Directors' general duties

How did directors' general duties develop?

From the early years of companies it was recognised that company directors were in a special position and owed certain duties to the companies that they served. These were common law duties and enforced as a matter of case law. Judges have adjudicated in many thousands of cases that have established the principles and set precedents. This case law continues to develop.

In the early days not very much was expected of directors, and conduct that would now be considered to be a breach of duty was tolerated. Expected standards have progressively risen and now much more is expected, though the requirements are still not (in many people's opinion) unreasonable.

Have directors' general duties now been codified?

Yes they have been codified by the Companies Act 2006 and incorporated into statutory law. The Act in many respects sets out what was generally considered to be the existing position in case law. However, some deliberate changes were made.

The old common law rules and equitable principles derived from case law are still used, where relevant, in the interpretation of the duties.

Can members ratify a breach of duty?

Yes they can, but of course they do not have to. An ordinary resolution is required unless something more demanding is required by the articles. However, members with an interest cannot vote or count towards a quorum, and this includes any member 'connected with' the member concerned.

To whom are the directors' general duties owed?

Directors' duties are owed to the company, not to individual members and not to third parties. However, the duty to promote the success of the company is subject to any other enactment or rule of law establishing duties to the company's creditors.

How are the duties enforced?

Only the company can enforce the duties. An action may be brought in the name of the company and, if it is successful, the benefit goes to the company as a whole. An action may be brought against some or all of the past directors as well as some or all of the present directors. An action may be brought in one of five ways:

1. By the members

They could do this through the medium of a general meeting, but it is improbable in practice.

By the directors

This is the normal way if the company is not in great financial difficulty. A recent and very important example is Equitable Life Assurance Society v Bowley 2003.

By a liquidator

If the company is solvent, the benefit if the action is successful will in practice pass to the members. If the company is insolvent, the benefit will in practice pass to the creditors.

By an administrator

This too may be effectively for the members or the creditors, depending on the outcome of the administration.

As a derivative claim.

Would you please explain what is meant by a derivative claim

A derivative claim is an action brought in the name of the company by a member or members. It is important to note that the company will be the plaintiff and that if the action succeeds, the benefit will go to the company as a whole and not just to the members who initiated the action.

Derivative claims sound like a license for anarchy. Am I right?

You are right in that the scope for numerous claims of little merit does exist. However, such claims do not often happen in practice. There are two main reasons for this:

The court has special procedures for dealing with derivative claims. These procedures do not stop unmerited claims being brought but they do make it likely that they will be weeded out at a relatively early stage.

The court can make the members who brought the claim pay the legal costs. This can be a significant deterrent.

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