Are there criminal sanctions for breach of the general duties?

No there are not. The cases are heard in the civil courts and there are no prosecutions and no punishments. The remedies for a successful action are civil remedies. Of course, directors do commit criminal offences and are prosecuted and punished, but that is a separate matter.

What are the remedies if an action is successful?

There are a number of remedies, including injunctions. The most common remedy is a financial payment by the director to the company.

Can a director be exempted from the consequences of a claim for breach of duty?

The answer is no. Any provision in a service contract, the articles or elsewhere which purports to exempt a director from liability to the company for the consequences of negligence, default, breach of duty or breach of trust is void. This is just as well because it would be nonsense if a company sued a director, won, banked the director's cheque then had to reimburse the director.

It is possible, though, subject to the articles, for the company to take out and pay for insurance for the director. The risks insured against can include an action for breach of the general duties.

Do the general duties apply to shadow directors?

Yes.

What are the general duties?

There are seven of them as follows:

Duty to act within powers;

Duty to promote the success of the company;

Duty to exercise independent judgment;

Duty to exercise reasonable care, skill and diligence;

Duty to avoid conflicts of interest;

Duty not to accept benefits from third parties;

Duty to declare interest in proposed transaction or arrangement.

What are the powers that directors must act within?

Section 171 reads in full as follows: 'A director of a company must -

act in accordance with the company's constitution, and

only exercise powers for the purposes for which they are conferred.'

The company's constitution is its articles (including an objects clause if there is one) and any relevant resolutions of the members.

What is the main thrust of the duty to promote the success of the company?

Section 172 commences as follows:

'A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole'

Quite clearly the members as a whole come first. In many companies directors who work to maximise long-term profits for the benefit of the members are likely to be fulfilling this duty.

There is more to it than that isn't there?

Yes there is. Section 172 goes on to say that in doing the above directors must have regard (amongst other matters) to:

'(a) the likely consequences of any decision in the long term,

the interests of the company's employees,

the need to foster the company's business relationships with suppliers, customers and others,

the impact of the company's operations on the community and the environment,

the desirability of the company maintaining a reputation for high standards of business conduct, and

the need to act fairly as between members of the company.'

It means that when directors decide what would be most likely to promote the company for the success of the members as a whole they cannot ignore this list. They must think about it and take it into account when they make their decisions.

How can that possibly be enforced?

That is a very good question and one is tempted to say that it is virtually unenforceable, though presumably the legislature that put Section 172 on to the statute book would disagree. Directors themselves, in good faith, decide what is in the interests of the company and its members. So long as they consider the things that they must have regard to they should be OK. Hopefully most directors act in a responsible way so it will make little if any difference.

Who is going to bring an action against them in the name of the company for, say, not acting in the interests of the environment? They are hardly likely to do it themselves. If it is done by the members, the liquidator, the administrator or as a derivative claim they should be in the clear so long as they can show that they acted in good faith and considered the environment.

A further obvious question is what are directors supposed to do if two things on the list conflict? For example, an action could be in the interests of employees but against the interests of the environment. My answer is PASS.

If it has an effect, it is likely to be a moral one. Directors may take their wider responsibilities more seriously than would otherwise be the case.

 
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