Corporate Law: Analysis of Directors' Duties Breaches in a Company

This report examines the breaches of directors' duties by Simon, Ralph, Nicola, and Miles within a company. It analyzes each director's actions, referencing the Companies Act 2006 and relevant case law to determine if they violated their legal obligations. Simon is criticized for failing to attend board meetings, neglecting insurance, and prioritizing personal interests. Ralph is assessed for improper use of power, lack of diligence, and failure to act in good faith, particularly regarding supplier choices. The report highlights the directors' fiduciary duties, duty of care, skill, and diligence, emphasizing the potential consequences of these breaches, including the risk of insolvency. The analysis provides a comprehensive overview of directors' responsibilities and the legal ramifications of failing to uphold them, offering valuable insights into corporate governance and law.

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INTRODUCTION
Every director in any company owes legal obligations and duties to the company1. These
obligations are designed to protect the company and ensure that the directors’ practice due
diligence in their operations, act in good faith and loyal to the company. Directors of a company
are generally required to act within their scope of powers conferred to them2, promote the
success of a company3, exercise independent judgement4, to exercise reasonable care, skill and
diligence5, to avoid conflict of interest with the company6 , not to accept any benefit from third
parties7 and the duty to declare any interests in transactions o arrangements with the company. If
a director violates their duties, they could be liable individually or as a company. A breach of a
general duty and obligation of a director gives the company equitable remedies against the
director including injunctions or damages8. The four directors, namely; Simon, Ralph, Nicola
and Miles, have all breached their directors’ duties covered individually below.
SIMON
ISSUES
1. Whether Simon had acted in breach of the duty to promote the success of the company.
2. Whether Simon had acted in breach of duty to exercise reasonable care, skill and
diligence.
1 Bryan Horrigan, Corporate Social Responsibility In The 21St Century:Debates, Models And Practices Across
Government, Law And Business (Edward Elgar Publishing 2010).
2 Section 171 of the Companies Act 2006
3 Section 172 of the Companies Act 2006
4 Section 173 of the Companies Act 2006
5 Section 174 of the Companies Act 2006
6 Section 175 of the Companies Act 2006
7 Section 176 of the Companies Act 2006
8 Sue McLaughlin, Unlocking Company Law 2Nd Edition (2nd edn, Routledge 2013).

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RULES
The Companies Act 2006 (CA) in addition to the Common Law principles on the general duties
of the director of a company applies in this case.
The Insolvency Act (1986) also applies in this case.
ANALYSIS
1. Whether Simon had acted in breach of the fiduciary duty to promote the success of
the company.
The director of a company is obligated to act in a bona fide manner that would promote the
success and welfare of the respective company9. A director must act in was that is considered in
good faith in order to promote the interest and success of the company for the benefit of its
members.
The Companies Act 2006 requires the director to act in good faith to promote success of the
company and to act for a proper course. Section 172 of the Companies Act 2006 states:
“(1) 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.” and in doing so have
regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
9 Roach, Lee, The Director's Duty of Skill and Care: Has the Law Commission Got it Right? (1999). Business Law
Review, Vol. 20, No. 51, 1999. Available at SSRN: https://ssrn.com/abstract=1754664 [Accessed 28 Sep. 2019].

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(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the
benefit of its members, subsection (1) has effect as if the reference to promoting the success of the
company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors,
in certain circumstances, to consider or act in the interests of creditors of the company.”10
A director will breach this duty if he fails to give proper considerations to interest of the
company ahead of other interests.
The role of director as an individual is to attend the board of directors meeting by enabling the
company to reach decisions and ensuring the company’s fundamental obligations are met.11
Simon has clearly failed to attend the board meetings and is no longer interested in the day-to-
day running of the company. He is supposed to be loyal and owe his allegiance to the company
be attending the board meetings and ensuring that he enables the company in making decisions
but he’s failed.
10 Section 172 of the Companies Act 2006
11 Burges-salmon.com. (2019). The responsibilities and duties of a company director. [online] Available at:
https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-
director/ [Accessed 28 Sep. 2019].

