{"id":383,"date":"2019-06-05T08:32:52","date_gmt":"2019-06-05T08:32:52","guid":{"rendered":""},"modified":"2019-06-07T09:28:22","modified_gmt":"2019-06-07T09:28:22","slug":"law-standards-limited-liability-8363","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-essays\/company-law\/law-standards-limited-liability-8363.php","title":{"rendered":"English Law Standards for Limited Liability Company"},"content":{"rendered":"

Critically discuss whether English law requires directors in English limited liability companies to behave to a sufficiently high standard in their conduct of the affairs of such companies. Illustrate your answers by reference to case law post Companies Act 2006<\/a> if relevant. <\/strong><\/p>\n

The Companies Act 2006 sets out the specific
\nduties that directors owe to the companies which they manage. It is to the
\nbenefit of directors that they understand and observe the importance of these
\nduties. The legislation and other associated statuses cover general business
\nfunctions such as tax, employment, health and safety to specific duties which
\nindividual companies carry out in the delivery of their services. The Act
\naddresses the exposure and the extent to which directors could become
\npersonally liable. This requires that directors are expected to behave to a
\nstandard as they manage the affairs of their companies. <\/p>\n

The CA
\n2006 supersedes and codified the accepted common law and equitable duties of
\ndirectors, however, this may not be termed as an exhaustive classification of
\nthe duties of directors as the view is that common law duties do continue to operate
\nwithin a limited scope.<\/p>\n

The directors of a company form the board of
\nthe company and are empowered to make decisions and take actions within defined
\nlimits on behalf of the company as set out in the company\u2019s articles. Chapter 2 of Part 10 of the
\nCompanies Act centers on the general duties of directors. <\/p>\n

The Scope and
\nNature of General Duties<\/strong><\/p>\n

The general duties are based on certain common law rules and
\nequitable principles as they apply in relation to directors and have effect in
\nplace of those rules and principles as regards to the duties owed to a company
\nby a director. Also, the general duties shall be interpreted and applied in the
\nsame way as common law rules or equitable principles, and regard shall be had
\nto the corresponding common law rules and equitable principles in interpreting
\nand applying the general duties. Chapter 2;170(3,4) Part 10 Companies Act 20061<\/sup><\/strong>. <\/strong>Chapter 1 of Part 11 Companies Act 20062<\/sup><\/strong> deals with derivative claims instituted due to breach of duty by
\ndirectors. The general duties, 171 to 177 of Chapter 2 of Part 10 of the Companies
\nAct 20061<\/sup><\/strong> include;<\/p>\n

171
\nDuty to act within powers<\/strong><\/p>\n

The actions taken by a director should be in
\nline with the company’s constitution, and only exercise powers for the purposes
\nfor which they are conferred. The company\u2019s constitution in this case refers to
\nthe company\u2019s articles, the decision taken based on the articles and the
\ndecisions of the shareholders which are binding on the company. <\/p>\n

In West Coast Capital(Lios) Limited [(2008) CSOH
\n72] 3<\/sup><\/strong>, Tesco Holdings Ltd failed in its attempt to gain
\ncomplete control of Dobbies Garden Centres Plc because West Cost owned part of
\nthe shares and were not willing to sell on to Tesco. Tesco eventually succeeded
\nin gaining 65% control of the company while WCC held on to their 35%. The new
\nboard of directors of Dobbies decided against paying dividends but proposed to
\nraise further capital, <\/p>\n

\u00a3150 million via a new shares issue. WCC
\nopposed this and sought to block the move because Tesco wanted to force them
\nout of the business unfairly. Lord Glennie, in the Court of Session; the
\ndirectors had exercised their powers under S 171 and the consideration was the
\npurpose for doing this which was raising further investment. It was only where
\nimproper motivation could be established that this could be the basis for
\nunfair prejudicial conduct and a possible breach of duty under S171. He
\ntherefore found in favour of Tesco. <\/p>\n

172 Duty to promote the
\nsuccess of the company<\/strong><\/p>\n

Directors should only engage in actions that
\nwill drive the success of the company and should be in good faith bearing in
\nmind that this will be beneficial to the members. They should consider the
\npossible consequences of any decision in the long term on the stability of the
\ncompany, the impact on the employees ensuring that they are not deprived and
\ncan continue to deliver their best services for the company, develop and
\nimprove on business relationships with customers and suppliers, contribution to
\nthe community and environment, ensuring that the company maintains a reputation
\nfor high standards and conduct and also upholding fairness amongst members<\/p>\n

