Director Duties

DIRECTORS` DUTIES AND RESPONSIBILITIES IN RUNNING A LIMITED LIABILITY COMPANY
1 INTRODUCTION
Company directors are appointed by the shareholders to run the company. In running the company they owe some duties and responsibilities to the shareholders and other stakeholders. The most important stakeholders that a company owes duties and responsibilities are the employees, creditors, trading partners, and the state.
The essay gives details of the general duties and responsibilities of all company directors that they need to fulfill in their capacity as directors and specific duties and responsibilities in relation to the position they hold in the company.
2 GENERAL DUTIES AND RESPONSIBILITIES OF DIRECTORS
2.1 DUTIES
2.1.1 FIDUCIARY DUTIES AND DUTIES OF CARE AND SKILL
Fiduciary duties require directors to work in the best interest of directors while duties of care and skill require them to exercise caution when dealing with company affairs. Breach of these duties can lead to legal action being taken against directors. The main duties include:[Thomas Rivers, How to be good: The emphasis on corporate directors' good faith in the post-Enron era, Vanderbilt Law Review, (2005), 58(2), 631-631-675. Retrieved from http://search.proquest.com/docview/198945891?accountid=45049.]
* Duty to act in good faith
This requires directors to act in all honesty when dealing with company affairs. Acting in good faith means that the director when faced with a challenging situation he / she should choose the best course of action as the shareholder himself would have or as any other person in his position as director would have.[IBID.]
In a recent case, the directors were sued by their shareholders for failing to live up to the duty of good faith. The directors had agreed to the actions of the CEO who received a bribe for the sanction of a merger from the expected acquirers. According to the shareholders the CEO had demanded a bribe for the merger to take place. If the directors had intended to act in good faith then they would not have accepted such a deal. The court ruled that the directors along with the CEO had acted in bad faith and were therefore liable for their actions.[Parnes v Bally Entertainment Corp (1997) Del Ch CA No 15192.] [Ibid.]
* Duty to exercise care, skill and diligence
It is expected that directors should act on a knowledgeable ground as any other persons in their capacities would do in performing their duties. They should also possess the knowledge and thoroughness in accomplishing tasks as set out in the corporations act. It is however expected that directors should not show more skill than is reasonable for a person in his capacity.[Ibid.]
In a court case, the judge ruled that directors were liable for making decisions that were uninformed even though they did not have the intention of acting in bad faith. The legal standards regarding duty of care, skill and diligence were also emphasized after the Enron scandal to make directors accountable for their careless actions. However, where the directors take all necessary precautions to ensure that they are fully informed before deciding on a matter, even though their decisions turn out to be wrong ones, they are not to be held liable.[Smith v Van Gorkom (1985) 488 A 2d 858.] [Ibid.]
* Duty to exercise independent judgement
The duty expects directors not only to make judgements but to make them in an independent manner. A director should not let his judgement be clouded by those of others, where a director makes decisions based on another`s judgement, he/she is said to have breached the duty. However they are allowed to make judgements based on others` advices. This duty also rests on the directors when they have to make decisions on whether to uphold the shareholders` interests over those of other stakeholders.[Tim Polding, The companies act 2006: New duties for company directors. The British Journal of Administrative Management, 13535188 (2008), 28-28-29, Retrieved from: http://search.proquest.com/docview/224614860?accountid=45049.]
GIO group`s chief financial officer, Mr. Vines was said to have disregarded the requirements of the corporations act by failing to reveal important information to the group where he was required to do so. Though he had acted truthfully, the seriousness of the matter required him to have disclosed the information. He had relied on a report given to him by another executive instead of investigating the report to make his own independent judgement. The court held that he had breached this duty.[Geoffrey William Vines v ASIC (2007) NSWCA 75.] [Ibid.]
* Duty to act within powers
When exercising their powers, directors should do so as the company`s constitution stipulates. The memorandum of association and articles of association give the directors the directive upon which their powers are to be exercised. These powers should therefore not go beyond those stated in the company`s constitution and they should be exercised in furthering the purpose for which they were appointed as directors.[Stephen Chan, Directors` duties in Hong Kong: Codify or Not. (2009) Retrieved from: /images/uploads/articles/Director.pdf.]
Ampol and another company, Bulkships, owned 55% of the shares of R W Miller Ltd. The two companies were in a competitive bid to take over Miller. Miller`s directors however were in favour of Howard because they were offering a higher bid but this was threatened by the holdings of Ampol and Bulkships. Miller`s directors went ahead and allotted some of the company`s shares to Howard to alter the percentage of shares held by Ampol. The court ruled that the directors of Miller had abused their powers of allotting shares as was contrary to what was expected of them.[Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821.] [Ibid.]
