What are the director’s duties in Section 172 - 175 of Companies Act 2006 to be known when opening a company UK ?


There are thousands of companies which have been registered and developed in UK from the time of England formation till now. These companies have different directors which have different responsibilities associated and these duties are under some rules which should be followed from the time of England formation. Be it the duty of setting a limited company uk or to register a company name uk these duties are performed following certain rules. The directors perform these duties following Companies Act 2006. These duties of setting a limited company uk and register a company name uk are one of the several duties.

In this article, we will dig into some Sections that discusses about director’s duties. First, we take a look on Section 172 which deals with the director’s duty to promote the success of the company and the remedies in case of breach of Section 172. Than we will discuss Section 173, 174 and 175 regarding director’s duties.

Section 172 of Director’s Duties

 

According to Section 172 of Companies Act 2006, director must work for the best interest and success of company and its members by observing good faith. He should consider these things while working towards the success of company and consider the long-term consequences before taking any decision and take care of employee’s interests. Maintain good relationships with customers, suppliers and other members of company, consider the impact of company’s operations on community and environment and should strive for maintaining company’s good reputation and be fair with all the members of the company. The idea of member’s benefits by working for company’s success has been adopted from ‘shareholder enlightened value’ proposal which was put forward by Law Commission and Company Law Review. The idea behind this proposal was that members be benefited in regard to the matters also in addition to making short term profits.

According to Worthington, Section 172 resolves issues regarding the interests of company and if a director perform duty to promote success for benefits of members i.e., according to their interests than it’s a breach. But Mills case suggested that acting according to Section should not be deemed as breach unless the action is contradictory to interest of company and unfair to member. You may be thinking that according to above opinions it does not fall in the category of company’s success to perform an action which benefits the company and it’s unfair to one class. But the fact is that this is not breach of director’s duty. This is fact even if director is himself a member of class and is receiving preferential treatment as in Mills case.

The Section 172 decides whether director is in good faith regarding the company’s interest of promoting success on the basis of common law test which is subjective in nature. The director’s claim of working in company’s interest is ignored if director work for his own benefit and if director claims that he has not acted for his own benefit than his opinions will also be considered and court has authority to reject his opinions. So, we can say that to take decision that whether director has acted according to company’s interest is taken on objective basis.

Remedies for breach of Section 172
The remedies for Section 172 are same as breach of equity according to Section 178 of Companies Act. In view of Worthington, there can be breach in duty by trustee which may be correspond to Section 172 breach. So, breach can be considered as breach of trust and same remedies can be employed as for breach of Section 171. According to Worthington, that court’s use objective test for testing whether director acted for company’s success is a severe practice because director’s duty to act within powers is a subjective test. The case study of JJ. Harrison relates to breach of Section 172, the director bought the land from company in 10,000 pounds and later sold it for 250,000 pounds because he applied for planning permission before buying it. Someone made an appeal to court regarding it and the court gave a decision to give the profits made by a director to claimant.

Section 173 of Director’s Duties

Section 173 of Companies Act 2006, deals with the duty of director to exercise independent judgement. According to this it is mandatory for a director to exercise independent judgement. The director’s acts which allow him to exercise his fiduciary discretions in future will falls in the breach of his duty because director is doing this for other purposes also in addition to company’s interest. If a director honestly believes that his discretion is in the company’s interest than this is acceptable and reasonable. In Worthington’s view it is fine for a director to exercise discretion in case of contract negotiations as long as final result is not obliged. Director can be fined for damages caused by him but he cannot be compelled to act in contradiction to his fiduciary duties.

The case of Fulham Football Club is related to Section 173. In this case, the contract was signed between directors and landlord on the condition that there will be no opposition towards the football ground redevelopment by the directors.  The directors decided to refuse this but court did not consider their appeal of refusal. There is no principle which bind directors from exercising fiduciary powers.

