Company Law 1 Assignment: Director Liability Analysis

This assignment analyzes the duties and liabilities of company directors under UK Company Law, specifically referencing the Companies Act 2006. The student utilizes the IRAC (Issue, Rule, Analysis, Conclusion) method to examine three scenarios. The first scenario assesses the liability of a solicitor and a surveyor who failed to identify a land dispute, focusing on the duty of skill and care and the impact of an exclusion clause. The second scenario evaluates the liability of the directors, the advertisement, market and sales manager and senior accountant for undervaluing property sales and the implications of the duty of skill and care. The third scenario's issue and rules are provided, and the student is expected to analyze the liability of the directors, the advertisement, market and sales manager and senior accountant. The analysis considers the duty of skill and care, the duty of loyalty, and the application of relevant case law, such as Regentcrest plc (in liq.) vs. Cohen and Re City Equitable Fire Insurance Co. The conclusion addresses the potential for liability of each director in each scenario, highlighting the application of negligence clauses and the need for directors to act in the best interests of the company. The assignment provides a comprehensive overview of director's responsibilities and potential liabilities in various situations.

Running head: COMPANY LAW 1
Company Law 1
Name of the Student
Name of the University
Authors Note

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IRAC- I
Issue
In this paper, the issue to be discussed is whether Jeremy and Jack have any liability
towards the company or not.
Rule
Historically, directors have been subject to English Company law obligations.
Nevertheless, the vast majority of the roles of directors had not been laid down in legislation.
However, presently the duties had developed through case law. Those functions included:
 The obligation to act in good faith in the benefits of the business;
 The obligation to show competence and care;
 The obligation to dodge contradictory interests and duties; and
 The obligation not to make a hidden profit.
In case of the UK companies, the directors are appointed in the board of the company by the
central authority1. Directors usually have many duties to perform. Presently, seven basic duties of
the directors are classified under the Companies Act, 2006 of the UK. Sections 171 to 177 of this
Act deals with the duties of directors, which replicate the Common law and equitable values. The
duties of the directors include:
 Duty to act within authorities;
 Duty to endorse the achievement of the company;
 Duty to implement free judgment;
1 Guest, Paul M. "The determinants of board size and composition: Evidence from the UK." (2008) Journal of
Corporate Finance 14.1: 51-72.

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 Duty to implement rational care, ability and persistence;
 Duty to avoid disputes of interest;
 Duty to reject assistances from the third parties; and
 Duty to proclaim interest in future dealings or agreements.
The above-mentioned duties may not be restricted or ignored, but companies may purchase
insurance to cover the costs of directors in case of violation of their duties2. The remedies for the
violation of duties is not codified in the Companies Act, 2006. Therefore, it follows the
provisions of common law and equity and include damages for losses, injunction or specific
performance3.
Section 172 of this Act deals with the overriding duties of the directors which states that a
director will act in the way he/she sees fit to maximize the success of the company for the good
of its associates completely. In Regentcrest plc (in liq.) vs. Cohen [2001] BCC 494 at [124] case
the court held that the mind of the director played an important role concerning with the
overriding duties.
Section 174 of this Act deals with the duty of skill and care. According to this section, the
obligation of skill and care puts current carelessness legislation on a substantive basis and
ensures that a director must behave with the care, expertise and caution that a fairly
conscientious individual should possess with both, (i) a director’s general awareness, expertise
and understanding to be required and (ii) the director’s own general awareness, expertise and
experience. It can also be said that, all directors must possess the ‘rational director’ standard and
must be assumed to have a director’s awareness, abilities and experience in that role to be
2 O’Sullivan, Noel. "The demand for directors’ and officers’ insurance by large UK companies." (2002) European
Management Journal 20.5: 574-583.
3 ANDREW. KEAY, L. L. B. DIRECTORS'DUTIES. (JORDAN Publishing Limited, 2016).

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anticipated. Therefore, a director with added or more advanced expertise (for instance
accountancy qualifications) will be kept with that experience to the level of a rational and fair
director. In the case of Re City Equitable Fire Insurance Co. [1925] Ch 407 the court stated that
even if the some of the directors have infringed their obligation of care, because an exclusion
clause was available for neglect, they were not obligated to compensate. Not only has that, even
in case of absence of an exclusion clause, a director needs not to compensate if he himself acted
honestly.
Section 177 and 182 deals with the duties to proclaim interest in future dealings or
agreements. Directors must report to the board of their company regarding the ‘nature and
extent’ of any interest that they may have in any transaction or agreement in which the company
is or may be a party to. In case of any of the sections a director can made a declaration either at a
meeting of the board of the directors or by a written or a general notice. If it becomes improper
or incomplete, a director must correct that statement4.
Analysis
In this given scenario, it has been observed that Land ComPlc is a property company the
objective of which is purchasing land, construct private apartments and buildings and selling
those real estates to the people at large directly.
It includes six directors among which three directors hold the position of executive
directors. A solicitor, namely, Jack and capacity surveyor, namely Jeremy took the responsibility
of surveying and registering a piece of land purchased by the company worth 500,000 Euro.
After visual inspection it has appeared to the surveyor that the highway could be accessed by the
fourth side but after inspecting the title deeds it has been observed a two-meter strip of land
4 Esser, Irene-marie, and Johan Coetzee. "Codification of directors' duties." (2004) Juta's Bus. L. 12: 26.