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2. Whether Simon had acted in breach of duty to exercise reasonable care, skill and
diligence.
The Companies Act 2006 mandates the director to exercise due diligence, reasonable care and
expertise on day-to-day running of the company if he/she:
a) Was a director of a company.
b) Had the similar responsibilities as that of a director.
Section 174 of the Companies Act 2006 states that:
“(1)A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with
—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out
the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.”12
In the case of Norman v Theodore Goddard [1991] & Re D’Jan of London Ltd [1993], Lord
Hoffmann clarified that the common law test of the director’s duty of reasonable care and skill
was the same as that in section 214 of the Insolvent Act (1986).
In determining whether the director exercised the requisite care, diligence and skill, the court
takes into consideration the circumstances in each case and the responsibilities required of that
director within the company.13
The standard of test is that of reasonable director in the same position as the director having the
same knowledge and skills.14
12 Section 174 of the Companies Act 2006
13 Minterellison.com. (2019). Doing business in Australia| Directors' duties - Insight - MinterEllison. [online]
Available at: https://www.minterellison.com/articles/doing-business-in-australia-directors-duties [Accessed 28 Sep.
2019].
14 Burges-salmon.com. (2019). The responsibilities and duties of a company director. [online] Available at:
https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-
director/ [Accessed 28 Sep. 2019].

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Simon had forgotten to renew the contents insurance of the company’s premises, what a
reasonable director would, that the company had to pay for the damages itself caused by the fire
thus risking the company becoming insolvent.
CONCLUSION
Therefore, Simon violated fundamental duties of running of the company such as the duty to
promote the success of the company by acting in the best interest of the company and the duty to
exercise reasonable care, skill and due diligence. He also violated the duties to attend and enable
the company in the making of decision and even failed to practice his obligations conferred to
him by law. He, therefore, placed his personal interests above the interests of the company thus
clearly prejudicing the company becoming insolvent.
RALPH
ISSUES
1. Whether Ralph had acted within the scope of powers and for a proper purpose.
2. Whether Ralph had acted in breach of duty to exercise reasonable care, skill and
diligence.
3. Whether Ralph had acted in breach of duty to act in good faith and in the best interest of
the company.

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RULES
The Companies Act 2006 (CA) and the Company Directors Disqualification Act 1986 in addition to
the relevant common law case laws on the directors’ duties to the company and the shareholders.
ANALYSIS
1. Whether Ralph had acted within the scope of powers and for a proper course.
Section 171 of the Companies Act 2006 provides that:
“A director of a company must—
(a)act in accordance with the company's constitution, and
(b)only exercise powers for the purposes for which they are conferred.”15
In the “Proper purpose rule”, Hogg v Cramphorn Ltd [1967], it was held that the power must
have been exercised for a proper purpose. It was also held that it was not enough that the
directors acted in a hones belief that they were acting in the best interest of the company.16
In the case Horward Smith Ltd v Ampol Petroleum Ltd [1974], it was held that even though the
powers the director used was intra vires but improper, the power used would be declared void in
the court of law.
A director should give enough considerations to matters when his/her decision is required and to
keep their discretion unfettered.17
15 Section 171 of the Companies Act 2006.
16 Hogg v Cramphorn Ltd [1967] Ch 254
17 Minterellison.com. (2019). Doing business in Australia| Directors' duties - Insight - MinterEllison. [online]
Available at: https://www.minterellison.com/articles/doing-business-in-australia-directors-duties [Accessed 28 Sep.

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Ralph used his discretion unreasonably to import cheaper stationery from Enrique Ltd without
considering Charles’ company, even despite the claims that Enrique Ltd subjects small children
to labour.
2. Whether Ralph had acted in breach of duty to exercise reasonable care, skill and
diligence.
Section 174 of the Companies Act 2006 provides that:
“(1)A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with
—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out
the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.”18
While most of the directors’ duties depends on the powers conferred on the directors, there are some non-
delegable, core and minimal standards of care that all directors are required to satisfy which includes:
a) Duty to carefully review and apply their minds to any directors’ and financial reports of the
dealings of the company.
b) Duty to generally monitor the company’s operations.
c) Duty to be well acquainted and make appropriate inquiries on the company’s operation.
In Re City Equitable Fire Insurance Co Ltd [1925], it was held that:
2019].
18 Section 174 of the Companies Act 2006.

