Director Duties:

“The codification of directors’ general duties under the Companies Act 2006 was an unfortunate
error. Far from clarifying and simplifying the relevant legal principles, it has only served to add an
additional layer of complexity to them.” Discuss. 2020ZAON

- Begin by pointing out that, prior to the CA 2006, directors’ duties were found in a mass of
case law and statute. As a result, the law was unclear and inaccessible and many directors
had little knowledge of the duties they were subject to.
- Point out that codification was not meant to radically reform the law—this is made clear by s
170 of the CA 2006. Accordingly, it could be argued that codification has done little to im-
prove the law. However, the fact that the codified duties are based on pre2006 law does not
mean that codification was an unnecessary step for two reasons:
1. Placing the duties in statute has a number of notable advantages.
2. The duties under the CA 2006 are different in several respects to their pre2006 common
law counterparts.

Advantages and disadvantages of codification

- You will then want to discuss the advantages and disadvantages of codification. Advantages
include:
1. Improved accessibility—theoretically, anyone can look to the CA 2006 and reasonably com-
prehend the duties owed.
2. Successful codification could result in the law becoming more predictable and will remove the
judge’s discretion to develop the law in subjective and unpredictable ways.
3. The duties could be expressed in broad and general language which could be applied to a
wide range of situations. This would allow the law to adapt to emerging practices.
- However, codification suffers from some noteworthy disadvantages:
1. Codification may provide a clearer and more accessible statement of duties, but it will not pro-
vide a comprehensive statement of the duties of directors. The codified duties will need to be in-
terpreted by the judges in marginal cases where the law is not clear. In such cases, recourse to
the statute will not be enough and the (p. a7) relevant case law will need to be known. Accord-
ingly, it could be argued that accessibility will only be marginally improved.
2. A corollary of this is that the codified law may not result in a notable increase in predictability.
The codified duties cannot cover every situation and Parliament cannot be expected to foresee
every
situation that might arise. The judges will still need to fill in any gaps that arise.
3. It is not easy to amend codified law. Most areas of company law are dynamic and the law
needs to be able to respond to new situations. To amend the statutory statement of duties, an
Act of Parliament would need to be passed. Amending legislation can be a long and complex
process, so codified law may be slow to adapt to changing circumstances.

Similarities and differences between the common law and statutory duties
- Students should also point out those areas where the law has remained the same and those
areas where the codified duties differ. As a general rule, the duties found in the 2006 Act are
the same as the common law duties, albeit with some slight alterations. Section 178(1) even
provides that the remedies for breach of the general duties will remain the same as for breach
of their common law counterparts.
- However, the 2006 Act has reformed the duties in some notable ways, with the obvious ex-
ample being the duty contained in s 172, namely to promote the success of the company for
the benefit of its members. You should discuss how the s 172 duty differs to the previous
‘bona fide in the interests of the company’ duty. It has been argued by many that the common
law duty was shareholderfocused, whereas the duty contained in s 172 is more stakeholder-
friendly. This is backed up by the list of relevant factors contained in s 172(1), which includes
the interests of employees, the community, and the environment, as well as the likely conse-
quences of any decision in the longterm. However, in keeping with the enlightened share-
holder approach, directors must have regard to these factors, but they cannot be used to
override the primary duty to promote the success of the company for the benefit of its mem-
bers.

‘Section 175 of the Companies Act 2006 adopts an overly strict position in relation to directors’ ex-
ploitation of corporate opportunities. A more flexible and permissive approach would be better at
encouraging entrepreneurship.’ Discuss.2023ONB3
- This question relates to the 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’. 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 (i.e. s 175 only ap-
plies to transactions between a director and a third party). The duty is extremely strict as can
be seen in the following case.
- Bhullar v Bhullar, analysis would look really good here, this case has been heavily criti-
cized, largely because the company agreed, at the claimants’ behest, not to acquire any
more properties. The Court, in effect, allowed the claimants to change their minds oppor-
tunistically at the moment an attractive commercial opportunity arose. For a detailed discus-
sion of this case, see Hans C Hirt, ‘The Law on Corporate Opportunities in the Court of Ap-
peal: Re Bhullar Bros Ltd’ [2005] JBL 669. See also the case of Regal (Hastings) Ltd v
Gulliver [1967].
- Where a director fails to obtain valid authorization, any resulting contract is voidable at the
company’s instance, provided that the third party involved had notice of the director’s breach
(HelyHutchinson & 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)).
- 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—this will likely continue to apply to the successor duty found in s 172.
Luxhotels Ltd has four directors, Abir, Baasil, Chen and David. The company runs a chain of ho-
tels. In 2022 the company decided it should open another hotel in Manchester, England. Abir’s
mother, Emily, owned a vacant office block in Manchester. Abir, a qualified surveyor, spent 10
minutes looking over the office block. She then proposed, at the next board meeting, that the com -
pany buy it for £1 million and convert it into a hotel. Abir did not formally declare to the board
that her mother owned the office block. Luxhotels’ board spent five minutes discussing Abir’s pro-
posal before approving it. Baasil voted to approve it because he is scared of Abir. Chen voted to ap-
prove it, even though she believed the purchase would lose the company money, because she also
believed that buying and converting the office block would help to regenerate, and create more jobs
in, the city of Manchester. David was not present at the meeting, and indeed has not attended any
board meeting for two years. The company bought the office block but was unable to convert it to a
hotel because of structural issues affecting the building that a competent surveyor would have iden-
tified. The office block is now worth only £750,000. Emily gave Abir £50,000 from the sale proceeds
of the office block.
Discuss.

