What are the director’s duties in Section 171 to be known when Company formation UK ?

30 May

There are various duties which are allotted to different members, workers and directors when setting up a company UK. In this article, we will discuss the duties which have to be performed by directors and which are allotted at the time of setting up a company UK. There are different duties which are related with director according to Section 170 of company’s Act. In this article we will study Section 171 of company’s act which is related with the director’s duty to act within the power. The authority can be to company registration UK or register a business name or any other duties, director should follow the rules and regulations. Director is liable for breach of the articles. Under Section 170(1), director owe duties to company and as a consequence of this can make changes in duties, can change proper claimant rule and can approve or ratify the breach which he makes. First, we discuss the duties of director which are owed to shareholders and creditors after company registration UK.

Director does not hold any special duties towards the shareholders generally but there are some special cases where director owe duties towards individual shareholders. Director owe a duty as trustee to those individual members who rely on him for taking advice. According to NZ court, this duty of trustee which is owed by director is towards those who continually seek for taking advice from him.

In case of takeover bid, there can be duties which are owed to shareholders by director and director does not owe any duties to creditors and creditors cannot enforce directors in context to any duties owed to them by director. According to Yukong case, Director cannot be sued by the creditor in case of any breach and he can be sued by a liquidator if director’s actions are not according to company’s interests after insolvency so director’s duties are owed to creditor in the case when the company is about to be insolvent. Company owe duties to creditors and director owes a duty of care to company. The company should make sure that the affairs of company are running properly and directors are not using company’s properties for their own benefits neglecting creditor’s rights.

According to Section 219 of companies act, director’s duties are cumulative in nature and under Section 172(1)(b), directors should consider employees’ rights. A case study of Re Welfab, is related to the director’s authorities, liquidators sued director for selling of company’s business at value less than the full value. But this was fine because all work force of company could take benefit from this rather than only specific class of employees.

Now we discuss the particular duties after company formation UK which are associated with director under Section 170.

Duty to act within power

Duty to act within power is given in Section 171 of company’s law. According to Section 171 of company’s article, director should exercise his powers within the limits. Let’s have a look at two cases where director violated Section 171. The first case is related to Selayer United Rubber, where director breached the rules related to financial assistance in case of company assets. The second case is related to Rolled Steel where director conducted a transaction without meeting the quorum demands and violated Section 171.

According to Model Article 3, director can exercise all his powers which he has been allotted except the actions exercised for improper purposes. A purpose is something which is associated with the interest of the company and by improper purpose we mean to act for a purpose which is against company’s interest. Now we discuss the improper purposes in the light of Model Articles.

Improper purpose and rules in the context of outsiders
Good/bad faith and proper/improper purposes have no relation as the good/bad faith is tested subjectively (based on opinions) and proper or improper purpose by objective test (either wrong or right). The director may have acted for improper purpose objectively but according to some honest and reasonable person he could have acted for the interest of the company. The nominated director should take into account the interest of the company which has nominated him as a director.

Improper purpose and rules in the context of insiders
The improper purposes in the context of insiders is related with shareholders. This includes to differentiate between the shareholders at the time of payment, using the power for unequal allotment of shares and issuance of new shares, using power to call meetings, to make calls and power to distribute profits. According to Worthington, court has different approaches towards the investigation of director’s powers towards members rights. The court’s approach can be strict equity or good faith approach.

Strict equity approach of Court
According to this approach, power given to a person should be used for the purpose for which it is allotted and courts decision on a particular matter should be given value and regard. But in view of Worthington, according to company’s law this thing is not easy to apply. In the case of Hogg Cramphorn, on takeover of the company, director issued large number of issues to trustee to frustrate the takeover bidder. The takeover bidder objected the director’s actions. The takeover’s appeal was considered because no doubt director was doing this for the interest of the company but it is improper purpose to frustrate the takeover.