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“A basic objective standard of reasonable care such as might be expected of an ordinary
person acting on his own behalf (a standard of care based on that of trustees), plus a subjective
standard that a director need not exhibit greater skill than can be expected of a person of his
knowledge & experience.”19
Company Directors Disqualification Act 1986 encourages the directors to act reasonably and to
show due diligence in their dealings with suppliers.
Ralph’s act and response to Charles is unethical of the standard required by the Companies Act
2006 in dealing with their suppliers. Ralph didn’t consider his suppliers nor the impact his
decision would have on the community when the reports that Enrique Ltd would be confirmed.
Ralph continued his dealings with Enrique Ltd despite unconfirmed claims that child labour is used.
3. Whether Ralph had acted in breach of duty to act in good faith and in the best
interest of the company.
Section 172 of the Companies Act 2006 provides that:
“(1) 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.”20
A director should act for the benefit and success of the respective company and its shareholders.
One should avoid situations where conflicts of interest is prone to arise and take necessary
precautions to avoid or manage any conflicts.
19 Re City Equitable Fire Insurance Co [1925] Ch 407
20 Section 172 of the Companies Act 2006.

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When making the decision, Ralph should have asked himself the following questions:21
a) Have you thought and considered the impact the decision would have on the community?
b) Have you declared your personal interests in the decision to the board of directors?
c) Will the decision benefit the company?
d) Have you considered any alternative options before making the decision?
It is also necessary and prudent that the director considers the interest of the creditors particularly
when the company is nearing insolvency.22
Section 172 of the Companies Act 2006 outlines some of the factors that a director should
consider before making a decision:23
(a) The likely consequences of any decision in the long term,
(b)The interests of the company's employees,
(c)The need to foster the company's business relationships with suppliers, customers and others,
(d)The impact of the company's operations on the community and the environment,
(e)The desirability of the company maintaining a reputation for high standards of business conduct, and
(f)The need to act fairly as between members of the company.
In the case of Liquidator of West Mercia Safetywear Ltd v Dodd [1988], it was held that the
director should consider the creditors and suppliers before making a decision when insolvency
approaches.24
21 Burges-salmon.com. (2019). The responsibilities and duties of a company director. [online] Available at:
https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-
director/ [Accessed 28 Sep. 2019].
22 Minterellison.com. (2019). Doing business in Australia| Directors' duties - Insight - MinterEllison. [online]
Available at: https://www.minterellison.com/articles/doing-business-in-australia-directors-duties [Accessed 28 Sep.
2019].
23 Section 172 of the Companies Act 2006.
24 Liquidator of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250

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In the case of Yukong Line Ltd Rendsburg Investments Corporation (No 2) [1998], it was held
that the director should still consider the creditor, and in this case the supplier, even though no
duty is owed to the creditor.25
It is clear that Ralph did not consider any alternative options nor the impact his decision would
have on the company.
CONCLUSION
Therefore, Ralph had breached general duties of a director such as duty to act within the confines
of his power and for a proper purpose, duty to exercise reasonable care, skill and diligence in
conducting his duties and the duty to act in good faith and in the best interest of the company.
Thus, he considered irrelevant issues without regards to the relevant issues before coming up
with the decision of buying from Enrique Ltd with unconfirmed claims of using child labour and
leaving out Charles.
NICOLA AND MILES
ISSUES
1. Whether Nicola and Miles had acted in breach of duty to avoid conflict of interest with
the company.
2. Whether they had acted in breach of the duty to act in good faith and in the best interest
of the company.
3. Whether they had breached the duty not to misuse information or their position for
personal gain.
25 Yukong Lines Ltd v Rendsburg Investments Corporation and Others (No 2): QBD 23 Sep 1997