Abir: spent 10 minutes looking over the office block and proposed to the board to purchase it. This is an
obvious breach of s.174 CA 2006 as Abir has failed his duty to exercise reasonable care, skill and dili-
gence. It reveals that a competent surveyor would have identified that the office block was unable to con-
vert to a hotel due to the structural issues affecting the
building. Herein, s.174(2)(b), the subjective standard is applied to Abir, a qualified surveyor to perform to
a high level according to his general knowledge as a qualified surveyor. The court generally focuses on
the process instead of the outcome of the decision, by which the directors decided to prevent hindsight
bias. If it is shown an appropriate level of care and skill exercised by the director, then he should not be
held in breach, even if it turns out to be a poor outcome for the company. The relevant process might in-
clude spending a reasonable amount of time to decide, and gathering of information to assess the risks.
Abir here spent 10 minutes to decide, definitely not exercising an appropriate level of care and skill

Further, this is a substantial property transaction under s.190 CA 2006. As it costs £1 million (exceeds
£100,000) and acquisition from Abir's mother, shareholder approval must be obtained. As Abir's mother
is a connected person to Abir as defined in ss.252-255 CA 2006 to include parents. On the facts, it fails to
obtain shareholder approval, thus s.195 CA2006 applies, so the transaction is voidable by Luxhotels Ltd,
and Abir as a director can be held liable for the losses of suffered by Luxhotels Ltd

Abir did not formally declare to the board that her mother owned the office block. This is a breach of
s.177 CA 2006 for failure to declare interest in proposed transactions or arrangement with the company.
On the facts, it is unlikely that the board is aware of Abir's interest in the proposed transaction. Thus, by
following Gwembe Valley Development v Koshy [2000], and s.177(4), Abir is in breach of s.177 as he
did not declare an interest to the board before Luxhotels Ltd entered into the transaction. Abir later re -
ceived £50,000 from the sale proceeds of the office block. Following s.176(1)(a) and (b), Abir must not
accept a third-party benefit. Emily is a third party as she is irrelevant to Luxhotels Ltd. Thus, according to
s.176(4), Abir is infringed on this duty as the benefit is clearly to be regarded as a conflict of interest.
However, shareholders may authorise this acceptance of benefits by s.180(4), the facts indicate nothing of
this
Baasil: voted to approve it because he is scared of Abir. He clearly could not form independent judgment
thus a breach of s.173 CA 2006. The facts indicate nothing that the company's constitution authorises
(s.173(2)(b)) Baasil to act on Abir's instructions. If he can argue that he merely treats Abir's instructions
as only advice but later on makes up his mind to promote what the best for the company, then he might
not be liable. If he simply followed Abir's instruction, there may be a further breach of s.172 (duty to pro-
mote the success of the company) if he believes this transaction is likely to be a poor outcome for Luxho-
tels Ltd. There is also a further liability under s.174 as he may be in breach of reasonable care and skill if
he believes what he did was something incompetent.

Chen: is clearly in breach of s.172, even though she might try to argue she was considering the non-ex -
haustive list of factors (a)-(f): herein for the company's reputation and the environment as it generates
more job opportunities in Manchester. After all, in People v Planet [2009], Sales J confirmed the primary
duty of directors remains to the shareholders. This was recently affirmed by the Supreme Court in BTI
2014 v Sequana [2022] that the ultimate beneficiaries of the directors' duties to act in good faith are the
shareholders. The good faith test is a subjective test as per Regencrest v Cohen [2001], Extrasure
Travel v Scattergood [2003] and Re Smith & Fawcett [1942]. After all, Chen believed the purchase
would lose the company money, this is definitely a breach of s.172 and also high chance of breaching
s.174.