The duty imposed by this section will depend
\non any enactment or rule of law requiring directors, in certain circumstances,
\nto consider or act in the interests of creditors of the company. Success for a
\nbusiness is viewed in the Act as an increase gained in value over a
\nconsiderable period. A director should act or make his or her judgment in good
\nfaith having considered the impact of any decision or action on the company,
\nits owners (shareholders), staff, external parties such as suppliers and
\ncustomers, the community and the environment.  <\/p>\n

In Franbar
\nHoldings Ltd v Patel & others [2008]
\nEWHC 1534 (Ch)4<\/sup><\/strong>; Franbar, a shareholder had a 25% stake in the company
\nand Casualty Plus held the remaining shares. Differences arose over the
\nmanagement of the company as Franbar alleged that the directors of the company,
\nappointed by Casualty Plus had diverted business opportunities away from the
\ncompany to Casualty Plus, suspended one of Franbar\u2019s nominated directors and
\ndid not make available required financial information. <\/p>\n

Franbar launched a
\nclaim for breach of the shareholders\u2019 agreement, an unfair prejudice petition and a derivative claim. The court refused permission to
\ncontinue a derivative claim in this case having concurred that a notional
\ndirector would not grant importance to the derivative claim and the claimant
\nwas already pursuing the other claims. His demands were best served this way. <\/p>\n

In Mission Capital Plc
\nv Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)<\/strong>5<\/sup><\/strong> ; the company had terminated
\nthe employment and directorships of two executive directors for failing to
\nprovide financial information and achieve the set financial forecast. Mission
\nCapital subsequently started proceedings against the former directors who also
\nstarted a counterclaim seeking to be reinstated on the grounds of unfair
\nprejudice and breach of shareholders agreement and also issued a derivative
\nclaim against the continuing directors. The court refused permission for a
\nderivative claim to continue having adjudged that the claimant\u2019s request could
\nbe addressed through the other claims. <\/strong><\/strong><\/p>\n

Furthermore, Mission Capital could also decide to remove the
\ndirectors who the derivative claim had been issued against as they would not
\nattach importance to this.<\/strong><\/strong><\/p>\n

In Iesini<\/em> v Westrip
\nHoldings Ltd<\/em> [2009<\/em>] EWHC
\n2526<\/em> (Ch<\/em>); [2010<\/em>] B.C.C.<\/em> [2011]
\n1 BCLC 498, [2010] BCC 420 6<\/sup><\/strong>, the
\nclaimants; shareholders in Westrip, accused the defendant directors of engaging
\nin unacceptable conduct amounting to breaches of duty by the defendants and
\nthis had led to the company losing ownership and control of an asset. This was
\na valuable mining license and that, but for their intervention, the company
\ncould have lost almost all the remaining assets. <\/p>\n

The claim was refused as the court held that a derivative
\nclaim instituted for the benefit of the company by a claimant may be allowed
\nprovided there were other benefits that he or she could derive from the claim
\nhowever, in a case where the person making the claim had participated in the
\nalleged conduct, the claim may be refused. The strength of the claims against
\nthe directors was weak and lacked the merit to grant permission.<\/p>\n

173 Duty to exercise
\nindependent judgment<\/h5>\n

Directors should be objective in their decisions. This
\nduty is not breached by their acting in accordance with an arrangement duly entered into
\nby the company that constrains the future exercise of moderation by its
\ndirectors, or in a way authorised by the company’s
\nconstitution. It is may be advisable for a director to seek and rely on the
\nadvice of others however, the fundamental decision lies with him or her. A
\ndirector should be in a position able to make decisions independently and not
\nhave others enforce their decisions and preferences on him.<\/p>\n

174 Duty to exercise reasonable care, skill
\nand diligence<\/h5>\n

Directors should exercise sufficient care, skill and expertise in their
\noperations. This will
\nmean that a director should have or strive to acquire the care, skill and
\ndiligence that is required to function effectively in his\/her role. The
\nrequisite operational knowledge, expertise and proficiency that may reasonably
\nbe expected of a person carrying out the functions carried out by the director
\nin relation to the company<\/p>\n

Reasonable care and expertise will imply that the director promptly
\naddresses issues that could impact on the stability of the business. The
\ndirector may also delegate to capable employees or professionals where
\napplicable.  <\/p>\n