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situated in the fourth side prohibiting the access towards the highway and making the progress
impossible. However, the owner of the strip of land ready to sell it worth 100,000.
Here, as per the provisions of section 172 both the directors Jack and Jeremy acted in the
way as they have seen fit to maximize the success of the company for the good of its associates
completely. The directors also fulfilled the criteria as mentioned in the Regentcrest plc (in liq.)
vs. Cohen [2001] BCC 494 at [124] case concerning with the overriding duties. Hence, both of
the directors have acted in good faith in the benefits of the business and its members.
As per the provisions of section 174 a rational director must possess some qualities, such
as: general awareness, expertise, understanding and experience. In fact having all these qualities
Jack and Jeremy failed to identify the dispute of the land. Here, both of them failed to perform
their duty of skill and care but as mentioned in the landmark case of Re City Equitable Fire
Insurance Co. [1925] Ch 407 due to the availability of an exclusion clause for negligence, Jack
was not obligated to compensate, because Jeremy took an active part in purchasing the land as a
surveyor. Therefore, Jack was not responsible for purchasing that disputed land.
As per the provisions of sections 177 and 182, both Jack and Jeremy performed their duty
to proclaim interest in future dealings or agreements.
Conclusion
Therefore, it can be concluded that both of the directors, namely, Jack and Jeremy have
failed to perform their duties u/s 174 of the Companies Act, 2006 but due to the availability of
the negligence clause Jeremy has held liable towards the company u/s 174.

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IRAC- II
Issue
In this paper, the issue to be discussed is whether Philip and Sam have any liability
towards the company or not.
Rule
Section 172 of the Companies Act, 2006 deals with the overriding duties of the directors
which states that a director will act in the way he/she sees fit to maximize the success of the
company for the good of its associates completely. In Regentcrest plc (in liq.) vs. Cohen [2001]
BCC 494 at [124] case the court held that the mind of the director played an important role
concerning with the overriding duties.
Section 174 of this Act deals with the duty of skill and care. According to this section, the
obligation of skill and care puts current carelessness legislation on a substantive basis and
ensures that a director must behave with the care, expertise and experience. It can also be said
that, all directors must possess the ‘rational director’ standard and must be assumed to have a
director’s awareness, abilities and experience in that role to be anticipated. In the case of Re City
Equitable Fire Insurance Co. [1925] Ch 407 the court stated that even if the some of the
directors have infringed their obligation of care, because an exclusion clause was available for
neglect, they were not obligated to compensate. Not only has that, even in case of absence of an
exclusion clause, a director needs not to compensate if he himself acted honestly5.
Section 175 of the Companies Act, 2006 provides a very specific legislative obligation to
prevent clashes of interest. A director needs to prevent any circumstances in which they have or
5 Renneboog, Luc, and Yang Zhao. "Us knows us in the UK: On director networks and CEO compensation." (2011)
Journal of Corporate Finance 17.4: 1132-1157.

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may have a concern that clashes with or may interfere in a straight line or secondarily with the
benefits of the company6. Specifically, this responsibility extends to a director who abuses any
land, facts or prospect. In Boardman vs. Phipps [1966] UKHL 2 case the court held that both the
directors violated that the duty of loyalty and liable for the profit earned. However, the obligation
does not extend to transactions or agreements with the company u/s 177 and 182 and there will
be no violation if the case cannot fairly be deemed likely to give rise to a clash of interest7.
Analysis
In this given scenario, Philip has the charges of advertisement, market and sales. Sam
worked over there as a senior accountant. Small site of town houses, developed by the company
were marketed and sold quickly at 40,000 Euros each. Later, it was observed that the houses
were undervalued and could be sold by 45,000 Euros each. Due to that, the company did not
make a loss but earned only a marginal profit.
Here, as per the provisions of section 172 both the directors Philip and Sam not acted in
the way as they have seen fit to maximize the success of the company for the good of its
associates completely. The directors also failed to fulfill the criteria as mentioned in the
Regentcrest plc (in liq.) vs. Cohen [2001] BCC 494 at [124] case concerning with the overriding
duties. Hence, both of the directors have failed to act in good faith in the benefits of the business
and its members.
Here, both of them failed to perform their duty of skill and care u/s 174. The senior
accountant Sam failed to decide the actual selling price because of wrong advertising, marketing,
and selling strategy of Philip. However, as mentioned in the landmark case of Re City Equitable
6 Mura, Roberto. "Firm performance: Do non‐executive directors have minds of their own? Evidence from UK panel
data." (2007) Financial Management 36.3: 81-112.
7 Lee, Rebecca. "Fiduciary duty without equity: fiduciary duties of directors under the revised company law of the
PRC." (2006) Va. J. Int'l L. 47: 897.