Abir, Basil, Chen: Each of them are liable for s.174 as they spent five minutes discussing Abir ’s pro-
posal before approving

David: He was not present at the meeting, and indeed has not attended any board meeting for two years.
This is a breach of s.174 for inactivity as a director for failing to supervise and monitor the performance
of the company (Lexi Holdings v Luqman [2009] and Raithatha v Baig [2017]

Add new case law such as: In ClientEarth v Shell plc [2023], the environmental law organisation,
ClientEarth, brought proceedings against the directors of Shell plc, the multinational oil company. Clien-
tEarth argued that Shell’s directors have failed to take sufficient action to reposition Shell’s business
away from oil production and towards more renewable and sustainable forms of energy. These failures,
ClientEarth argued, will damage Shell financially and amount to breaches of the directors’ general duties
in s.172 (duty to promote the success of the company) and s.174 (duty of care, skill and diligence).

Megacrude plc operates an oil refining facility. It has four directors, Alan, Beth, Claire and Dave.
Claire is 16. Beth has an MBA in marketing. Dave is a nominee director for his father, Eric, who
owns 15 per cent of Megacrude’s shares. Eric pays Dave a ‘commission’ of £100,000 each year for
acting as his nominee director. In January 2022 Megacrude’s directors decided that Megacrude
would donate £5 million to an arts charity. Alan believed the donation would bring little benefit to
Megacrude but voted for it because he is passionate about the arts. Beth and Claire voted for the
donation because they thought it would improve Megacrude’s reputation. In fact, the donation has
ended up harming Megacrude’s reputation, because the charity was itself investigated for fraud
and human rights abuses in March 2022 and this scandal harmed the reputation of the charity ’s
major donors. Dave voted for the donation because Eric told him to do so. In December 2022
Megacrude purchased a solar energy farm from Eric, for £10 million. Although the price was a fair
reflection of the value of the solar energy farm in December 2022, the farm’s value is now substan-
tially lower because of recent changes in the global energy market and Megacrude’s board regrets
the purchase. Discuss whether any of Megacrude’s directors have breached any duties they owe to
Megacrude and whether Megacrude could take any action in respect of the purchase of the solar
energy farm from Eric. (This question concerns mainly directors’ duties, plus the statutory controls
on ‘substantial property transactions’. It relates mainly to Chapter 10 of the MG, together with
that part of Chapter 9 discussing ‘shadow directors’. Students must identify the duties being
breached, applying relevant provisions from CA 2006.)

- Eric is unlikely either a de facto or a shadow, director. We are not told he ever attends board meetings,
making it unlikely he is acting as a de facto director. To be a shadow, he would have to be instructing a
‘governing majority’ of directors (Ultraframe). He might tell his nominee (Dave) what to do but Dave
does not constitute a governing majority of the board. Many students treated Dave’s conflict of inter-
est, about the wind farm purchase, as falling within s.175 CA 2006. It does not; s.177 applies. Note that
s.175(3) expressly says that where a director has a conflict of interest arising out of a transaction with
the company, s.175 does not apply.
- Start with Eric, explaining briefly that Eric appears to be neither a de facto, nor a shadow, director, for
reasons set out above. Turning next to Dave: consider whether the commission paid for his being a
nominee director breaches s.176. It is a benefit and it is paid by a third party. It seems to be paid be -
cause he is a director. However, does it create a conflict of interest? It would if it could influence the
way he votes (and we know that Dave sometimes votes as Eric tells him to do). Finally, consider
whether Dave’s voting for the donation because Eric tells him to do so may also put Dave in breach of
s.173: he does not seem to be exercising his independent judgment.
- Alan: he may breach s.172. A good answer would explain what s.172 requires and the balance between
shareholders’ and stakeholders’ interests. Unlikely A could avoid liability by pleading good faith – he
knows the payment won’t benefit M. The Charterbridge case does not help Alan: Charterbridge
seems to apply only if the director has given no thought to whether a decision will benefit the com -
pany; Alan has given much thought here.
- Beth and Claire are unlikely to breach s.172 since they do believe their decision will ‘promote the
company’s success’. However, they may breach s.174. A good answer will note how different stan-
dards may be applied to them. Claire will be judged ‘objectively’ (despite her youth) – as she has taken
the decision a reasonable director would take. Beth, with her professional qualification in marketing,
will be judged subjectively – was her decision one that a reasonable director with her qualification
would have taken? However, note in either case that courts avoid judging with ‘hindsight’
(Regentcrest).

Restful plc owns and runs a number of hotels. Doris formed the company and still owns 40 per cent
of its shares. The company has three legally appointed directors: Gerard (who is Doris’s son),
Astrid and Pauline. Pauline is in poor health and rarely attends board meetings. Her employment
contract says her attendance at board meetings is unnecessary. Although Doris is no longer a
legally appointed director, she often tells Astrid and Gerard what decisions they should take as di-
rectors. At a social event in June 2021, Gerard met his friend, Henry. Henry told Gerard that he
now owned and ran a golf course in Scotland but intended to retire for health reasons and was
looking ‘for a quick sale at a bargain price’. At Restful’s board meeting in July 2021, Astrid and
Gerard discussed whether Restful should purchase Henry’s golf course. Gerard voted against pur-
chasing it because Doris told him to do so. Doris told him to do so because she had concluded
(wrongly) that the golf course was unprofitable. Astrid voted against the purchase because, al-
though she thought the golf course was very profitable, she was strongly opposed to golf courses on
environmental grounds. Pauline was not present at the meeting. Doris and Gerard subsequently
contacted Henry and bought his golf course for themselves, for £1million. Six months later, they
resold it for a substantial profit. They gave Astrid £30,000 out of the profit they made. Did Doris,
Gerard, Astrid or Pauline breach any of their duties to the company?
Would your answer differ if, at Restful’s board meeting in July 2021, Gerard and Astrid had
passed a resolution authorising Doris and Gerard to buy Henry’s golf course for themselves?

