DIRECTORS DUTIES

Answer Three – 2020

Q3: Whether you believe there have been any breaches of the duties owed to the Company by
its director, Paul, under Part 5 of the Companies Act 2014; and (b) the remedies that are
available to the Company arising from any breaches of such duties.

Part (a) Fiduciary Duties

Directors owe their duties to the company as a whole and not the individual members. Despite
this, there are limited circumstances in which an exception to this rule may apply. These include:

 Shareholders: Directors may owe a duty to shareholders if they represent themselves as

acting as agents for the shareholders.

 Creditors: Directors of insolvent companies owe duties to creditors to preserve the

assets until the company is properly wound up.

 Employees: No duty at common law – s. 224 CA 2014 required directors to “have

regard” to employees in the performance of their function – but per s. 224(2) CA 2014,
this duty is owed to the company, NOT the employees

s.228 (a) The duty to act in good faith in what the director considers to be the interests of the
company Historically this duty would have been assessed with reference to the intention of the
director in exercising powers, the proper use of powers, and the fettering of discretion. When
assessing the director’s good faith, or bona fides, a subjective test is applied and the intention of
the director will be assessed with reference to whether they were honestly seeking to further the
interests of the company. In Regentcress PLC v Cohen, similarly the court referred to the
honest belief of the director and whether they believed they were acting in the interests of the
company. Whether such an honest belief existed will be a matter of fact in each case, however,
where substantial detriment arises it will be more difficult to argue that it did.

228(b) – act honestly and responsibly in relation to the conduct of the affairs of the company.
Compliance with company law is a relevant consideration under this heading, as can be
discerned from the case law dealing with such matters relating to restriction proceedings per
Business Communications Ltd. v. Baxter. In the case of Re USIT World plc, Peart J made
an obiter dicta observation on acting honestly and what distinguished it from responsibly:
"Dishonesty implies something akin to improper dealing with money or other assets belonging to
the company…irresponsibility is a different concept. Whole dishonesty will always amount to
irresponsibility the converse is not true".

228 (c) act in accordance with the company’s constitution and exercise his or her powers only for
the purposes allowed by law This duty requires an assessment of the purpose of his actions,
which must be the furtherance of the company’s objects as seen in Howard Smith Ltd. v.
Ampol Petroleum Ltd, where it was found that the court will examine the substantial purpose of
the exercise of power with regard to the director’s bona fide beliefs and judgment and then go on
to examine whether this exercise of power, was on balance, a proper one.

228 (d) not use the company’s property, information or opportunities for his or her own or anyone
else’s benefit unless— (i) this is expressly permitted by the company’s constitution; or (ii) the use
has been approved by a resolution of the company in general meeting. Director should not
benefit from his or her office by exploiting a business opportunity received as a result of position
as a director. The rule may not apply so strictly where directors of company reject the business
opportunity first, as seen in the Canadian case of Peso Silver Mines Ltd v Cropper (not
applicable in IE). Although there has been some shift in this approach as seen in Gencor ACP
Ltd where it was found that the only escape from potential accountability would be from obtaining
prior approval of the company's shareholders.
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228 (f) avoid any conflict between the director’s duties to the company and the director’s other
(including personal) interests unless the director is released from his or her duty to the company
in relation to the matter concerned, whether in accordance with provisions of the company’s
constitution in that behalf or by a resolution of it in general meeting.

In Regal (Hastings) v. Gulliver, the duty to avoid conflict was said to be an absolute duty and
does not depend on the absence of bona fides; the liability arises from the mere fact of having
made a profit. In this case, the plaintiff company owned a cinema which the directors decided to
sell. They decided to acquire 2 others and sell all 3 as a going concern. A subsidiary was
formed with the intention of taking a lease of the other two. The subsidiary had a share capital of
£5,000, divided into 5,000 £1 shares. The landlord of 2 other cinemas would only offer the
leases to the new company if it had a paid up share capital of £5,000 or alternatively, if the
directors would provide personal guarantees. The plaintiff company could only raise £2,000, so it
subscribed to this amount of shares. The directors personally subscribed to the remaining
£3,000 worth of shares. The new company then acquired a lease of the 2 cinemas. They then
sold the shares in both the plaintiff company and the subsidiary. They made a personal profit
from their sale of the shares in the subsidiary. When the new owners of the plaintiff company
became aware of this, proceedings were instituted against them by the company, claiming that
the profit belonged to the company, as the directors had breached their fiduciary duties to the
company. There was no suggestion that the directors had not acted in good faith, or that what
they had done was not for the benefit of the company. If they had not agreed to personally take
up shares in the subsidiary, the lease would not have been granted on the strength of the capital
which the company itself was in a position to subscribe.

The court found that the motive of the directors was immaterial. In the course of their
management of the company, they entered into a transaction from which they made a personal
profit. As fiduciaries, they were obliged to account for that profit. Courtney notes, the decision in
Regal (Hastings) has been criticised as being too harsh

228(1)(h) directors owe a duty to “have regard” to the interest of company’s members. The
relatively old Canadian case of Allen v Hyatt provides the departure point for this area. Directors
will stand in a fiduciary relationship to shareholders where they expressly undertake obligations
to those shareholders. Here company directors induced shareholders to give them options to buy
their shares, on the basis that it would help them negotiate an amalgamation with a third
company. The directors then exercised their option and made personal profits.

228(I) duty to have regard to the interests of creditors in an insolvency situation. This duty has
been recently approved by Regulations 2022 which gave effect to Directive (EU) 2019/1023 on
preventive restructuring frameworks, on discharge of debt and disqualifications, and on
measures to increase the efficiency of procedures concerning restructuring, insolvency and
discharge of debt.

