CA 2006, s 170(4) requires us to interpret the new law by reference to pre-existing common law and equitable principles. In the case of the duty to promote the success of the company (s 172) its origins can be found in the established principle that a director must act bona fide in the best interests of the company and utilise his powers for the purposes for which they were conferred1. In reality these are two duties and they are now split between two sections ie the duty to act in accordance with the company’s constitution and only exercise powers for intended purposes (s 171) and the duty to promote its success (s 172). We discuss abuse of powers in Ch 5 and need only say a few further words about “best interests” and “bona fide” here. The test is a largely subjective one. The Court does not attempt to gainsay the opinion of the directors on commercial matters if they have genuinely decided on a course of action. However, it is not “in the interests of the company” to use its conferred powers irregularly, whatever the intention may be. In Bamford v Bamford2 the directors issued shares to frustrate a takeover bid which was a misuse of their powers. The fact that they were honest and well-intended did not prevent this being a breach of the duty of good faith, since they were mistaken as to the interests of the company as a whole (shareholders are entitled to receive bids), but the transaction being voidable was nevertheless capable of being ratified by the company as the injured party, in the absence of any director’s personal gains.
The CDDA 1986 has had an important impact on the development of the law relating to directors’ duties. Many of the leading cases on the duties in recent years have been in the context of disqualification proceedings under the CDDA. In determining whether a person is unfit to be concerned in the management of a company and therefore should be disqualified under Section 6, the court has regard to the matters set out in Part 1 of Schedule 1, one of which is: “any misfeasance or breach of any fiduciary or other duty by the director in relation to the company”. The disqualification cases provide a rich harvest of instances of wrongful conduct, ostensibly in the context of a failed enterprise, which are useful in helping a director decide what he should or should not do in respect to a company which is still a going concern. A discussion on disqualification, with a recitation of a good spread of the more recent authorities, has therefore been included at the end of this narrative (Ch 12). There remains the question of the interrelationship between the new statutory rules and the types of conduct which courts find relevant in considering whether a director should be disqualified from office. For instance, will the reference to “any misfeasance or breach of fiduciary or any other duty” require an examination on a CDDA application of the new general statutory duties, or can the courts look at other circumstances or the pre-existing law? Conversely, can the disqualification cases continue to be an indirect “source” of ascertaining corporate wrongdoing, ie of interpretative value for the purposes of CA 2006, s 170? Because of the open nature of these questions it remains pertinent to examine the case law both before and after the adoption of the new code.
Also, s 172(3) (discussed below) recognises that the duty to promote the success of the company is displaced when the company becomes insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute personally towards the funds available to creditors in an insolvent winding-up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all steps to minimise the loss to creditors. it has been suggested that the duty to promote the success of the company may need to be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. The Government intends to allow the law to develop in the area.
The law would impede the development of modern business practice if it continued to insist that directors were trustees by any other name. Trustees are usually required to act unanimously, whereas a simple majority decision of a board of directors will suffice. Again, trustees must exercise a high degree of restraint and conservatism in their investment judgments, complying with what the Trustee Act 2000 allows, whereas directors will be expected to display entrepreneurial flair and accept commercial risks to satisfy shareholders that a sufficient return is being produced on capital. It is generally upon trust principles that directors are made accountable for their handling of the company’s property and, like trust property, assets wrongfully disposed of by them may be traced into the hands of third parties who have knowingly received it1. However, individual directors, unlike individual trustees, do not normally receive property directly into their hands, and their control over company assets arises from the delegation under the articles of association which the shareholders have willingly conferred upon them, not from any strict liabilities imposed by the trust instrument or beneficiaries under disability. In any event, the idea of “fiduciary obligation” as applied to directors has required redefinition.
In British and West Building Society v Mathew2 a fiduciary was characterised as a person who undertakes to act for another in circumstances that give rise to a relation of trust and confidence. This is altogether a more flexible approach than previously, because it fixes directors with the notion of accountable stewardship with respect to a company’s property without imposing the formal duties of a trustee. At the same time it allows a trust based remedy to be applied if the directors are found to have breached the particular fiduciary duties that apply to them by virtue of their own office eg loyalty and the duty to act bona fide in the interests of the company. This enables greater loss recovery from the directors concerned than if a common law damages claim is brought against them3. Reference to directors as “trustees” needs to be understood in this more limited sense4. Directors are constructive trustees of misapplied assets and must account strictly for losses which the company suffers.