Pauline: she arguably breaches s.174 – her failure to attend board meetings means she is not monitoring
the management of the company: Lexi Holdings v Luqman. It is unlikely her employment contract provi -
sion would avoid liability – directors’ duties in ss.171–177 are mandatory provisions, and cannot be ex-
cluded except insofar as any provision expressly permits exclusion; nothing in s.174 expressly does that.
However, even if Pauline is in breach of s.174, does her inactivity cause any loss to the company?
Gerard: will breach s.173 CA 2006 if he merely follows Doris’s instruction (but not if he makes up his
mind, albeit taking account of her advice). Consider also whether he breaches s.174. Explain what s.174
says and the objective/subjective standard it employs. Apply this to G. If G is relying on D ’s advice, is
that reliance itself careless? Gerard may also breach s.175 when he buys the golf course. This is probably
a corporate opportunity from which he profits. Explain the case law relevant to s.175, including Regal,
Cooley etc. It is irrelevant that the opportunity arguably lies outside the company’s existing line of busi-
ness: O’Donnell. Explain significance of his learning of the opportunity in a social context: s.175 still ap-
plies but perhaps requires only that he informs the board (Bhullar). Since he does this he may, perhaps,
avoid liability.

Doris: need to establish first if she is a shadow director; note s.251 and the relevant case law. Given her
instructions to the two active directors, she is likely to be such. Then explain s.170(5) and note the impli-
cations of Standish: shadows are only liable for things they do as a shadow: the taking of the opportunity
may not be seen as something done in her capacity of a shadow. But she might be liable for breach of
s.174 given how incompetent her ‘advice’ to Gerard appears to be.

Astrid: explain and apply s.172, including its ‘good faith’ test. She may also breach s.176 in accepting
this benefit but only if it creates a ‘conflict of interest’ for Astrid.

Finally, a good answer might also mention the possibility of relief from liability under s.1157 and rele-
vant case law. And would this answer differ if there was a board authorisation? Note s.175(4) – now per-
mits board authorisations of conflicts of interest. But, for a plc, only if the articles expressly permit this:
we are not told this company’s articles do (and the model articles for plcs do not). Moreover, the board
meeting must be quorate without counting the conflicted director. Since G was conflicted, he is not al-
lowed to count, leaving the meeting inquorate.

Note: Dealing with the purchase of the golf course as a possible breach of ss.177 and 190, these two pro-
visions only apply to ‘self-dealing’ – where a director has an interest in a transaction that the company is
entering into. But the company, Restful plc, is not entering into a transaction (to buy the golf course):
s.175 therefore applies, not s.177 (or s.190). Misunderstanding the meaning of ‘from a third party’ in
s.176 (and suggesting that Doris and Gerard would not count as ‘third parties’). This is incorrect – as
s.176(2) makes clear, essentially anyone other than the company itself is a third party.

In July 2021, the directors of Surefire plc decided that the company would replace all its petrol ve -
hicles with more expensive electric ones. The board stated this would significantly reduce Surefire’s
profits, but that ‘it was important the company did its bit for the environment’. Qing has not been
legally appointed a director of Surefire Ltd, but she attends, and votes at, most board meetings. In
August 2021, Qing stayed for two weeks, rent-free, in a holiday villa owned by Zesta plc, one of
Surefire’s main suppliers. Qing told Surefire’s board about her stay.
Chun is a director of Surefire. Wei is not a director of Surefire, but is a relative of Chun. In Sep -
tember 2021, Surefire purchased a high street store for £500,000 from Wei. Surefire bought the
store because it was hoping to expand its high street sales but it has now decided that it will focus
on online sales instead. It no longer needs the high street store, which has fallen substantially in
value. In January 2022, Chun decided that she was tired of working for Surefire Ltd, and was going
to set up her own business, in competition with Surefire Ltd. Chun did not tell Surefire’s board of
her intentions but did see her bank manager to discuss how she could fund her proposed business.
In April 2022, Chun resigned as a director of Surefire, and Surefire is now aware of her intentions.
Surefire now has a number of new directors, and they seek your advice on whether Surefire can
take any action in respect of the foregoing.
Advise Surefire Ltd. director duties and company management)

