LA4008: Company and

Partnership Law

Week 8: Directors and Director Duties

Directors
• Manager on behalf of shareholders.
• Usually act as ‘board’ – collective
• Section 158 of 2014 Act provides that ‘the business of a
co shall be managed by its Directors’.
• May also be an employee, e.g. managing director.
• Distinction between executive and non-executive
directors
• Details of formally appointed directors- matter of public
record
Types of directors
1. Formally appointed directors
2. Shadow directors
o Fyffes v DCC plc - directions or instructions – behind
the scenes pulling the strings.
o S.221
3. De facto directors
o Gray v McLoughlin; Re First Class Toy Traders Ltd
(2004) – did the individual assume the status and
functions of a director?
o S. 222

• Director duties apply to all types.

Appointment of Directors
• Minimum of one
• S.142 of the 2014 Act – not more than 25 directorships
• Promoters appoint first directors – all others appointed
by shareholders
• One director of a company must be resident in an EEA
state
• Vacancies can be filled, but only temporarily, until next
AGM
Excluded from Appointment
• A corporate entity
• Undischarged bankrupts
• Restricted/disqualified persons
• Company’s appointed auditors
• Minors
Removal & Disqualification
• S.146 of 2014 Act states that members can remove a director
by ordinary resolution
• S.146 – Director can argue their case (natural justice)
• Articles of association or the constitution of the company can
provide rules disqualifying others
o Director becomes bankrupt
o Becomes of unsound mind
o Absent from board meetings, without approval, for more than 6
months
o Director is subject to a restriction order
Remuneration of Directors
• No automatic entitlement to pay
• Unless there is an employment contract- employment
law applies here
• S. 155 of 2014 Act allows the board of Directors set
remuneration for Directors and the Act states that they
‘may’ be paid expenses
• Payments made to directors are publicly available
Transactions involving
Directors
• S. 239 of the Companies Act 2014:
o Prevents a co. from giving a loan or quasi loan to its
Director, shadow Director, or a Director Of its holding
company , OR
o To persons connected with any of the above
• Directors face prosecution if in breach of section 239
• All loans must be disclosed in company accounts
Connected person?
• S.220 defines a connected person as:

• (a) director's spouse, civil partner, parent, brother, sister or

child;
• (b) a person acting in his capacity as the trustee of any trust,
the principal beneficiaries of which are the director, his spouse
or any of his children or any body corporate which he controls;
or
• (c) in partnership, within the meaning of section 1(1) of the
Partnership Act, 1890, with that director.” Unless that person
is also a director of the company.
• (2) A body corporate shall also be deemed to be connected
with a director of a company if it is controlled by that director
Exceptions to s.239
• THERE ARE A NUMBER OF EXCEPTIONS TO THE s.239
PROHIBITION

1. Where the loan is under 10% of the relevant assets of

the company.
2. Where the loan has been validated with the SAP.
3. Where the transaction is between companies within a
group of companies (inter-company loan).
4. Where the payment is for vouched for director
expenses.
5. Where the transactions is a normal business
transaction for the company, e.g. a bank.
Directors Powers
• Whatever is necessary for the running of the company. S. 158
• Section 40 of the Act provides for the authority of the Board
• The Board of Directors and any person registered by them
under s.39 will have authority to bind the company in
contracts or transactions
• Remember- a company’ constitution may provide for
additional restrictions on director powers.
• This poses difficulties for third parties entering into contracts
with directors.
Royal British Bank v Turquand
• Indoor management rule
• Third parties are entitled to assume that all internal
management rules are being complied with.

• Now supported by s.40

• Third party can rely on objective view of director’s power
to bind the company
Director Duties
• Sources
1. Companies Act 2014
2. Case Law
3. Articles of Association/Constitution

N.B. duties contained in a company’s constitution are

additional duties. They supplement the case
law/Companies Act duties.
The Companies Act duties cannot be excluded!
To Whom are they Owed?
• Owed to company, not to members/shareholders
• If Director is in breach of duty-company is the proper
plaintiff- Foss v Harbottle (1843) 2 Hare 461
• Parkes & Sons Ltd v. HSBC
o Directors of an insolvent company owe duties to
creditors
o Re Frederick Inns [1994]- Directors paid Revenue bill
on behalf of other companies in the group. Duty owed
to creditors not to diminish company funds- must act
in the best interest of creditors in doing so.
• Section 224 of the 2014 Act provides that Directors are
to have regard to the interests of employees
Companies Act 2014
• Codifies and sets out the duties owed by Directors to the
company
• S.228 of the Act= principle duties
Main Fiduciary Duties
1. Duty to act in good faith in the best interests of the
company
2. To act honestly and responsibly
3. Duty to use due care, skill and diligence in the exercise
of their functions
4. Duty to disclose any personal interest or profit and to
avoid any conflict with the interests of the company
Duty to Act Bona Fide
• Subjective test
• Re Smith & Fawcett Ltd. [1942]
o Did what they honestly believed to be right
o An honestly held, even if an unreasonable belief, is a
defence
o “must exercise their discretion bona fide in what they
consider, not what the court may consider to be in the
best interest of the company.”

