be included in the declaration can be found in Fairford Water Ski Club
Ltd v Cohoon [2020], paras 67–104. The declaration must be made before the company enters into the
transaction or arrangement (CA 2006, s 177(4)). Two points should be noted:
the s 177 duty only applies to transactions/arrangements that are likely to give rise to a conflict of
interest, and
as the duty covers indirect transactions/arrangements, the director does not actually need to be a
party to the transaction/arrangement in order for the s 177 duty to be breached.
Following the declaration, the other directors can then decide, via a board resolution, whether to proceed
with the proposed transaction/arrangement. Note that under the model articles, the director who made the
declaration cannot generally participate in the board resolution, nor will he generally count towards the
quorum during that resolution.
Revision tip
In problem questions involving a conflict of interest, students are often unsure whether to apply s
175 or s 177. It is important that you understand the differences between the two duties as applying
the incorrect section will result in a loss of marks. The key difference is in the scope of the two
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duties. Section 175(3) states that s 175 does not apply to transactions between a director and the
company. Conversely, s 177 does apply to transactions between the director and the company. Also
note that, unlike s 175, s 177 only requires disclosure (and not authorization). Understanding the
different scope of the duties will better enable you to identify which section should be applied to the
facts of the question.
The s 177 duty relates to proposed transactions or arrangements only. Existing transactions or
arrangements are covered by s 182, which provides that where a director is interested in an existing
transaction or arrangement that has been entered into by the company, he must declare the nature and
extent of that interest to the directors. The duty found in s 182 is likely to be supplementary to the duty
found in s 177, as opposed to being a general duty in its own right.
↵ Where a director enters into a transaction in contravention of s 177, the transaction is voidable at the
company’s instance. Where a director enters into a transaction in contravention of s 182, he commits an
either way offence (CA 2006, s 183). A director can be liable under both sections if he does not disclose his
interest in a proposed transaction, and then does not disclose once the same transaction has been entered
into by the company.
Looking for extra marks?
That no liability is placed upon a director for a breach of s 177 has been heavily criticized for three
reasons. First, it appears that a director who has breached s 177 can keep any profit acquired if the
transaction or arrangement proceeds. Second, if rescission is not available (e.g. because a third
party’s rights would be affected), then there will be no consequences for the director’s breach of
duty. Third, it has been argued that there is no justification for imposing criminal liability for
breach of s 182, but not imposing criminal liability for breach of s 177 (indeed, s 317(7) of the
Companies Act 1985 (now repealed) imposed criminal liability on directors who failed to disclose
an interest in proposed or existing contracts).
A failure to comply with s 182 will not invalidate the transaction/arrangement, nor can the director
involved be made to account for any gains made or indemnify the company for losses sustained (Coleman
Taymar Ltd v Oakes [2001]), although such remedies may be obtained if a breach of any other general duties
has occurred.
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Revision tip
Sections 175, 176, 177, and 182 all relate to conflicts of interest. A single or continuing act or
omission can often result in breaches of multiple duties. For example, a director may fail to disclose
an interest in a proposed transaction, thereby causing a breach of the duty contained in s 177. Once
the company enters into the transaction, if the director does not disclose the interest as soon as is
reasonably practicable, he will also breach the duty found in s 182. The non-disclosure and his
failure to disclose his own breach of duty may also amount to a breach of s 172. Ensure that you are
aware of the differences between the various provisions, and the ways in which they can overlap.
Table 4.1 demonstrates the differences between the various conflict of interest duties in relation to
disclosure and authorization.
Transactions requiring member approval
In addition to the general duties, the law imposes more specific ‘duties’ in relation to certain transactions
or arrangements the directors enter into with the company (as these transactions are between the
company and the director, they could be regarded as specific cases involving a conflict of interest). In
relation to such transactions or arrangements, compliance with the general duties is insufficient (CA 2006,
s 180(3)) and member approval is also required.
Revision tip
Exam questions featuring one or more of the four specific statutory duties are reasonably common
(often alongside problem questions relating to the general duties), so ensure that you are aware of
these specific duties and the requirement of member approval.
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Table 4.1 Disclosure and authorization of conflicts of interest

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1.
2.
Service contracts
Historically, directors would try and make it prohibitively expensive to remove them from office by
negotiating lengthy service contracts. For example, if a company sought to remove a director five years
before his service contract is to end, and he was being paid £2 million per year, the company may need to
pay the director £10 million in compensation for early termination of his contract.