- adopt a good structure for working through the liability of each director: either looking at each event
within the question, or at each director, in turn.
- Regarding the replacement of petrol vehicles: explain how this might infringe s.172; explain the
meaning of that provision, its good faith element (Regentcrest), how it permits account to be taken of
environmental factors but, apparently, only as a means of promoting the success of the company for
benefit of members. The profit-reducing decision might also breach s.174, which does not have this
good faith test.
- With regard to Qing’s free holiday: there are two points to address. First, was Qing a de facto direc-
tor? Note s.250 – anyone who is ‘occupying the position of a director’ – and relevant case law, such as
Gemma etc. Qing’s attendance and voting at board meetings suggest she may be acting as a de facto
director. If she is, then she is a ‘director’ under s.250 and subject to the same duties (in ss.171–177) as
any de jure director. Second, did this receipt of a benefit breach s.176? Declaring this benefit to the
board would not per se prevent a breach of s.176, unless the declaration were seen as ensuring no con-
flict of interest could arise.
- With regard to the store purchase: this is a transaction being made by the company, in which a di-
rector, Chun has an interest (according to her relationship with the vendor, Wei). Chun needed to de-
clare that interest under s.177, unless the board was already aware of it, or ought to have been so. It
may also be a substantial property transaction. It is large enough (over £100,000). It must also be with
a director, or at least with a ‘connected person’. Wei is not a director but may be connected to a direc-
tor, depending on whether her relationship with Chun (which the question does not specify) falls within
the definition in ss.253–254. If so, then the purchase needed shareholder approval. If not obtained, then
the transaction is voidable.
- Turning to Chun’s decision to set up in competition with Surefire, it is important to identify how
this may breach s.175. Merely forming the intention to compete is not a breach of s.175 even if that in -
tention is kept secret (e.g. Balston). Likewise, resigning in order to compete, and then competing, does
not breach s.175. However, so long as Chun remained a director, she was not permitted to take more
than very minimal steps without disclosing her intentions: British Midland; Shepherds Investments.
Here, she takes some significant steps. Probably this is a breach of s.175. Moreover, if Chun uses Sure-
fire’s confidential information – beyond the ‘general fund of knowledge’ acquired as a director – for
her new business, this might also breach s.175 (Thermascan). If she takes corporate opportunities
learnt about while a director of Surefire, that would also breach s.175 (Cooley and s.170(2) CA 2006).
- Finally, good answers might note briefly that, even if a breach is shown, a director might be relieved of
liability under s.1157 CA 2006.

Note: Failing to spot that Qing may be a de facto director, under s.250 CA 2006 will cost you marks.
Failing to consider whether the purchase of the high street store qualifies as a ‘substantial property trans-
action’ falling within s.190 (and the consequences if it does so). Discussing s.190 but assuming that every
transaction over £100,000 is caught by s.190 is also wrong. Only transactions that are both large and, cru-
cially, either with a director or with someone connected to a director, are caught by s.190. About Chun,
and her intention to set up a competing business, some answers failed to identify the relevant case law to
apply, specifically, that which applies to a director who, while remaining on the board, secretly prepares
to compete with the company.

In August 2020, scientists working for Cells plc developed a new type of battery. In September
2020, Cells incorporated a subsidiary, Subvolta Ltd, to make the battery. A week before Subvolta
was incorporated, Roberta, a director of Cells, signed a lease for a factory that Subvolta was to oc -
cupy, adding the words ‘signed for Subvolta Ltd and without personal liability’ above her signa-
ture. Subvolta began producing the new battery in October 2020. By December 2020, it was appar-
ent that many of Subvolta’s employees were becoming ill as a result of handling the chemicals in-
volved in the production process. Those employees were threatening to sue Subvolta. The produc-
tion process had been designed in accordance with Cells’ general guidance on health and safety,
which Cells sent to all its subsidiaries. In February 2021, Subvolta decided to stop making the bat-
tery. Subvolta’s directors resolved to transfer all of Subvolta’s assets to Assethide Ltd, another sub-
sidiary of Cells. Subvolta is now in liquidation.
a) Will Roberta be personally liable in respect of the lease she signed?
b) Did the directors of Subvolta breach section 172 Companies Act 2006 in transferring Subvolta’s
assets to Assethide?
c) Will Cells be liable in tort to Subvolta’s injured employees?
(This question combines several different areas of the module: pre-incorporation contracts (covered
in Chapter 5 of the module guide), the directors’ duty in s.172 CA 2006 (covered in Chapter 15 of
the module guide) and the tortious liability of a parent company (covered in Chapter 4 of the mod-
ule guide).)

a) Regarding the lease signed by R is a pre-incorporation contract, under s.51 CA 2006, R is personally li-
able for this contract. However, this is subject to any ‘agreement to the contrary’ between R and the third
party (the landlord). Do the words R adds constitute an ‘agreement to the contrary’, which excludes her
personal liability? A good answer would note Phonogram v Lane: there must be clear evidence of an
agreement excluding such liability. R’s words may well evidence such an agreement.