In another case, the main object of the company`s operations was to vend railway carriages. The company directors however decided to contract another company to construct a railway line. It was held that the directors had not acted within their powers as the constitution required of them.[Ashbury Railway & Iron Co v Riche (1875) LR 7 HL 653.] [Andrew J Sherman, Guidelines for Establishing a Board of Directors and Advisory Board. Fast-Track Business Growth, 131. (2003), Retrieved from EBSCOhost.]
* Duty not to delegate powers
When directors are given powers to act on behalf of the shareholders they are expected to use them for the correct purpose. When they decide to delegate their powers to their subordinates they are going against the expectations of the shareholders. It is their duty not to delegate such powers because they are used to distinguish them from the subordinates.[Stephen Chan, Directors` duties in Hong Kong: Codify or Not. (2009) Retrieved from: /images/uploads/articles/Director.pdf.]
Most of the powers bestowed upon directors are those that require major decisions to be taken that affect the entire company; it is recommended that the directors do not delegate such powers because they will be held responsible for decisions that their subordinates make that could adversely affect the company.[Michael A Adams, Essential Corporate Law, (Routledge, 2002).]
* Duty not to gain an unfair advantage from position
While acting as directors of the company, the directors are expected not use the company in gaining an unfair advantage. Unfair advantages usually manifest themselves in the form of insider trading. Directors are discouraged from using inside information to profit themselves. Where found to have been involved in insider dealings the directors can be held liable for making inside information known to particular persons whereas the rest of the public is not aware of such information.[Ibid.]
For example where a director has access to information that the company he works for is about to sell shares and he leaks this information to a fellow director in another company for a price, the director can be held liable for disclosing information that was not made available to the public and for gaining an unfair advantage from the deal in the form of the compensation price.[Ibid.]
* Duty not to accept benefits from third parties
Not accepting benefits from third parties means both monetary benefits and those which have non monetary. Cases of acceptance of benefits are usually related to conflicts of interest, a director can not be held liable where the benefits are not likely to lead to conflicts of interest. It is however difficult to determine which benefits will lead to such conflicts and directors are therefore discouraged from accepting benefits in general.[Edward Brown, A case of split loyalty? Multiple directorships and conflicts of interest under the Companies Act 2006. Journal of International Banking and Financial Law. (Butterworths, 2010), Retrieved from: /uploads/publications/JIBFL_brown.pdf.]
For instance, a director should not take advantage of an offer where the offer would be beneficial to the company. Where a director comes across a good deal to purchase shares at a fair price from another company and decides to purchase the shares without the company`s knowledge, he is said to have breached the duty by accepting benefits that make him have conflicting interests with that of the company.
* Duty to avoid conflict of interest
Conflicts of interest usually arise where the directors have to deal with third parties and do not involve dealings with the director`s own company. The 2006 act allows directors to enter into third party transactions without consulting with the shareholders. They are allowed to do so if and only if they have no personal interests in the transactions other than those of the company. The duty is however compromised where the director has cross directorships and therefore such directors are likely to choose their own interests over the company`s. Sometimes cross directorships is also known to lead undivided loyalty.[Ibid.]
A company whose main operations was selling grocery, owned property which it used for commercial purposes by letting it out to tenant. The occupants of the property had a car park on an adjacent property. When one of the company directors had that the adjacent property was for sale, he bought the property under the name of another company which he was also a director. The court ruled that the director had duty to inform the grocery company of this opportunity but he chose his own interest over that of the company, he had therefore breached the duty to avoid conflicts of interest.[Bhullar v Bhullar (2003) EWCA Civ 424.] [IBID.]
* Duty to avoid wrongful trading
When directors allow their companies to trade where potential insolvency is perceived they are said to be wrongfully trading. Directors can be held legally responsible to the company`s creditors where they knew or were expected to have known that their company was headed to liquidation. Directors therefore have a duty to avoid such trading and in instances where their companies are involved in third party transactions, they need to let the third parties to be aware of the imminent liquidation for them to decide to continue trading or not.[Purnells, Insolvency Law Library& Insolvency Legal Case, (2011), Retrieved from ]
An insurance company had been making profits for quite some time until 1990 when it experienced poor results. The board met to discuss the reasons for the poor results and what that meant to the company. It was discovered that the company had heavy losses but the directors resolved that the company would continue trading, based on the results of the balance sheet, cash flow statements and management accounts. Liquidators advised the directors of the prospect of insolvent liquidation but the directors continued with trading. It was later discovered that the balance sheet figures were misstated and the court held that the directors were to be held personally liable for the debts owed and for damages to the insurance company.
