13. Directors' duties

To whom the duties are owed

Directors owe their duties to the company, not to individual shareholders. In Percival v Wright directors bought shares from members without telling them about takeover talks. They owed the members no duty to disclose.

The duty of good faith

Section 231(1) says a director stands in a fiduciary relationship towards the company and must observe the utmost good faith in any transaction with it or on its behalf.

Best interests: section 231(2) requires a director to act at all times in what he believes to be the best interests of the company as a whole, so as to preserve its assets, further its business and promote its purposes. Under section 231(3) he may have regard to the interests of employees as well as members. The test is what the director honestly believes, as in Re Smith and Fawcett: directors must act bona fide in what they, not the court, consider to be in the company's interests.

No contracting out: section 231(4) says no article, contract or resolution can relieve a director from this duty or from liability for breaching it.

Proper purposes

Section 231(5) says a director must use his powers for the purpose for which they were given, not for a collateral purpose. Section 234 adds that directors must not, without a special resolution, exceed their powers or use them for a different purpose, even if they believe that is in the company's interests. In Howard Smith v Ampol Petroleum directors issued shares to destroy a majority shareholder's control. The Privy Council set the issue aside, although the directors were not acting for personal gain.

Care and skill

Section 232 requires a director to act honestly, in good faith and in the best interests of the company, with the care, diligence and skill that a reasonably prudent director would exercise in comparable circumstances. Failure grounds an action for negligence and breach of duty. Each director is responsible for board actions he took part in, and unjustified absence does not excuse him. The same standard applies to executive and non-executive directors.

The older standard: in Re City Equitable Fire Insurance, Romer J set a low standard: a director need show only the skill reasonably expected of a person of his knowledge and experience, and need not give continuous attention to the company's affairs. Re D'Jan of London applied a stricter objective standard. The Act's 'reasonably prudent director' test is objective, like D'Jan.

Conflict of interest

Section 233 treats directors as trustees of the company's money and property and as its agents. Section 235 says that, despite anything in the articles, a director must not, without the company's consent, put himself in a position where his duty to the company conflicts, or may conflict, with his personal interests or his duties to others. The duty not to misuse confidential information continues after he resigns.

The strict rule: in Aberdeen Railway v Blaikie the company contracted to buy chairs from a firm in which its chairman was a partner. The company could avoid the contract. A fiduciary may not enter engagements in which his interest conflicts with his duty.

Profits from the position: in Regal (Hastings) v Gulliver directors took up shares in a subsidiary because the company could not afford them, and made a profit when they sold. They had to account, though they acted honestly and the company could not have made the profit itself. In IDC v Cooley a managing director who secretly took for himself a contract offered to him personally had to account for his profit.

Disclosing one's own wrongdoing: in Item Software v Fassihi a director who was secretly planning to divert a contract to himself broke his duty of loyalty by failing to disclose his own misconduct to the company.

Loyalty and care distinguished: Bristol and West Building Society v Mothew explained that not every breach of duty by a fiduciary is a breach of fiduciary duty. Fiduciary duty concerns loyalty; carelessness is a breach of the duty of care.

Consequences of breach

Section 240 says that if a director breaches sections 233, 234 or 235, he and anyone who knowingly took part must compensate the company for its loss; he must account for any profit; and the company may rescind any contract made in breach. Under section 241 proceedings may be brought by the company or by any member. A member sues in a representative capacity for all the members and joins the company as a defendant.