b) Explain the meaning of s.172 and how, when company is solvent, this requires directors to prioritise
shareholders’ interests. On this basis, Subvolta’s directors’ actions in transferring S’s assets to Hide do
not breach s.172. However, note how, when company is insolvent, or sufficiently close to insolvency, the
duty changes, and the directors must give greater weight to – and even prioritise – creditors’ interests.
Note relevant case law, such as West Mercia; Dickinson v NAL; Sequana and how s.172(3) acknowl-
edges this shift in priorities. The key issue is whether S was sufficiently close to insolvency, at the time of
the asset transfer, for creditors’ interests to take priority. Dickinson suggests mere risk of insolvency if fu-
ture liabilities arise (here, successful tortious claims) will not suffice. Sequana says the test is whether in-
solvency was ‘more likely than not’.

c) The focus should be on whether Cells owed a duty of care to prevent Subvolta from injuring its em-
ployees. A good answer might start with Chandler v Cape, noting that it suggested that in some situations,
a parent would owe a duty of care to prevent its subsidiary harming its employees. However, because the
case law has now moved away from Chandler, a good answer would deal with it quite quickly and briefly
and move on to the post-Chandler case law. AAA v Unilever, Vedanta Resources v Lungowe and Okpabi
v Royal Dutch Shell plc all suggest that a parent will only be liable if it is guilty of sufficient ‘misfea-
sance’, that is of having intervened sufficiently in the management of those subsidiary activities that have
caused injury, or having (negligently) advised the subsidiary how to manage those activities. It is not
clear if Cells has done these things. It seems mostly guilty of just non-feasance – of simply failing to act.
On the other hand, it has issued health and safety guidelines and we know these were followed by Sub -
volta. If these were negligent and they have led to the harmful production process that has injured the em-
ployees, that may be sufficient to establish a duty of care for Cells.

Note: In part (a), failing to spot this was a pre-incorporation contract, or failing to discuss whether R ’s
words, added to the contract, constitute an ‘agreement to the contrary’ under s.51. In part (b), many stu-
dents seemed unaware of the changing obligation under s.172 (reflected in s.172(3)) as the company ap -
proaches insolvency. In part (c), a failure to discuss the up-to-date case law (post-Chandler).

Dinghies Ltd makes small yachts. The company has three appointed directors: Kiran, Ling and
Mark. Mark is an expert in designing sailing craft. Nora, who is the company’s solicitor and is mar-
ried to Mark, often attends board meetings.
In October 2020, Kiran was approached by Edith at a social event. Edith told Kiran that she had
just invented a new type of canoe. She asked Kiran if Dinghies would be interested in buying all
rights to the canoe for £1 million. Kiran sent Edith’s designs for the canoe to Ling, Mark and Nora,
and a board meeting of Dinghies was held. Only Kiran voted in favour of Dinghies purchasing the
rights to the canoe. Mark voted against because he did not think the canoe would sail very well.
Nora also spoke against. She did this, in part, because she did not like Kiran, and partly because
Mark told her to do so. Ling voted against the purchase because she was concerned that the process
for making the canoe would be environmentally harmful, although she acknowledged that produc-
ing the canoe would probably be very profitable. In November 2020, Kiran had a health scare, and
decided to retire as a director of Dinghies. The other directors arranged for Dinghies to give her
£200,000 as a ‘thank you’ for her hard work. By January 2021, Kiran was feeling much better, and
decided to set up her own business making small sailing-craft. In February 2021, she contacted
Edith, and bought her invention from her for £500,000. Sales of the new canoe, which sails very
well, have been hugely successful and very profitable for Kiran. Discuss. (This question concerns di-
rectors’ duties. It relates primarily to Chapter 15 of the module guide (but also raises an issue
about de facto directors from Chapter 14 of the module guide). Students must identify the duties
being breached, applying relevant provisions from CA 2006. Since those statutory provisions must
be interpreted in the light of the older, ‘pre-Act’ case law, the question also requires students to
demonstrate good knowledge of relevant cases too.)
- address, in turn, the potential liability of each director:
- Ling: She may potentially be in breach of s.172; by rejecting a profitable (albeit environmentally harm -
ful) project, she has not promoted the success of company for benefit of members. However, s.172 adopts
a subjective test (she must act ‘in good faith’) and she may argue that she believed the profit on making
the canoe would be offset by other losses the company might suffer as a result of the harm caused to its
environmental reputation. But even if she avoids liability under s.172, she may be liable under s.174.
- Mark: he may breach s.174. A good answer would explain the objective and subjective standards and
explain which applies to him, in view of his specialist expertise.
- Nora: we need to decide if she is a de facto director. Explain and apply definition of that (in s.250, and
in relevant case law, mentioned above). Explain the consequences of being a de facto director – she is
treated in the same way (and owes the same duties) as a de jure director. She may breach s.173 – if she is
merely following Mark’s instructions, rather than exercising her own judgement. She may also breach
s.172 given her decision may be motivated by hostility to Kiran.
- Kiran: may breach s.175. There are two aspects to Kiran’s behaviour. First, he sets up in competition
with Dinghies. However, there is no evidence that he has the intention to do this before he ceases to be a
director. And even if he did decide, before resigning, to set up in competition, there’s no evidence he took
any steps to further this intention before resigning: see British Midland. Once he has resigned, he is free
to compete: CMS Dolphin. Second, however, he takes what may be a corporate opportunity for personal
gain. On the one hand, it has been said that a director can still be liable, even if they take such opportuni -
ties after resigning: what matters is not when they take it but when they learnt about it: IDC v Cooley and
s.170(2) CA 2006. And Regal takes a very strict line in defining what are opportunities that directors can-
not take. However, other cases have suggested a director will avoid liability, even if taking a corporate
opportunity, if they take it post-resignation provided the reason for resigning is not motivated by the de -
sire to take the opportunity and if it is not a ‘maturing business opportunity’ that the company is itself still
actively pursuing: see e.g. IEF v Umunna and CMS Dolphin.
- Finally, the payment on retirement to Kiran needs shareholder approval – s.215.
Note: Treating Nora as a ‘shadow director’ may be an issue. But there is nothing to suggest Nora satisfies
the test for a shadow director, in s.251 CA 2006, you may mention this in the answer. She may well be a
de facto director, however. The difficulty is with the £200,000 payment to Kiran, a weak answer ignored
it entirely (but most facts in problem questions are there for a reason!). Arguing that the payment might
breach s.176 was better than ignoring it but still wrong. To fall under s.176, the benefit to the director
must be paid by ‘a third party’ – i.e. not the director’s own company. But here the payment is made by
Kiran’s own company (Dinghies). It is wrong to argue about Kiran’s potential liability as if all he was do-
ing was setting up in competition with Dinghies. But he is doing more than that. He is also, arguably, tak -
ing a ‘corporate opportunity’ (Edith’s invention) that belonged to Dinghies. His liability for doing that,
under s.175, needs to be examined separately from the competition issue.