In Gregson v. HAE Trustees Ltd [2008] 2 BCLC 5427<\/sup><\/strong>, the corporate trustee and its directors were sued for
\nalleged breach of trust and failure in their duty by not fully considering the
\nimplications of decisions made in the management of funds in the trust. They
\nhad kept back investments in a family company that had been previously put into
\nthe trust and the company had now become insolvent. The claim was on the basis
\nthat the directors were in breach of their duty to the corporate trustee and
\nthe claim against them was part of the trust property, therefore a claim
\nagainst them could be made obligatory by her as a beneficiary. The directors
\nopposed this. The High Court held that the dog-leg principle could not hold as
\nthe directors\u2019 duties were owed to the corporate trustee in its own right
\ntherefore a claim for breach of duty would not succeed. <\/p>\n

In Brannigan v Danes – [2016] All
\nER (D) 2768<\/sup><\/strong> ;
\nthe claimant, B was a minority shareholder of a company,
\nPortobello Estates Ltd (PEL). PEL had been incorporated as a special purpose
\nvehicle in relation to certain development projects. B brought a derivative
\nclaim against the other directors and shareholders alleging that the first
\ndefendant, S, had been negligent and\/or had acted in breach of duty in failing
\nproperly to progress a development project, which led to loss of profit of
\n\u00a322m. B contended that the defendants were brothers and had close business
\nconnections that and the breach could have been avoided. Furthermore, an
\nalternative planning permission was discovered by B which demonstrated bad
\nfaith on the part of the defendants. The court refused permission to progress
\nthe claim. It was not unusual to have multiple planning applications as they
\ncould be made in stages hence would not amount to bad faith. Furthermore, PEL
\nhad decided against proceeding with the claim having sought legal advice on the
\nmatter, extreme cost involved and the fact this may be unaffordable.<\/p>\n

In Stainer v Lee and others [2010] EWHC 1539 (Ch)<\/strong>9<\/sup><\/strong>, the<\/strong> minority shareholder sought a representative action
\nagainst the other two directors who were majority shareholders of the
\ncompany.  One of the directors had loaned
\ncompany funds to other director\u2019s company the company was owned and controlled
\nby the first director. The other director failed to pay any interest on the
\nloan and the minority shareholder decided to apply for permission to continue
\nderivative claim seeking relief on behalf of the company against the other
\ndirectors. The Chancery Division of the High Court granted the application,
\nsubject to some control, namely that permission would be limited to the
\nconclusion of disclosure and terms as to costs pursuant to s 261(4) of the Act.<\/p>\n

Similarly, Cullen Investments Ltd
\nand another v Brown and others – [2015] All ER (D) 8110<\/sup><\/strong>, courts granted the permission sought having proven that he will be
\ndisadvantaged<\/p>\n

175
\nDuty to avoid conflicts of interest<\/strong><\/p>\n

Directors should stay clear of situations in which he\/she
\nhas, or can have interests that are at variance, or possibly may create
\ndisputes, with the interests of the company.<\/p>\n

One should consider the exploitation of any property,
\ninformation or opportunity (and it is irrelevant whether the company could take
\nadvantage of the property, information or opportunity). This duty does not
\nrefer to a conflict of interest due to a transaction or arrangement with the
\ncompany. It is also not contravened if the situation is not expected to lead to
\na conflict of interest or if the matter has already gained the prior agreement
\nof other directors<\/p>\n

In a private company, where a transaction has been
\nproposed and agreed by the directors or in a public company where the
\nconstitution enables the directors to authorise a transaction once it is
\nproposed and reviewed by them in line with the constitution, there is no
\nbreach. The concerned directors will usually have no voting rights on the
\nmatter and the minimum number required by constitution to agree the decision
\nmust be met<\/p>\n

Differences of interest also includes a clash of interest
\nand duty and a variance of duties.<\/p>\n

Towers v Premier Waste Management Limited<\/strong> <\/strong>[2011] EWCA Civ 923<\/strong>11<\/sup><\/strong>; <\/strong>Mr. Towers had been a
\nDirector of Premier Waste Management Limited, a specialist waste disposal and
\ntreatment company. Towers fell out with the board and left the company in
\nDecember of 2003 and afterwards, it became clear that Towers had accepted a
\npersonal loan without payment from Mr Colin Ford, a customer of the company
\nwithout notifying the board. The loaned items were returned in 2008 after Mr
\nFord had invoiced the company for the cost of hiring the equipment.<\/p>\n