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RULES
The Companies Act (CA) 2006 and the relevant common law principles precedent to this case
such as the “No-Conflict Rule” and the “No- Profit Rule” apply in this case.
ANALYSIS
1. Whether Nicola and Miles had acted in breach of duty to avoid conflict of interest with
the company.
Section 175 (1) and (2) of the Companies Act 2006 states that:
“(1) A director of a company must avoid a situation in which he has, or can have, a direct or
indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity
(and it is immaterial whether the company could take advantage of the property, information or
opportunity).”26
A director is obligated to avoid situations where his personal interests in a matter conflicts or ma
conflict with the company’s interest.
If a director has a personal material interest in a matter, he/she has a duty to disclose the details
of the interest. 27
26 Section 175 of the Companies Act 2006.
27Section 195 of Corporations Act 2001.

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If a director finds himself/herself in a situation where he/she has conflicting interest in a matter,
the director should:28
a) Seek approval from the board of directors: Any conflicting interest can be approved
by the other directors of the board. If the directors do not have the requisite power, the
matter can be taken to the shareholders for approval.
b) Check the articles of association: The company’s constitution may contain provisions
relating to the conflicting interests.
c) Regulate his/her behavior: Even if the potential conflict of interest has been permitted
by the articles of association, the director should still act appropriately regarding matters
of disclosure of personal interest and promoting his/her duty to promote the success of
the company. The director should, however, take reasonable care to act as stipulated in
the articles of association and any other authorization attached thereto.
Nicola and Miles did not disclose their intentions of their interest in buying a controlling share in
Constructing Alignment Ltd. They had, therefore, breached their fundamental duty to disclose or
seek approval from the board of directors.
No-Conflict Rule
In the case of Aberdeen Railway Co Blaikie Bros [1843-60], it was held that where the director
sells his personal property to the company with the intention of profiting from that transaction,
he cannot benefit from that contract because the contract is voidable.29
In the case of DEG-Deutsche Investitions v Koshy [2002], it was held that a director will not
benefit from a personal contract unless he/she fully disclosed his interest in the contract and that
the contract should e ratified by the shareholders at a general meeting after full disclosure.30
28 Burges-salmon.com. (2019). The responsibilities and duties of a company director. [online] Available at:
https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-
director/ [Accessed 28 Sep. 2019].
29 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; [1843-60] All ER Rep 249.
30 Deg-Deutsche Investitions Und Entwicklungsgesellschaft mbH v. Koshy [2001] All ER (D) 389

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Section 175(1) replaces the no-profit rule that states that directors should not profit from their
position unless expressly allowed or ratified by the directors and shareholders.31
In Keech v Sandford (1726), it was held that the rule was of strict liability that does not depend
on the director’s fault or whether he/she acted in good faith or not.
The reasoning behind this is to discourage temptation.
Section 239 of the Companies Act 2006 on ratification of acts by directors also provides that:
“(1) This section applies to the ratification by a company of conduct by a director amounting to
negligence, default, breach of duty or breach of trust in relation to the company.
(2) The decision of the company to ratify such conduct must be made by resolution of the members of the
company.
(3) Where the resolution is proposed as a written resolution neither the director (if a member of the
company) nor any member connected with him is an eligible member.
(4) Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained
disregarding votes in favour of the resolution by the director (if a member of the company) and any
member connected with him.
This does not prevent the director or any such member from attending, being counted towards the
quorum and taking part in the proceedings at any meeting at which the decision is considered.”32
2. Whether they had acted in breach of the duty to act in good faith and in the best
interest of the company.
Section 172 of the Companies Act 2006 provides that:
31 No-Profit Rule in Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134; [1942] 1 All ER 378
32 Section 239 of the Companies Act 2006

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“(1) 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.”33
Nicola and Miles failed to act in good faith when they did not disclose their interest in the
conflicting matters of interest to the company. They did not act in the interest of the company but
made a decision to independently contract in personal capacity without due regard on the
implications of their acts.
They failed to act honestly and for a proper purpose. They acted selfishly and greedily and ended
up placing their interests above the interests of the company.
The powers of director should be used for the purposes which they were conferred but not a
collateral use. An improper purpose may include where the director uses his/her position to gain
advantage for themselves.34
The court will not try to assess whether the decision was good or bad but will assess how and
why the powers and decisions by the directors were consistent with the powers and authority
conferred to them.
3. Whether they had breached the duty not to misuse information or their position for
personal gain.
33 Section 172 of the Companies Act 2006
34 Section 182 of the Corporations Act 2001