Good faith approach of Court
This approach is based on the factor whether director acted in a good faith or not. The UK courts are not in favour of this approach. The director’s opinions are the only major factor which determined the purpose for which power was exercised. In the case Howard Smith, large number of shares were issued by the director in defense of takeover. Some members said that director had acted for his own interest while some said that director had acted for the interest of company but the main purpose of director’s actions was to frustrate the majority shareholders of Ampol so the court due to contrary statement declared that the director’s actions were breach of duties.

When director’s actions affect the rights of different classes than court makes decision on the fairness between classes and Sections of classes. The different approach must be applied when there is matter about what is fair between different classes of shareholders and not just the company’s interest. The following case study is related to Mill Mills case. The director was part of resolution which paid distribution to the share types which he holds. The shareholder holding other shares claimed that this is not right. But this was right as the director did this just to change the form of distribution from one form to another and this was in best of company’s interest.  The director’s action was a good purpose and was in the best interest of company.

Under Section 171, directors only owe duty to company and not to shareholders individually and shareholders can seek an action against prejudice under Section 994.

Breach of Section 171 and Remedies


There are different consequences which director has to face on the breach of Section 171 and the remedies that must be applied in case of breach of Section 171.

The Section 171 is breached if the director acts outside the powers allotted to him and all the remedies which are equitable are available in case of breach of Section 171. The case study of Clark Cutland will help us in studying the breach of Section 171.  Director misused assets of company and also taken unauthorized salary or remuneration. This was in fact a breach of Section 171 as director acted against and beyond the powers allotted to him and used his powers for improper purposes.

In case of breach of Section 171, directors and trustees are bound to compensate the loss caused due to breach. All the directors are equally liable if more than one director is involved in the breach.

What happens if the director lacks actual authority? The company cannot enter into contract when director uses this for improper purposes. The third party can rely on ostensible authority based on the satisfaction of Freeman and Lockyer Test in case actual authority is absent. According to Lord Nicholls, contractor can rely on ostensible authority if he has no knowledge of absence of actual authority. The contractor’s knowledge of lack of actual authority than contract cannot be made on basis of ostensible authority.  Actual authority is granted based on the fact that the director will use it observing honesty and on behalf of company. Director’s dishonest act will not make ostensible authority void and contract which is made on the basis of ostensible authority is of no value and is considered null. The improper allotment and issuance of shares will be deemed as null if director does this for the collateral benefit neglecting the shareholder’s benefit.

Now we discuss the misapplication consequences in case of property. In case of breach misapplied property can be recovered by a recipient and recipient can be imposed with a liability of unjust enrichment according to laws of breach. In view of Sir George Jessel, Master of the Rolls, company is a beneficiary of company’s money and agent acts as a trustee on company’s behalf. The third party which receives property regardless of the fact that the agent is misusing his authority of trust than the third party is liable to return the property. The case study related with the rolls steel is discussed in which third party could not acquire the property because of misuse of power by the agent.

The law for accessory liability in case of misapplication is same as for equity mistrust. The bank is liable to sell its any accessory for compensation of the loss as the failure of transaction is a result of their diligency and lack of skills. The bank cannot escape by just giving an explanation. According to Lord Nicholls, third party is liable to sell an accessory for assisting a breach of trust but if it is negligent of the fact than it is not liable. Trustee even if he is honest has committed a breach it will still be considered as a breach. The assisting party will be liable for all the consequences.

Directors can do misapplication in case of taking unauthorized remuneration. A case study related with the unauthorized remuneration will clear the concepts. This case is related to the Guiness Sanders. The director awarded 5 million pounds to committee in context of takeover. This was misuse of power and authority by director. In view of lords house this was outside of director’s authority and director is required to return the money taken. Directors are not expected to follow Article 19 and 23 of Model Articles. The director should take remuneration for proper purposes and after the service is finished he is not entitled to take a remuneration and remuneration should be taken for a market price and director who paid himself more benefit than the difference between market value and received amount. Director can receive remuneration based on the contract based and that contract should be valid.

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