The company made a claim against Ford,
\nrefusing liability for the hire charges and a further claim against Mr. Towers
\nfor the profits received. Ford made a counterclaim for the cost if hire of his
\nequipment. The High Court ruled that Towers should pay the company the sum of
\n\u00a37,997.31 which included cost and interest of the hiring the equipment. He was
\nalso to pay the cost of the action. The decision was upheld by the Court of
\nAppeal who concluded that by failing to disclose the loan of the equipment,
\nTowers had breached his duties to the company which included the no conflict
\nprinciple and duty not to make a secret profit. By his concealment of the loan,
\nhe did not act honestly and reasonably.<\/p>\n

On the contrary, in the case of Foster Bryant
\nSurveying Ltd v Bryant & Anor [2007] EWCA Civ 20012<\/sup><\/strong>
\n; the Court of Appeal found that there was no breach of fiduciary upholding the
\ndecision of the High Court. Foster and Bryant were directors of the company and
\nthe large part of their work came from Alliance. On being notified that he
\nwould be made redundant, Bryant resigned however Alliance decided to keep his
\nservices and funded him to set up his own practice. Foster had sought for
\nBryant to contract his services through his company, FBS but the idea was
\nrejected. <\/p>\n

The company sued Bryant on the grounds of having
\nbreached his fiduciary duties of loyalty and diverting corporate opportunities
\nto himself. This was rejected in High Court and the
\ndecision was further upheld in the Court of Appeal. Rix LJ delivering the lead
\njudgment identified the challenge in addressing the situation in which a
\ndeparting director may or may not be held to have breached their fiduciary
\nduties and given that this was facts based it could be held that Bryant\u2019s
\nresignation was innocent of any disloyalty or conflict of interest.<\/p>\n

In, O\u2019Donnell v. Shanahan
\n[2009] 1 BCLC 32813<\/sup><\/strong>,
\nAllied Business & Financial Consultants Ltd\u2019s business consisted of
\nproviding clients with financial advice & assistance. A director came
\nacross an opportunity to secure interest in an investment property whilst in a
\nbusiness transaction and he proceeded with the opportunity. The other director
\nfiled a derivative claim alleging conflict of interest & breach of the duty
\nnot to make a profit.  The claim was dismissed on grounds that, although
\nthe opportunity came to the director\u2019s attention in course of acting in his
\ncapacity as such, it was not an opportunity in the company\u2019s line of business.<\/p>\n

Also in Helmet Integrated
\nSystems Ltd v. Tunnard [2007] IRLR 12614<\/sup><\/strong>the court held that it was not a breach of contract or fiduciary duty
\nwhere a senior employee takes steps to start his own company which rivalled his
\ncurrent employers while he is yet to end his existing contract but the company
\nwas yet to commence operation.<\/p>\n

\u00a0176 Duty not to accept benefits from third
\nparties<\/h5>\n

Directors should avoid accepting third party benefits which is offered
\nto them due to their position as a director or doing anything as director. The \u201cthird
\nparty\u201d here refers to a person other than the company,
\nand this could be corporate or a person acting on behalf of a corporate
\norganisation.<\/p>\n

Where the benefit in question does not affect the duty of the director,
\nthis should not give rise to a conflict of interests and whilst this is not a
\nbasis for the receiving benefit to be authorised
\nby the directors, the acceptance could be agreed by the company’s shareholders.
\nThe company’s articles may also allow that directors may legitimately receive
\nthird party benefits up to a certain value, provided they do not breach the
\nrelevant provisions of the company\u2019s constitution.<\/p>\n

177 Duty to declare interest in proposed
\ntransaction or arrangement<\/h5>\n

Where a director in any way, directly or indirectly has an interest in a
\nproposed transaction or arrangement with the company, he is required to declare
\nthe nature and extent of that interest to the other directors. This could be
\nmade at a meeting of the
\ndirectors, by notifying the other directors in writing or a general update. If
\nthe position changes, it is best that further declaration should be made and
\nsuch declaration must be made before the company commits to the affected
\ntransaction. Where there is no variance or divergence that could lead to a
\nconflict, a director may not be required to declare his\/her interests in the
\ntransaction. This is also applicable if the other directors are already aware.<\/p>\n