Part (b) Remedies

Per section 232 (1) Subject to section 233, where a director of a company acts in breach of his or
her duty under section 228 (1)(a), (c), (d), (e), (f) or (g), he or she shall be liable to do either or
both (as the corresponding common law rule or equitable principle with respect to the matter
would have required) of the following things, namely— (a) account to the company for any gain
which he or she makes directly or indirectly from the breach of duty; (b) indemnify the company
for any loss or damage resulting from that breach. Therefore, the Company should seek a
remedy under section 232, and the company is the proper plaintiff.

The normal remedy where a director wrongly profits from his position is to make him account for
the profits to the company. This arises by virtue of the fact that the director has certain fiduciary
obligations to ensure that the company has the chance of exploiting all potential business
opportunities. If the director takes an opportunity for himself in breach of those duties that
opportunity is treated as if it were the company’s and the director will have to account for the
fruits of that opportunity.
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However, as was pointed out in Aerospares Ltd v Thompson, an account of profits would not
always be the most appropriate remedy, particularly where this would mean the handing over of
profits made for an indefinite period of time. In this case Kearns J. simply awarded damages for
that part of the business which he deemed to have been poached by the former directors.
 DIRECTORS DUTIES

Answer One – 2020

Q1: “While company directors have a fiduciary duty to act in the interests of their company, they
also have duties to have regard to the interests of other persons; however, all such duties are
owed to the company."

Duty to Shareholders

Courtney argues that in a private companies situation, “it is more likely that the directors may be
found to be agents of the shareholders and consequently to owe fiduciary duties to the
shareholders”.

Section 228(1)(h) directors owe a duty to “have regard” to the interest of company’s members.
However, 228(1)(h) does not displace the common law position which is that directors do not
owe members or shareholders a duty to act in their interests.

The relatively old Canadian case of Allen v Hyatt provides the departure point for this area.
Directors will stand in a fiduciary relationship to shareholders where they expressly undertake
obligations to those shareholders. Here company directors induced shareholders to give them
options to buy their shares, on the basis that it would help them negotiate an amalgamation with
a third company. The directors then exercised their option and made personal profits.

The Privy Council held that the directors must account to the shareholders for the profit they had
made. Viscount Haldome stated that “the facts in the present case were widely different from
those in Percival v Wright, and their lordships thought that the directors must here be taken to
have held themselves out to the individual shareholders as acting for them on the same footing
as they were acting for the company itself, that was, as agents.”

This was the basis of the more recent New Zealand decision of Coleman v Myers where such a
duty was also found on the facts. On the facts, a fiduciary relationship was found, and the courts
relied heavily on the closely held family nature of the company. The factors that were held to
assist in finding duties to the shareholders were:

• Dependence upon information and advice;

• Existence of a relationship of confidence;
• The significance of some particular transaction for the parties;
• The extent of any positive action taken by the director to promote it.

These factors, taken together, gave rise to a fiduciary relationship between the director and the
shareholder. These factors were cited with approval by Keane J. in the Supreme Court in
Crindle Investments v Wyme. Woodhouse J. stated, in the above case, that “the standard of
conduct required from a director in relation to dealings with a shareholder will differ depending on
all the surrounding circumstances and the nature of the responsibility which in a real and
practical sense the director has assumed to the shareholder”.

The decision was also approved by the Court of Appeal in Peskin v Anderson in which the court
held that there must be established ‘a special factual relationship between the directors and the
shareholders in the particular case’. However, there is a crucial difference between a fiduciary
duty to act in the interests of a company and a duty to have regard to the interests of the
members in general.

Duties to Creditors
Despite the general rule, directors also owe certain duties to creditors.

It is now established law in Ireland that when a company is insolvent, the directors owe a duty to
the creditors. Irish cases in this line refer to the Australian decision of Kinsella v Russell
Kinsella Property Ltd where a company there was faced with imminent collapse. Despite this, it
granted a lease of a premises at an undervalue, and without a rent review clause, and it also
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granted an option to purchase the premises at any stage during the term of the lease at a price
below the market valuation. The lessees were two of the directors, but the lease was approved
by the company in general meeting. Shortly after the grant of the lease, the company went into
liquidation, and the liquidator sought to have the transaction set aside as a breach of directors’
duty.

Duty to Employees
In Park v Daily News Ltd an attempt to make ex gratia payments to employees was held to be
ultra vires, despite the fact that the majority of the shareholders of the company supported it. The
Court of Appeal held that there was no authority to support the proposition that directors are
entitled to consider the interests of the employees, irrespective of any resulting benefit to the
company.

Statute has touched on the position under s.224 (previously: s.52 of the 1990 CA) which states
that:

• The matters to which the directors of a company are to have regard in the performance of
their functions shall include the interests of the company’s employees in general, as well
as the interests of its members.
• Accordingly the duty imposed by this section on the directors shall be owed by them to
the company (and the company alone) and shall be enforceable in the same way as any
other fiduciary duty owed to a company by its directors.

Courtney observes that the section has “dubious value” as what the legislature gave by
subsection 1 it took away by sub-s.2. There is a distinction between owing a duty and simply
being required to have regard to their interests. The net effect is that the directors are obliged to
have regard to the interests of employees but the recipients of that statutory favour cannot
themselves enforce that duty. Only a liquidator or strong creditor voting power can vindicate
s.224 (previous s.52).

Interests of person who appoint directors

S. 228(3) and (4) provide that, without prejudice to s.228(1)(a), a director may have regard to the
interests of a particular member in certain circumstances.