This practice is now regulated by s 188 of the CA 2006, which provides that a director cannot have a
guaranteed term of employment of over two years, unless it has been approved by a resolution of the
members. Where s 188 is breached, the relevant contractual provision will be void and the contract will be
deemed to contain a term allowing the company to terminate it at any time by giving reasonable notice (CA
2006, s 189).
Revision tip
Students frequently misunderstand s 189 by stating that if member approval is not obtained, the
director’s employment contract will be void. This is not the case—only the term relating to the
director’s length of employment will be void.
↵ Note that, in relation to companies with a premium listing, Provision 39 of the UK Corporate
Governance Code states that contract or notice periods should be one year or less, meaning that s 188 is
rarely relevant in such companies.
Substantial property transactions
Under the general duties, a director with a conflict of interest can avoid committing a breach of duty if he
discloses that interest to the other directors (although ss 175 and 176 also require authorization). However,
where the arrangement constitutes a ‘substantial property transaction’, disclosure alone is insufficient
and the company must not enter into the arrangement unless it has first been approved by a resolution of
the members, or is conditional upon such approval being obtained (CA 2006, s 190(1)). Two types of
arrangement require such approval:
where a director of a company, or a person connected with the director, acquires, or is to acquire, a
substantial non-cash asset, or
where the company acquires, or is to acquire, a substantial non-cash asset from such a director or
person so connected.
A ‘non-cash asset’ is ‘any property or interest in property, other than cash’ (CA 2006, s 1163(1)) and it will
be substantial if it is (i) over £100,000, or (ii) exceeds 10 per cent of the company’s asset value and is more
than £5,000 (CA 2006, s 191(2)).
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A substantial property transaction entered into without member approval is voidable at the company’s
instance, unless (i) restitution is impossible; (ii) the company has been indemnified; or (iii) a third party’s
rights would be affected (CA 2006, s 195(2)). Additionally, any director or connected person involved in the
arrangement will be liable to account for any gains made and will be liable to indemnify the company for
any losses sustained as a result of the arrangement. For an example of these above rules in action, see Re
Duckwari plc [1995].
Loans, quasi-loans, and credit transactions
Under the CA 1985, companies were generally prohibited from making any form of loan to their directors,
and breach of this prohibition constituted a criminal offence. The CA 2006 takes a very different approach
that is dependent upon the type of transaction in question:
No company can make a loan to a director unless the transaction has been approved by a resolution
of the members (CA 2006, s 197(1)).
A public company cannot make a quasi-loan to a director unless the transaction has been approved
by a resolution of the members (CA 2006, s 198(2)). A quasi-loan occurs where a company agrees to
pay a sum on behalf of the director, or where it reimburses expenses incurred by another due to the
actions of the director.
A public company cannot enter into a credit transaction (e.g. hire purchase or conditional sale
agreements, the leasing or hiring of goods) with a director unless it has been approved by a
resolution of the members (CA 2006, s 201(2)).
It should be noted that the requirement for member approval will not apply in certain cases (e.g. loans or
quasi-loans that do not exceed £10,000 do not require approval). Where approval is needed, a failure to
obtain such approval will result in the same remedies as failure to obtain approval for a substantial
property transaction.
Payments for loss of office
The law requires that the members approve certain voluntary payments made by the company to directors
leaving office, with such payments being defined by s 215(1) of the CA 2006. The rules differ depending on
whether the company is quoted or unquoted:
An unquoted company cannot make a loss of office payment to a director unless the payment has
been approved by a resolution of the members (CA 2006, s 217(1)).
A quoted company or an unquoted traded company cannot make a loss of office payment to a director
unless (i) the payment is consistent with the approved directors’ remuneration policy, or (ii) the
payment has been approved by a resolution of the members of the company (CA 2006, s 226C(1)).
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Looking for extra marks?
Be aware of why certain topics are current and controversial. Payments made to departing directors
are a controversial issue, especially where the payment has been made to a director who is regarded
as ineffective. The government originally recommended that loss of office payments made to
directors of quoted companies should be subject to a binding shareholder vote but, following
consultation, this was dropped and s 226C was enacted instead. Do you think such payments should
always be subject to member approval?
Where member approval is required and is not obtained, the recipient will hold the payment on trust for
the company and any director who authorized the payment is jointly and severally liable to indemnify the
company for any loss resulting from the payment (CA 2006, ss 222(1) and 226E(1)).
Relief from liability
A director who has committed a breach of duty may attempt, or be able, to obtain relief from liability in
several ways:
A director’s service contract or the company’s articles may contain a provision excluding liability for
negligence, default, breach of duty, or breach of trust. Such provisions are void (CA 2006, s 232(1)).