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The Companies Act 2006 provides that the director should not improperly use his/her position or
information which he/she obtains in the course of him/her being a director to:35
a) Gain advantage to themselves or someone else.
b) harm the respective company.
The statutory duty of a director not to misuse his position or information means that he/she
should not use unauthorized information that belongs to the company.
Being a director may provide an opportunity for one to gain advantage or profits as Nicola and
Miles did. Although the directors may wish to use such an opportunity for personal gain, they
ought to exercise reasonable care and might not be able to do so legally but under the procedure
prescribed by law and the obligations they owe to the company.36
Due to the attraction that these opportunities may have on the directors and the possible conflict
that may arise out of it, the law curtails such freedom of directors to gain advantage out of these
opportunities.
Nicola and Miles exploited the confidential information they accessed by their position as
directors to benefit themselves and thus violating this duty not to misuse information for personal
gain.
35 Minterellison.com. (2019). Doing business in Australia| Directors' duties - Insight - MinterEllison. [online]
Available at: https://www.minterellison.com/articles/doing-business-in-australia-directors-duties [Accessed 28 Sep.
2019].
36 Mondaq.com. (2019). Directors Duties & Liabilities Under The Companies Act 2006 - Corporate/Commercial
Law - UK. [online] Available at:
http://www.mondaq.com/uk/x/63438/Directors+Officers/Directors+Duties+Liabilities+Under+The+Companies+Act
+2006 [Accessed 28 Sep. 2019].

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CONCLUSION
Therefore, Nicola and Miles had breached general duties of a director such as duty to avoid
conflict of interest with the company, duty to act in good faith and in the best interest of the
company and duty not to misuse information or their position for personal gain. They used their
positions improperly to use confidential information of the company for their individual gains.

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BIBLIOGRAPY
Statutes
Companies Act (CA) 2006.
Corporations Act 2001.
Cases
Hogg v Cramphorn Ltd [1967] Ch 254
Re City Equitable Fire Insurance Co [1925] Ch 407
Liquidator of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; [1843-60] All ER Rep 249.
Deg-Deutsche Investitions Und Entwicklungsgesellschaft mbH v. Koshy [2001] All ER (D) 389
No-Profit Rule in Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134; [1942] 1 All ER 378
Yukong Lines Ltd v Rendsburg Investments Corporation and Others (No 2): QBD 23 Sep 1997
Journal Articles
Roach, Lee, The Director's Duty of Skill and Care: Has the Law Commission Got it Right?
(1999). Business Law Review, Vol. 20, No. 51, 1999. Available at SSRN:
https://ssrn.com/abstract=1754664 [Accessed 28 Sep. 2019].
Books
McLaughlin S, Unlocking Company Law 2Nd Edition (2nd edn, Routledge 2013)
Horrigan B, Corporate Social Responsibility In The 21St Century:Debates, Models And
Practices Across Government, Law And Business (Edward Elgar Publishing 2010)

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Online Resources
Burges-salmon.com. (2019). The responsibilities and duties of a company director. [online]
Available at: https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-
and-duties-of-a-company-director/ [Accessed 28 Sep. 2019].
Minterellison.com. (2019). Doing business in Australia| Directors' duties - Insight -
MinterEllison. [online] Available at: https://www.minterellison.com/articles/doing-business-in-
australia-directors-duties [Accessed 28 Sep. 2019].
Mondaq.com. (2019). Directors Duties & Liabilities Under The Companies Act 2006 -
Corporate/Commercial Law - UK. [online] Available at:
http://www.mondaq.com/uk/x/63438/Directors+Officers/Directors+Duties+Liabilities+Under+T
he+Companies+Act+2006 [Accessed 28 Sep. 2019].