Conclusion<\/strong><\/p>\n

The success of a company rest is dependent on the directors who also ensure that the interests of the company as well as shareholders is protected. Directors are appointed agents and they owe duties to the company, the standard demanded of them is high and the Companies Act 2006 has helped in clarifying this with restrictions and guidelines on what is expected of directors. Directors’ are appointed by shareholders to manage the company’s affairs for the benefits of the shareholders. The success of any company depends on having good, dedicated, knowledgeable and honest directors. Therefore, success can only be achieved, if the directors and are supported by the shareholders in carrying out their functions. From the reference cases, the courts pay due attention to director’s duties and how these duties are performed. \u00a0The courts however do not seek to encourage unnecessary litigation being aware that the burden of expectation placed on directors is high and that many shareholders may seek to raise challenges where possible. The cost of litigation and proceedings is high and many companies are unable sustain endless litigation on matters on limited consequence.<\/p>\n

Directors play important parts in a corporate governance
\nsystem and fulfilling their duties is primary to sustenance of the operational
\nsystem in which the organization exists. Directors can also play multiple roles
\nin organisations depending on the size of the organisation and often, their
\npowers and responsibilities could be extensive. <\/p>\n

    \n
  1. Chapter 2;(177 -177) Part 10 Companies Act 2006<\/li>\n
  2. Chapter 1; Part 11, Companies Act 2006<\/li>\n
  3. West Coast Capital(Lios) Limited [(2008) CSOH 72]<\/li>\n
  4. Franbar Holdings Ltd v Patel & others [2008] EWHC 1534 (Ch)<\/li>\n
  5. Mission Capital Plc v Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)<\/strong><\/li>\n
  6. Iesini<\/em>\u00a0v\u00a0Westrip Holdings Ltd<\/em>\u00a0[2009<\/em>]\u00a0EWHC 2526<\/em>\u00a0(Ch<\/em>); [2010<\/em>]\u00a0B.C.C.<\/em>\u00a0[2011] 1 BCLC 498, [2010] BCC 420\u00a0<\/li>\n
  7. Gregson v. HAE Trustees Ltd [2008] 2 BCLC 542<\/li>\n
  8. Brannigan v Danes – [2016] All ER (D) 276<\/li>\n
  9. Stainer v Lee and others [2010] EWHC 1539 (Ch)<\/strong><\/li>\n
  10. Cullen Investments Ltd and another v Brown and others – [2015] All ER (D) 81<\/li>\n
  11. Towers v Premier Waste Management Limited\u00a0[2011] EWCA Civ 923<\/li>\n
  12. Foster Bryant Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200<\/li>\n
  13. O\u2019Donnell v. Shanahan [2009] 1 BCLC 328<\/li>\n
  14. Helmet Integrated Systems Ltd v. Tunnard [2007] IRLR 126<\/li>\n<\/ol>\n

    Web search<\/strong><\/p>\n

      \n
    • Lexis<\/li>\n
    • Westlaw<\/li>\n<\/ul>\n

      Bibliography and Case Law References:<\/strong><\/p>\n

        \n
      1. Chapter 2;(177 -177) Part 10 Companies Act 2006<\/li>\n
      2. Chapter 1; Part 11, Companies Act 2006<\/li>\n
      3. West Coast Capital(Lios) Limited [(2008) CSOH 72]<\/li>\n
      4. Franbar Holdings Ltd v Patel & others [2008] EWHC 1534 (Ch)<\/li>\n
      5. Mission Capital Plc v Sinclair and another [2008] EWHC 1339 (Ch) All ER (D) 225(Mar)<\/strong><\/li>\n
      6. Iesini<\/em>\u00a0v\u00a0Westrip Holdings Ltd<\/em>\u00a0[2009<\/em>]\u00a0EWHC 2526<\/em>\u00a0(Ch<\/em>); [2010<\/em>]\u00a0B.C.C.<\/em>\u00a0[2011] 1 BCLC 498, [2010] BCC 420\u00a0<\/li>\n
      7. Gregson v. HAE Trustees Ltd [2008] 2 BCLC 542<\/li>\n
      8. Brannigan v Danes – [2016] All ER (D) 276<\/li>\n
      9. Stainer v Lee and others [2010] EWHC 1539 (Ch)<\/strong><\/li>\n
      10. Cullen Investments Ltd and another v Brown and others – [2015] All ER (D) 81<\/li>\n
      11. Towers v Premier Waste Management Limited\u00a0[2011] EWCA Civ 923<\/strong><\/li>\n
      12. Foster Bryant Surveying Ltd v Bryant & Anor [2007] EWCA Civ 200<\/li>\n
      13. O\u2019Donnell v. Shanahan [2009] 1 BCLC 328<\/li>\n
      14. Helmet Integrated Systems Ltd v. Tunnard [2007] IRLR 126<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

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