Similarly, provisions requiring the company to indemnify the director for losses sustained due to his
breach of duty are also generally void (CA 2006, s 233).
Section 239 of the CA 2006 puts in place, for the first time, a statutory scheme concerning
ratification of acts committed by directors that amount to negligence, default, breach of duty, or
breach of trust (it will be noted that these are the grounds for a derivative claim, as discussed at p 157,
‘The statutory derivative claim’). Accordingly, ratification can serve to prevent a derivative claim
from being brought (indeed, s 263(2)(c) provides that permission to continue a derivative claim will
be refused where the act has been ratified)). Ratification requires a resolution to be passed. Where
ratification occurs, any cause of action is extinguished, but acts that cannot be ratified under
pre-2006 law (e.g. acts not bona fide in the interests of the company) cannot be ratified under s 239.
Where an officer of the company is found liable for negligence, default, breach of duty, or breach of
trust, then s 1157 of the CA 2006 allows a court to grant that officer, either wholly or partly, relief
from liability on such terms as it sees fit. An officer of the company can also petition the court for
such relief. For an example of s 1157 in action, see Re Duomatic Ltd [1969].
Vacation of office
A director’s term of office may be vacated in numerous ways:
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The director can relinquish office at any time by giving notice to the company and the company must
accept his resignation. The director’s employment contract will normally provide for a notice period,
but where it does not, a term requiring reasonable notice will be implied into the contract (CMS
Dolphin Ltd v Simonet [2002]).
The articles may provide that a director’s office will terminate upon the occurrence of a specified
event. For example, the model articles provide that a person will instantly and automatically cease to
be a director if he is prohibited by law from being a director (e.g. because he has been disqualified). It
is common for a company’s articles to provide that a director must vacate office if the other directors
so require.
The company’s articles may provide for the retirement of the directors by rotation. In practice, it is
only public companies that tend to require retirement by rotation (as noted at p 65, ‘Appointment’).
Two forms of termination of office are more complex and deserve further discussion, namely removal and
disqualification.
Removal
Section 168(1) of the CA 2006 provides that ‘[a] company may by ordinary resolution at a meeting remove
a director before the expiration of his period of office, notwithstanding ↵ anything in any agreement
between it and him’. Despite the wording, s 168 can be used to remove multiple directors. It should also be
noted that the words ‘at a meeting’ indicate that the written resolution procedure cannot be used (CA
2006, s 288(2)(a)).
The power granted to members by s 168 appears extremely substantial, but two factors mitigate its
usefulness. First, a removal under s 168 does not deprive the director of compensation payable as a result
of the removal (CA 2006, s 168(5)). If the director’s remuneration is substantial, or his service contract
lengthy, this compensation may be extremely high. Second, s 168 does not prohibit companies from
including weighted voting clauses in their articles (the model articles do not provide for weighted voting
rights). Such a clause usually provides that, in the event of a vote seeking to remove a director from office,
the voting power of the director will be increased, usually to such an extent as to enable him to defeat any
resolution seeking his removal. The case of Bushell v Faith [1970] provides an excellent example of how
weighted voting clauses can weaken the power granted to shareholders by s 168.
Looking for extra marks?
In practice, the effect of weighted voting clauses may be more limited than many realize. First, the
clause in Bushell was justified on the ground that the company in question was a quasi-partnership,
and it may be the case that such clauses are effective only in relation to such companies (although
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no rationes or dicta exist to this effect). Second, such clauses will breach the Listing Rules, and so
will not be adopted by listed companies. Third, a weighted voting clause could be removed by
passing a special resolution.
It should be noted that a removal can take place other than under s 168. Section 168(5)(b) provides that s
168 should not be construed as derogating from any power to remove a director that exists outside s 168.
Accordingly, the power to remove a director under s 168 exists alongside any other power (e.g. the articles
may contain a provision allowing the directors to remove a board member via a board resolution). The
advantage of using a separate board power is that it will not be subject to the procedural requirements
found in s 168 (Browne v Panga Pty Ltd (1995)).
Disqualification
The members may be able to remove a director from office but the Company Directors Disqualification Act
1986 (CDDA 1986) grants the court the power to make an order disqualifying a person from promoting,
forming, or taking part in the management of a company (or LLP) without the leave of the court.
Numerous grounds for disqualification exist, including:
A person can be disqualified if he commits an indictable offence in connection with the promotion,
formation, or management of a company (CDDA 1986, s 2).
A person can be disqualified if he is a director of a company that has become insolvent and his
conduct as a director makes him unfit to be concerned in the management of the company (CDDA
1986, s 6). Most disqualifications occur under s 6.