In Re Duckwari Plc (No 2)5—
The company acquired a property asset in circumstances where one of its directors was in breach of the fiduciary obligations (expressed in statutory form as CA (1985, s 320 now CA 2006, s 190) to obtain shareholders’ consent for the transaction in which he was an interested party. The property subsequently fell in value while in the company’s ownership.
Held: the director was personally accountable for the loss, pound for pound, as a fiduciary was obliged to restore assets, or their equivalent value, as if trust funds had been misapplied.
The same principle applies if the asset increases in value.
By imposing a person-to-person fiduciary responsibility on a corporate officer it becomes possible to follow assets into the hands of others who are “fixed” with the breach of trust he is treated as having committed. The issue here is the degree of awareness of the breach that is required to make the third party a constructive trustee. Liability with the benefit of hindsight is a wonderful thing, but a workable distinction has to be drawn between persons who dishonestly receive assets knowing them to be derived from wrongdoing and those who deal with directors in good faith and are not put on enquiry by any suspicious circumstances7. More recently, courts have moved away from the “knowing receipt” test to assess simply whether it is unethical or unconscionable for the third party, in all the circumstances including the business context, to be allowed to retain, at the company’s expense, what has become vested in him: BCCI (Overseas) Ltd v Akindele
Directors are in control of substantial assets belonging to another, the company they manage. Although a majority of shareholders may dismiss them at will1 great damage could be done to the company’s interests, including misappropriation of its property, in the time it takes to bring about their removal. While some fetter on indiscretion is provided by there being a board exercising powers, and undertaking surveillance, collectively, many companies now have a sole director who is also the only shareholder, over whom no obvious control exists. Indeed, one of the hardest lessons for the small company proprietor to learn (usually from his professional advisers) is that the company’s assets are not his assets, and that he cannot extract them for his own benefit as he pleases2. Almost as hard to grasp, judging by the recent plethora of cases, is the notion that exploitation by a director (whether or not he is the proprietor) of a corporate opportunity for his own purposes is just as much a misapplication of property as if funds had been taken from the till.
Faced with this catalogue of mischief the law has needed to evolve rules which compel directors to act in a way which puts the company’s interests before theirs. Since corporate law is a Johnny-come-lately into our jurisprudence, principles have needed to be borrowed or adapted from other areas of law. The chief of these is the law of agency, as mercantile transactions in which an agent is empowered to create binding relations between his principal and a third party are of ancient origin and have at their root the agent’s obligations of obedience (or loyalty), care and skill, personal performance and good faith. But agency itself shares a further set of principles, based around the law of trusts. As was argued as early as 179516:
“The office of a common agent has already been described in this case, and it is needless to enter into refinements or niceties as to the nature of trusts or the specific name of trusts. There is no magic in the term: he is a trustee (in technical style) who is vested with property in trust for others: but every man has a trust to whom a business is committed by another, or the charge and care of any concern is confided or delegated.”
And so for company directors such obligations are termed “fiduciary”, because they derive from trusteeship; and in early law the duties of directors and trustees were considered the same.
However, a company director is not a trustee in a strict sense, and the suggestion that he might be is an historical quirk. In the nineteenth century most companies other than chartered or statutory corporations were not distinct legal entities as we now recognise them, but operated under deeds of settlement with property and powers actually vested in trustees. The managers or directors of the companies equated with the trustees, and were treated as custodians, and it was not until the adoption of the limited liability company with separate boards that the roles became distinct. A vestige of the old form is seen in the modern unit trust where the underlying property is vested in the trustees (who owe obligations as such to unit holders) but the funds are controlled by managers, who exercise much greater discretion but are still to be regarded as “fiduciaries”.
It is perhaps no co-incidence that the rules of company law have been worked out in the Courts of Chancery which administered rules of equity as opposed to common law, and enforced trusts, and there has been a natural tendency for judges of those courts to emphasise the equitable aspects of a company director’s position. This influence also accounts for the fact that the fiduciary obligations of directors, which entail strict personal accountability, are generally of a higher standard than those formulated at common law, such as care and skill.
