Directors' Duties: Adequate to Prevent Abuse of Power?

Structure
Exec summary – 600 words
Intro – 500 words
Body 1 – 1500 words
Body 2 – 110 words
Conclusion – 300 words
Total – 4000
Directors transact the business of the company and are necessary because whilst a
company has separate legal personality it is a legal fiction.With reference to statute and case law, critically appraise and evaluate
whether the duties directors are subjected to are adequate to prevent
directors abusing their powers and privileges.
Directors are essential because even though the law treats the company as a
separate entity from those who run it, business cannot be conducted without
directors. The primary source of company law in the UK is legislation. This is
because the formation of any company in the UK is subject to the Acts of Parliament
which regulate the relationship(s) and interaction(s) between the members and the
company itself. The new amendments in the statute, the Companies’ Act 2006
(CA), emphasise the importance of using the statute in interpreting future decisions,
and that the new statute replaces the previous common law and equitable principles.
This paper will primarily refer to the CA 2006 for illustrating the general duties which
directors are subjected to, alongside the relevant common-law duties. It will show
that courts have relied on both statute as well as the older common-law in making
their decisions with regards to breach of fiduciary duties. Sections 171-177
exemplify the general duties directors owe towards the company. Along with the
statutory sections, the paper will also discuss the relevant cases with regards to
directors’ duties. The general duties in CA 2006 include a duty to adhere to the
company’s constitution and the powers prescribed, to promote the company’s
success, to exercise independent judgement, to exercise reasonable care, diligence
and skill, and, more generally, to avoid conflicts of interest. After mapping out the
relevant law, the essay will turn to assessing the question of whether the duties
found in legislation and cases, as they stand, are adequate enough to prevent
directors from abuse of power. It will be shown that, at times, when the courts
referred to older cases, their decisions may have caused ambiguity because of the
older law developed prior to the development of corporate governance. Thus, the
dependence on older precedents alongside the new statutory duties may have
resulted in incoherency in the case law. Therefore, it will be argued that the law,
alone, may not be adequate to fully prevent breach of duties. This will be
demonstrated using two cases. In the first case, the Supreme Court did not find
breach on the basis that the director was not acting in his legal capacity as a de facto
director. It was argued by the majority that the defendant was acting in his capacity
as a director of the corporate director, which according to CA 2006, is legal given the
requirement that each company ought to have a natural director conducting its
business. In another case, however, the sole director of the company who was
acting in his capacity as a director of the corporate director was deemed to be a de

Structure
Exec summary – 600 words
Intro – 500 words
Body 1 – 1500 words
Body 2 – 110 words
Conclusion – 300 words
Total – 4000
Directors transact the business of the company and are necessary because whilst a
company has separate legal personality it is a legal fiction.With reference to statute and case law, critically appraise and evaluate
whether the duties directors are subjected to are adequate to prevent
directors abusing their powers and privileges.
facto director, and therefore liable to compensate the company with equitable
fiduciary duties. The two contrasting cases spark concern with regards to the
efficiency of the law, as it stands, to preclude directors from breaching their duties.
This is because there is no standardized test for determining the circumstances
where directors owe equitable fiduciary duties for assuming the role of a de facto
director. The analysis of the two cases will be provided in the later sections
proceeding the statutes and relevant cases with regards to directors’ duties. It will be
concluded that the absence of a consistent guide which determines when directors
are acting as de facto directors may have spurred inconsistencies in the law as it
stands, and therefore this may arguably render the law alone inadequate, to prevent
breach. It will be suggested that principles of corporate governance, which
developed after the law, have been, to an extent, useful to incorporate when
examining whether directors have caused breach.
This work seeks to explain and outline directors’ duties with reference to the
Companies’ Act 2006 (CA). It aims to highlight the importance of directors in
transacting companies’ business and promoting success. The first sections will
define relevant and important terms. They will also refer to significant statutory
sections regarding directors’ duties, alongside the relevant cases. Next, the essay
will compare two cases regarding duties, and how they were both decided. It will be
concluded that the inconsistencies in the old case law may spur confusion and
discrepancy regarding directors’ duties. Therefore, the law, by itself, may not be
adequate to prevent breach. Finally, the absence of a unanimous approach by the
courts, and the high dependence on facts when formulating a decision, may render
the law in and by itself insufficient to prevent breach of duties.
Who runs the company’s business? What constitutes a company?
Directors are essential actors in governing a company’s affairs. The
separate legal entity principle was established under the Foss v Harbottle rule. The
principle confirmed that where damage has occurred, only the company can bring a