In 2017, Archie, Bernard and Charles were appointed directors of Groundsheets plc, a company
making tents.
Archie is the company’s Human Resources director. In January 2019, he decided to increase all em-
ployees’ wages by 25 per cent, adding £2 million to the company’s annual wage bill. He decided to
do this because of his belief ‘that wealth should be distributed more equally in society’.
Bernard is in charge of purchasing raw materials for the company. In February 2019, he accepted a
case of expensive wine that was given to him by one of the company’s suppliers, to thank him for all
the contracts which Groundsheets had recently awarded to that supplier.
In March 2019, Groundsheets was offered the opportunity to buy, for £3 million, all the shares in
Dingies Ltd, a company making inflatable boats. Charles, who is a qualified accountant, looked
over Dingies’ accounts and advised Archie and Bernard that Dingies was worth much less than £3
million. He also noted that Dingies’ business was very different from that of Groundsheets. On
Charles’ advice, the board decided not to buy Dingies. Shortly thereafter, Bernard fell out with
Archie. Bernard resigned from Groundsheets, and then immediately bought Dingies for £3 million.
It is already clear that Dingies was worth much more than £3 million, and Bernard has made a
large profit.
Discuss whether any of the directors of Groundsheets breached their duties to the company. (Direc -
tor duties)
Archie: arguably, he has breached the duty under s.172 CA 2006. Directors must ‘promote the success of
the company for the benefit of its members’. Indeed, directors must also have regard to the interests of
employees, but they must do this with a view better to promote the interests of shareholders. Archie
seems to have acted not in his shareholders’ interests. However, the test is a subjective one – because of
the ‘good faith’ requirement in s.172. If Archie were to persuade the judge that he honestly believed that
increasing employees’ salaries was the best way to benefit shareholders, he ought not to be found liable.
The gift to Bernard looks like a possible breach of s.176 – he is receiving a benefit payable to him be-
cause of his conduct as a director. It would have to be shown that this was indeed why he was given the
gift. It would also have to be shown that the gift created a ‘conflict of interest’ for Bernard. If, however,
Bernard did not expect to receive the gift when he made the relevant decisions, it is unlikely that the gift
created any conflict of interest for him.
Regarding Bernard’s purchase of Dingies, this looks likely a breach of s.175. He has taken an opportu-
nity for himself, contrary to section 175(1). It does not matter that the company itself rejected this oppor -
tunity – see Regal Hastings. Nor does it matter whether the opportunity taken falls outside the scope of
the company’s existing line of business – O’Donnell v Shanahan. It is not suggested that the board has
authorised Bernard to take the opportunity.
Finally, Charles’ advice to the board that the price was too high seems a possible breach of s.174. We are
told Charles was a qualified accountant, so he will be judged against a higher subjective standard – that of
the professional accountant – making it more likely he will be found to be in breach of s.174.
Note: did not deal with each of the three characters in the question. In relation to Archie, students might
note s.172, but not clearly explain what s.172 requires of directors, and in what ways directors are enti -
tled, under that section, to take into account employees’ interests. In relation to Bernard, weaker answers
tended to miss s.176 altogether, or else fail to explain the importance of deciding if there was a conflict of
interest in Bernard’s receipt of the gift. In relation to Charles, weaker answers tended to ignore his poten-
tial liability altogether, or else failed to explain fully the meaning of s.174, and especially the significance
of the ‘subjective’ element to s.174.
You have been consulted by Huan, the Chairperson of the board of directors of Oldstuff plc, a com-
pany dealing in antiques. She tells you about three sets of events which recently occurred at Old-
stuff.
a) In June 2018, Kong, who was then a director of Oldstuff, secretly decided to set up a new busi -
ness in competition with Oldstuff. In July, he bought premises from which to conduct his new busi -
ness. In September 2018, he resigned as a director of Oldstuff. In October 2018, he negotiated a
large and very profitable contract with Janet for his new business. Janet had been a client of Old-
stuff, and in October 2018 Oldstuff was still actively trying to get further contracts from Janet.
However, Janet had already decided not to award any new contracts to Oldstuff because she was
unhappy with the service Oldstuff had given her in the past.
b) Vanya has never been appointed a director of Oldstuff, but has regularly attended its board
meetings. In December 2018, she negotiated for Oldstuff to purchase a Greek statue for £1 million.
It is now clear the statue was only worth £600,000. Vanya is a world- famous expert on Greek stat-
ues.
c) In April 2019, Oldstuff agreed to purchase a set of paintings from George, a director of Oldstuff,
for £300,000. Because of a downturn in Oldstuff’s business, it no longer wants these paintings.
Advise Huan whether Oldstuff could take any action in respect of these events. (Director Duties)