* Duty to avoid fraudulent trading
Fraudulent trading is closely linked to wrongful trading except that in this case the directors carry out the business with the aim of defrauding creditors. Usually directors are aware of the company`s situation but they decide to go about their business knowing that they will not be able to pay their creditors. Directors are also encouraged to avoid such trading because; where the court learns of such activities, the parties involved can be asked to contribute to the company`s assets in order to pay amounts due to creditors.[IBID.]
In a case dealing with fraudulent trading, a road haulage company obtained onerous leases via one of their previous directors who had been removed from the company. The directors along with their solicitors came up with a plan to sell shares to one of the directors` father in law; the resulting goodwill was purchased by another company that traded using a different name. The directors assured their landlord they would pay their rent without fail. They did not live up to the landlord`s expectation as the company went into liquidation. It was held that the directors had obtained the leases with the aim of not intending to pay up. They were made liable for the outstanding rent.[Ibid.]
* Duty to keep proper books of accounts
The directors are in charge of the company`s books of accounts. They have a duty to ensure that all books of accounts are prepared according to the required regulatory framework and they should be made available to the shareholders upon demand. They should also avail these books to the auditors during audits of the company. Failure to keep them properly or failure to avail them to shareholders and auditors when demanded can lead to legal action being brought against them.[Michael A Adams, Essential Corporate Law, Routledge (2002).]
* Duty to make proper use of company`s property
Company property should be used for the purpose of company affairs; directors have a duty to make proper use of such property. Where directors use property such as company cars and aircrafts for their personal affairs they are said to be in breach of this duty and they can be held liable for their actions.[IBID.]
* Duty to enter into transactions according to the requirements of the law
Company transactions are to be carried out as the law stipulates. Directors are supposed to establish good relationships between the company and its customers and directors. This is to ensure that the transactions are done for the benefit of the company. Where they have personal interests in the company`s transactions they are expected to disclose them to the board of directors who are to analyze whether these transactions will lead to conflict of interests where the directors would want to enrich themselves instead of working towards the success of the company.[Chan Stephen, Directors` duties in Hong Kong: Codify or Not? (2009), Retrieved from: /images/uploads/articles/Director.pdf.]
A company wanted to sell shares and therefore gave their directors options to buy the shares in order to negotiate with the other company for the sale to take place. The directors did not sell the shares on behalf of the company; instead they bought the shares from the shareholders using their options and later resold the shares at a profit. It was held that according to the law the directors had acted as agents to the shareholders and were entitled to repay them the gain at the time the sale took place.[Allen v Hyatt (1914) 30 TLR 444.] [Ibid.]
* Duty to observe memorandum and articles of association
These two documents contain the constitution of the company. Directors should go about their duties following the rules set out in the articles and the memorandum. Where the directors act according to their own personal judgements without consideration of the constitution, they can be held liable for acting against the constitution of the company. They need to realize that the constitution was set up to give guidance on the company`s operations and hence they are obliged to follow it in whatever circumstance.
It was written in the constitution of a company that the main purpose for the company`s existence was to provide housing to students from abroad. The constitution also allowed the directors to obtain loans provided they maintained the business to that of housing. However the company directors altered the business to that of breeding pigs and obtained a loan from the bank. It was held that the company directors had not observed the constitution and therefore the bank loan was void.[Introductions Ltd v National Provincial Bank Ltd (1968).] [William Quick, The board of directors: Rights, duties and responsibilities. Bank News, 106(12), 16-16-17+. (2006) Retrieved from: http://search.proquest.com/docview/205925262?accountid=45049.]
1 LEGAL DUTIES
* Duty to comply with statutory requirements
Statutory requirements of directors include the duties that are imposed on directors upon receiving that title such as keeping records, preparing and approving annual accounts, registration of the company, and its directors and those that are imposed on them in the case of company insolvency which are to find ways in which creditors can be reimbursed their funds.
* Duty to file accounts with relevant bodies
All company directors are to file accounts at the end of every financial year as is require by the companies act. Accompanying these accounts are the reports related to the financial accounts. Failure to file these accounts within the period required that is, within six months after the financial year comes to an end, the registrar c...