The court will not substitute its own view for that of
the directors.
Duty to Act Bona Fide
• Regentcrest plc v Cohen and another [2001] 2 BCLC 80
• ‘...the question is whether the director honestly believed
that his act or omission was in the interests of the
company.’

• Clark v Workman
o ‘In all cases bona fides is the test of the valid exercise
of powers by trustees’
o This case involved the director restricting his decision
making power via a contract with a third party
Due Care, Skill, and Diligence
• No particular skills required
• Re City Equitable Fire Insurance Company [1925]
• Romer J ‘as long as a director acts honestly he cannot be
made responsible in damages’.
1. A Director need not exercise greater skill than may be
reasonably expected considering their knowledge,
experience, qualifications etc.
2. A Director does not have to give the company
continuous attention.
3. A Director may delegate their duties (if allowed under
the company’s constitution)- May trust those you
delegate to [Re National Bank of Wales] unless…
Duty to use due care, skill and
diligence
• S.228 (g) adds to the decision in Re City

• (g) exercise the care, skill and diligence which would be

exercised in the same circumstances by a reasonable
person having both—

• (i) the knowledge and experience that may reasonably be

expected of a person in the same position as the director;
and

• (ii) the knowledge and experience which the director has

Duty to use due care, skill, and
diligence
• Dorchester Finance Co. Ltd. v Stebbing [1989] BCLB 489
• Directors were qualified accountants
• No board meetings held- frequent use of blank cheques
• Directors breached their duties because had they
demonstrated the level of care/skill expected of
someone with their qualifications, the losses sustained
by the company could have been avoided.
Duty to use due care, skill and
diligence
• Jackson v Muster Bank ltd – duty extends to taking
action when misconduct by a fellow director is
discovered.
• Director of bank with branches in Cork and Dublin
• Only attended Dublin meetings
• Director warned that the Cork branch was engaging in
irregular lending to employees.
• Director did not investigate
• Court: Director was under a duty to investigate/attend
Cork meeting once put on notice of possible illegal
behaviour in Cork.
Conflict of interest
• Duty to disclose personal interest/conflict of interest
• Industrial Development v Cooley [1972] - Cannot divert a
business opportunity
• Any and all opportunity belong to the company, even if the
company could not avail of them.
• Third party was interested in working with MD.
• Did not want to work with the company.
• MD feigned illness and retired early.
• MD took the work personally.
• Company sued for lost profits.

Director must get consent of the company- company not obliged

to consent
Liability of Directors
• S.232 of the Act.

• Directors’ have potential personal liability as a result of

their directorships but any provision purporting to
exempt or indemnify them is void. – S.235. this includes
any exemption or indemnity re:
o Inaccurate statement of solvency
o Fraudulent trading
o Acting when restricted/under the instruction of a
restricted person
o Failure to keep proper books of accounts
Restriction
• Part 14 of the 2014 Act deals with Compliance and
Enforcement of company Law
• S.819 = a Court may impose a restriction of 5 years on a
Director of an insolvent company such that s/he cannot
be an officer of any company for that duration
• S 822 – allows a person apply for relief from the
restriction
• Defences include: Acting honestly/in the best interest of
the company
Restriction
• Re Tralee Beef and Lamb (In Liquidation) (2004)
• Supreme Court:
• There needs to be a more clearly defined level of
responsibility between executive and non-executive
directors.
• As non-executive directors are less involved in the
business day-to-day, restriction ought to be rarer in these
cases.
Defence
• S. 819(2) if the person acted honestly and responsibly and co-
operated fully with Liquidator
Disqualification
• Chp 4 of Part 14 of the 2014 Act
• Court can disqualify – 5 yrs or more
• Automatic Disqualification if convicted of Fraud or any
dishonesty
• Court has Discretion to Disqualify a Director for:
o Breach of any duty
o Fraudulent or reckless trading
o Court believes person to be unfit to be involved in
management of company
Disqualification
o Repeated failure to make reports and returns
o Repeated failure to keep proper books of accounts
o Disqualification in another jurisdiction
o Director of a ‘struck off’ company
o Application by member, officer, liquidator, examiner or
creditor
Disqualification
• Application to disqualify can be made by:

1. Any member/shareholder
2. Officer of the company
3. Creditor of the company
4. Examiner
5. Liquidator
6. Director of Corporate Enforcement
7. Director of Public Prosecutions
Criminal Penalties
• Companies Act now provides for category 1,2,3,4 offences.
• First two carry potential imprisonment
• In essence, a director who breaches their duties are
potentially liable:
1. To indemnify the company for any losses
2. To repay any profit made
3. Fines
4. Restriction
5. Disqualification
6. Criminal fines
7. Imprisonment
Recap
• Several sources of duties:
1. Case Law
2. Companies Act 2014
3. Articles/Constitution

• Duties apply to formally appointed directors and

shadow/de facto directors alike.

• Strong potential penalties

• Enforcement