Kong’s setting up of his own business raises a possible breach of s.175. The decision to set up in business
in competition and the taking of some steps to further this intention could constitute a breach. British
Midland, and Shepherds Investments, both suggest that once the decision to set up in competition has
been formed, only the most limited of steps can be taken without either informing the board or resigning
as a director.
Moreover, he also takes a contract from Janet, a client of Oldstuff. He seems to have used his knowledge
while a director to profit personally; see Regal and IDC v Cooley. It does not seem to matter that Janet
was unwilling to deal again with Oldstuff – IDC v Cooley. Does it matter that he takes the contract only
post-resignation? Probably not: what matters is when he acquired the relevant information (IDC and now
s.170(2)). True, some cases (e.g. Umunna) suggest that if the resignation is not motivated by the desire to
secure the contract, and the contract isn’t a ‘maturing business opportunity’, then a director will not be li-
able. However, neither of these conditions applies to Kong.
Vanya may be a de facto director – if she participates in ‘governance of the company’ through attendance
at board meetings as an equal with other directors’: re Gemma. (Note: we are not told anything to indicate
that she was a shadow director, within the definition in s.251 CA 2006.) If she is a de facto director, she’s
liable to the same duties as de jure directors. These include s.174 – duty of care and skill – which she’s ar-
guably breached. A good answer would be that s.174(2) imposes a higher subjective test for those who
are more highly qualified, which probably applies to Vanya, given her expertise. Judged against that,
she’s likely in breach of duty by overvaluing the statue.
Regarding the purchase of the paintings, George, as a director of Oldstuff, had an interest in a transac-
tion being entered into by Oldstuff. He was therefore required to declare this under s.177, unless the
board either already knew of the interest, or ought to have known. Since George is the vendor of the
paintings, it seems reasonable to think the board ought to have realised he had an interest in the transac -
tion. However, the contract will also be caught by s.190, requiring shareholder approval. This is because
it is ‘substantial’ (meaning over £100,000) and it is with a director. Shareholder approval was therefore
required. Without shareholder approval, the transaction is voidable, George would be liable to account for
any gain made, and he and all other directors who approved the transaction must indemnify Oldstuff for
any loss it suffers (s.195).

Note: A failure to deal with all parts of the question, including ignoring Vanya’s non-appointment as a di-
rector, or treating Vanya as a shadow (rather than a de facto) director. Treating the purchase of the Greek
statue, in part (b), as a ‘substantial property transaction’ under s.190 CA 2006 (we are not told this pur-
chase was from a director or someone who is connected with a director). Not treating the purchase of the
paintings (in part (c)) as a substantial property transaction (the price is over £100,000, and we are told the
purchase was from a director).