Section 174 of Director’s Duties

Now we will put a light on Section 174 of Companies Act 2006, which deals with the duty to exercise skill, diligence, and care. Director should strive to learn knowledge and understanding of company’s business both on individual and collective level. Lord Woolf MR in relation to Westwing Parking case said that director should be well informed about the matters of company and should learn how to supervise them and all the responsibility in case of delegation. Director’s role, skills and renumeration level should also be considered. The non-executive and executive directors both owe same duties to company but non-executive director does not run the business.

In view of Lord Justice Hoffman, test for checking director’s care, skill and diligence can be done by employing Insolvency Act 1986 Section 214.  Under the Model Article 5, if a director delegates his functions or powers, this does not free director to perform supervision. It depends on whether he is executive or non-executive director the way he delegates power. It was disapproved by Lord Justice Hoffman in the case of City tire Insurance that it is not necessary for a director to exercise his power of supervising the delegated parties in the absence of suspicion. In view of Lord Justice Hoffman, it is a sensitive matter to determine the extent of holding non-executive director accountable on the same duties as an executive director. However, he said that non-executive directors should supervise the actions of executive directors. The standard is same for both executive and non-executive directors and the point of flexible standard is sensitive to discuss. In context of this, positions of executive and non-executive directors should be considered.

Consequences of Section 174
According to Section 174, for any loss director is liable to compensate that loss. In view of Worthington, director’s ability to bind the company should not be affected by mere negligence. Gross negligence and self-serving negligence could be deemed as an improper purpose.

Section 175 of Directors Duties

Section 175 of Companies Act 2006 deals with director duty to avoid conflicts of interest. According to the Section, director should avoid the situations which are against the interest of the company directly or indirectly. The Section 175 refrains director to avoid self-interested behavior to obtain benefits on company’s behalf. A case explained by Lord Justice Parker, illustrates the conflicts of interest irrespective of the fact that whether company wanted to buy or not, director should inform company about its interest, considering this as part of his duties. If director went to the solicitor of company to gain information about legal pursuing, the opportunity supports the fact that director had a conflict of interest.

The second case where director illustrated conflict of interest is of O’Donnell. Out of the 3 directors of company which provide financial advice and services, 2 directors had separate companies which offered the same services. Due to this investment opportunity is taken by second company. The other director objected this because the investment knowledge was gained by the two directors as a director and profit making using that knowledge was a breach of fiduciary duty and the directors were liable according to Lord Justice Rimmer.

According to Section 175.6, resolution should be passed to authorize the director and the director to whom power is given cannot vote and also cannot contribute towards quorum requirements.

In view of Worthington, it is acceptable for the members to authorize a breach of general duties. In Queensland Mines case, it was declared by council that the director is not liable for the breach because he did the action on the consent of shareholders.

 

Remedies for breach of Section 175
The remedies are same as that is case of equity. Remedies include loss compensation, accountable for profits, constructive trust over assets acquired through breach. A case of Warman Dwyer illustrates the account of profits, in which account of profit was ordered for two years but there was no liability after two years.

 

The Fielding case is an example of breach of Section 175. There was a conflict with company’s interest on setting up a new business by fiduciary. Court said that to award all the profits from the new company to principle will be wrong. However, court should consider the fiduciary time, skill and work towards the success and not the breach only. This case was against the interests as profits should go to public and not to directors. It should not be considered as breach caused the basis of new company but the fact is that fiduciary was doing this for its own benefits and interests. This is like compensation of loss in account of profits. 

From the case of Gencor, there are also remedies in case of third-party profits from breach. The director is accountable for diverting the opportunities towards his own company and should also be accountable for the profits.

According to the case of Simonet, the fiduciary will liable to pay the full amount of profit if it diverts the opportunity to a company in which he holds some shares. If the other members and directors had no knowledge about the breach than they are not liable and are liable to the extent only if they had knowledge about the breach. The indefinite amount of profits would be unfair because it is not same when a company is set up for profits from breach and where it is set up with the conflict on principle’s interest.

According to Section 170, 175 and 177 directors should be loyal, honest and should work with integrity. The director’s fiduciary duties remain even after his retirement. According to Section 175, director should not exploit property and should keep himself aware of duties and company’s matters and should be aware of Section 176 which forbids him to take benefits from third parties.

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