Structure
Exec summary – 600 words
Intro – 500 words
Body 1 – 1500 words
Body 2 – 110 words
Conclusion – 300 words
Total – 4000
Directors transact the business of the company and are necessary because whilst a
company has separate legal personality it is a legal fiction.With reference to statute and case law, critically appraise and evaluate
whether the duties directors are subjected to are adequate to prevent
directors abusing their powers and privileges.
claim.1 Furthermore, Salomon v Salomon has been a landmark judgement under
which a corporation “is a legal entity, separate and distinct from, the shareholders
and officers.2” This principle was affirmed in many cases.3 With reference to statute
and case law, the next section will define who a director is, and what duties he/she is
subjected to towards the company.
The CA 2006 defines a director “as any person occupying the position
of a director and includes non-executive directors and executive”.4 Directors are
subjected to statutory and common law duties.5 While director duties seem direct,
determining breach depends on various factors, mostly his/her state of mind or
intention.6 In general terms, directors’ duties are derived from two principles:
fiduciary duty, and the duty of care.7
1 (1843) 67 E.R. 189; Westlaw
(https://login.westlaw.co.uk/maf/wluk/app/document?
&srguid=i0ad82d0800000169f35bceb2cae8bf37&docguid=I9CF0E8B0E57
111DAB242AFEA6182DD7E&hitguid=I9CF0E8B0E57111DAB242AFEA6182
DD7E&rank=1&spos=1&epos=1&td=272&crumb-
action=append&context=5&resolvein=true)
2 [1897] A.C. 22 (H.L);
– The main issue of the case was the liquidator claimed that Aron Salomon, who was
the major shareholder, was guilty for failing to fulfil his fiduciary duty to the company
on grounds of fraud. The Court of Appeal ruled in favour of the liquidator’s claim, but
the decision was reversed by the House of Lords. Google scholar
(https://scholar.google.co.uk/scholar_case?
case=4691288273817939661&hl=en&as_sdt=2005&sciodt=2006)
3 see 3 (name the cases here to show youre well read lol)
4 Westlaw, UK. Directors’ powers and duties – check references doc.
5 Worthington, 2000 – check ref doc
6 See 9
7 steel, 2016 – check ref doc.

Structure
Exec summary – 600 words
Intro – 500 words
Body 1 – 1500 words
Body 2 – 110 words
Conclusion – 300 words
Total – 4000
Directors transact the business of the company and are necessary because whilst a
company has separate legal personality it is a legal fiction.With reference to statute and case law, critically appraise and evaluate
whether the duties directors are subjected to are adequate to prevent
directors abusing their powers and privileges.
Sections 171-177 CA 2006 outline the general duties for all directors.8 Those duties
“replace the common law duties and equitable principles upon which they are based
(s 170(3)).”9 What this means is that the new duties ought to be applied in
coordination with older duties rather than a separate code10. The following section
will reference directors’ general duties (CA 2006) and the relevant cases.
Duty to adhere to company’s constitution
Section 171 CA 2006 compels directors to adhere to the company’s
constitution and to only exercise powers for the purposes prescribed.11 In Eastford
Ltd. V Gillespie and anor, it was held that a company is legally allowed to ratify the
acts of a director even if they were not previously ratified in its constitution. 12” Lord
Hodge stressed that the general duties in the statute must not overpower the
changing commercial corporate circumstances. In support of his view, he refers to
Lord Glennie in West Coast Capital and Palmer’s Company Law which suggest
“that older cases remain relevant to the interpretation of statutory duties.13”
With regards to exercising powers for the purposes conferred, Lord Greene MR
established “proper purposes doctrine” in Re Smith and Fawcett Ltd: “a director
8 Westlaw UK – check ref
9 Alan Steinfeld, Marina Mann and Richard Ritchie,
Blackstone’s Guide to
The Companies Act 2006 (OUP 2007) 82.
10 Ibid; p. 83
11 ibid; p.84
12 [2010] CSOH 132; Lord Hodge emphasised (at paras. [13] to [14]) the importance
of “avoiding the danger that a statutory statement of general duties would make the
law inflexible and incapable of development by judges to deal with changing
commercial circumstances - Corporate Law and Governance (source)
(http://corporatelawandgovernance.blogspot.com/2010/10/uk-scotland-
directors-duties-and-board.html)
; westlaw, UK
13 West Coast Capital (Lios) Ltd Petr ; 2008] CSOH 72 ; ibid