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Fire Insurance Co. [1925] Ch 407 due to the availability of an exclusion clause for negligence,
Sam was not obligated to compensate, because Philip has done the advertisement, marketing and
sale. Therefore, Sam was not responsible for selling those houses at a below cost.
As per the provisions of section 175, both of the directors, namely, Sam and Philip failed
to show the loyalty towards the company and its members as mentioned in the Boardman vs.
Phipps [1966] UKHL 2 by doing wrong marketing. Due to them the company earned a marginal
profit only.
Conclusion
Therefore, it can be concluded that both of the directors, namely, Sam and Philip have
failed to perform their duties u/s 172, 174 and 175 of the Companies Act, 2006 but due to the
availability of the negligence clause Philip has held liable towards the company u/s 174. For
violating the provisions of section 172 and 175 the amount of compensation must be decided by
the company.

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PART- III
Issue
In this paper, the issue to be discussed is whether Joe, Helen and Sam have any liability
towards the company or not.
Rule
Section 172 of the Companies Act, 2006 deals with the overriding duties of the directors
which states that a director will act in the way he/she sees fit to maximize the success of the
company for the good of its associates completely. In Regentcrest plc (in liq.) vs. Cohen [2001]
BCC 494 at [124] case the court held that the mind of the director played an important role
concerning with the overriding duties.
According to section 176 of this Act the object of the no conflict rule is to guarantee that
directors perform their duties as if they were at stake in their own benefits8. In addition to
business incentives, the law requires directors to recognize no benefits under section 176 from
third parties, and also has explicit regulation regarding dealings of a company with another entity
in which directors have an interest.
Analysis
In this given scenario, Joe is the chairman of the board. Helen is the sister-in-law of Joe
and also a non-executive director of the company. Sam worked over there as a senior accountant.
The board have decided to purchase one building of Toddmoor at 750,000 Euros and
rejected Rawsum. Later, Joe decided to purchase Rawsum personally and resells it at 600,000
8 Pass, Christopher. "Corporate governance and the role of non-executive directors in large UK companies: an
empirical study." (2004) Corporate Governance: The international journal of business in society 4.2: 52-63.

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Euros. Sam and Helen remained silent throughout the discussion and Helsam Ltd acquired
Toddmoor.
Here, as per the provisions of section 172 the directors, namely, Joe, Helen and Sam have
not acted in the way as they have seen fit to maximize the success of the company for the good
of its associates completely. The directors also failed to fulfill the criteria as mentioned in the
Regentcrest plc (in liq.) vs. Cohen [2001] BCC 494 at [124] case concerning with the overriding
duties. Hence, three directors have failed to act in good faith in the benefits of the business and
its members.
According to the provisions of section 176, Joe has decided to purchase Rawsum for his
own benefit and for this reason Heslam Ltd acquired Toddmoor. Here, he violates the provisions
of section 176 by thinking about himself and not for the benefit of the company and its members.
Conclusion
Therefore, it can be concluded that all of the directors, namely, Joe, Helen and Sam have
failed to act in good faith in the benefits of the business u/s 172 of the Companies Act, 2006. Joe
performed the duties for his own benefit and Sam and Helen did not made any protest against it.
Joe also violates the provisions of section 176 as he thought for the benefit of his own and not for
the business.

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BIBLIOGRAPHY
Books and Journal
ANDREW. KEAY, L. L. B. DIRECTORS'DUTIES. (JORDAN Publishing Limited, 2016).
Esser, Irene-marie, and Johan Coetzee. "Codification of directors' duties." (2004) Juta's Bus.
L. 12: 26.
Guest, Paul M. "The determinants of board size and composition: Evidence from the
UK." (2008) Journal of Corporate Finance 14.1: 51-72.
Lee, Rebecca. "Fiduciary duty without equity: fiduciary duties of directors under the revised
company law of the PRC." (2006) Va. J. Int'l L. 47: 897.
Mura, Roberto. "Firm performance: Do non‐executive directors have minds of their own?
Evidence from UK panel data." (2007) Financial Management 36.3: 81-112.
O’Sullivan, Noel. "The demand for directors’ and officers’ insurance by large UK
companies." (2002) European Management Journal 20.5: 574-583.
Pass, Christopher. "Corporate governance and the role of non-executive directors in large UK
companies: an empirical study." (2004) Corporate Governance: The international journal of
business in society 4.2: 52-63.
Renneboog, Luc, and Yang Zhao. "Us knows us in the UK: On director networks and CEO
compensation." (2011) Journal of Corporate Finance 17.4: 1132-1157.
Cases
Boardman vs. Phipps [1966] UKHL 2

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Re City Equitable Fire Insurance Co. [1925] Ch 407
Regentcrest plc (in liq.) vs. Cohen [2001] BCC 494 at [124]
Legislation
Companies Act, 2006