A director can be disqualified where he has been found to have engaged in fraudulent trading or
wrongful trading (CDDA 1986, s 10).
Looking for extra marks?
Be aware of how this area of the law has evolved and will continue to evolve. The grounds for
disqualifying a director have recently expanded and will likely continue to expand. The government
also plans to increase the scope of the disqualification regime to cover former directors of dissolved
companies.
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Revision tip
In problem questions, you may be required to advise a director of the possible consequences of his
actions. Students tend to ignore the potential for disqualification, and focus solely on the rescission
of transactions, the payment of compensation, or the imposition of criminal liability. A director
who could be barred from acting as a director for numerous years will clearly want to know of this
potential consequence, so make sure you are aware of the grounds for disqualification.
Breach of a disqualification order or undertaking constitutes an either way offence. Further, a person who
acts as a director whilst disqualified can be personally liable for the debts and liabilities of the company
incurred during the duration of the contravention (CDDA 1986, s 15). The SBEEA 2015 inserted new s 15A–
C into the CDDA 1986, which empowers the courts to make compensation orders against a person,
providing that (i) the person is subject to a disqualification order or undertaking, and (ii) the conduct to
which the order or undertaking relates has caused loss to one or more creditors of an insolvent company of
which the person has at any time been a director. The order will require the disqualified person to
compensate the creditors or the company. For guidance on the exercise of the powers granted by s 15A–C,
see the first case where a compensation order was granted, namely Re Noble Vintners Ltd [2019].
Succession planning
Irrespective of how a director vacates office, a key goal of the company will be the appointment of the
departing director’s successor. Succession planning is now recognized as a key governance issue, with the
Financial Reporting Council (FRC) stating that sound succession planning contributes to the long-term
success of a company, principally because it ‘ensures a continuous supply of suitable people (or a process
to identify them), who are ready to take over when directors, senior staff and other key employees leave
the company in a range of situations’. The UK Corporate Governance Code provides that companies should
have an effective succession plan in place for board and senior management. Unfortunately, Grant
Thornton’s 2019 Corporate Governance Review states that only 17 per cent of FTSE 350 companies provide
good or detailed accounts of their succession planning.
Key cases

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Case Facts Principle

Key debates

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Exam questions
Essay question
‘The codification of directorsʼ duties has done little in practice to improve the law.ʼ
Do you agree with this statement? Provide reasons for your answers.
See the Outline answers section in the end matter for help with this question.
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Problem question
Ethos plc is a major, international graphic design company. One of Ethosʼ directors, Mike, is in extreme financial
difficulty and is close to having to declare himself bankrupt (which would make him ineligible to act as a director of
Ethos). Accordingly, to prevent this, the other directors of ↵ Ethos cause the company to lend Mike £15,000. The
transaction is disclosed at a meeting of the directors and the directors unanimously agree to authorize the loan. Mike
was present at this meeting, but did not vote on whether the loan should be made.
Ethosʼs articles of association state that ‘Ethos plc may engage in any activity directly related, or incidental to, the
carrying on of a graphic design businessʼ. The directors of Ethos cause the company to lend £5,000 to Ceri, who will
then pay off the loan over a two-year period. Ceri is a major client of Ethos but, aside from this, she has no other links
with the company or its directors. A number of Ethos members hear of the loan and argue that Ceri must repay the
money immediately.
The board of Ethos discover that Asset Strip plc is considering a takeover bid of Ethos. Asset Strip plans to break up
the various parts of Ethos and sell them off individually and to remove the companyʼs directors. Ethos is making a
considerable profit and the directors genuinely believe that it would not be in the interests of the company or its
members for Ethos to be taken over by Asset Strip. Accordingly, the directors cause the company to issue new shares
to Sylvia—an existing member who is known to oppose the takeover—with the aim of preventing the takeover from
succeeding.
Discuss whether or not Ethos or any of its directors have breached the law.
Online resources
This chapter is accompanied by a selection of online resources to help you with this topic, including:
An outline answer <https://iws.oupsupport.com/ebook/access/content/roach-concentrate6e-student-resources/
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roach-concentrate6e-chapter-4-further-reading?options=name>
Interactive key cases <https://iws.oupsupport.com/ebook/access/content/roach-concentrate6e-studentresources/roach-concentrate6e-chapter-4-interactive-key-cases?options=name>
Multiple choice questions <https://iws.oupsupport.com/ebook/access/content/roach-concentrate6e-studentresources/roach-concentrate6e-chapter-4-multiple-choice-questions?options=name>
© Oxford University Press 2020
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