Legal Aspects of Business MOD003379: Director's Duties Report

This report delves into the legal aspects of business, specifically focusing on the duties and responsibilities of company directors. It examines the legal framework, particularly the Companies Act 2006, and explores the obligations of directors to act within their powers, as outlined in Section 171 of the Act. The report discusses the importance of adhering to the company's constitution (Articles of Association) and exercising powers for their intended purposes. It also analyzes the duties outlined in Section 172(1), which encompass considerations for long-term decisions, employee interests, relationships with stakeholders, societal and environmental impacts, ethical business conduct, and fair treatment of members. Furthermore, the report examines relevant case laws, such as Lonrho Ltd v Shell Petroleum Ltd and West Mercia Software Ltd Liquidator v Dodd, which clarify directors' fiduciary duties and responsibilities, particularly in cases of insolvency. The report emphasizes the significance of directors acting in good faith, avoiding conflicts of interest, and the consequences of acting outside their powers, as highlighted in cases like Re Smith and Fawcett and Punt v Symons. Finally, it references the case of Towers v Premier Waste Management Ltd (2011), which illustrates the potential repercussions of breaching directors' duties. The report concludes by summarizing the key takeaways and emphasizing the importance of directors fulfilling their appointed roles within the company.

Legal Aspects of
Business

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
The legal dimension or aspect generally defined as the terminology of law identified by the
legislative branch of the country. In this context, certain regulations and laws are clarified which
are obligatory to be regarded at the phase of decision-making. When the organization fails to
conduct its element of the work/job in any circumstance, there is a heightened risk that
disciplinary action will be taken against the organisation (Pathak, A., 2013). In the sense of the
study, there is thorough explanation of the duties of directors to whom they are expected to carry
out whatever work inside the premises of company. Further, here in studymultiple case laws and
examples are also discussed to understand topics.
MAIN BODY
Referring to the applicable laws and case law, the director of a company objectively addresses
the following duties: duties to act within powers:
The Companies Act,2006 outlines the rules and procedures that must be practiced by any
corporation before taking a decision or making policies. There are also certain guidelines and
legislation for directors that ought to be practiced. Here in the act, section 171 outlines the
duties to act in under the specified powers, here this has been stated that directors are not in a
position to take either of those actions where their authority or powers does not exist or beyond
the such powers. Any decision made or action taken by a director should be permitted by the
majority of members, otherwise disciplinary actions can be enforced against the act of
director.Based at the current circumstance, it is very essential to carry out certain works where
proper protocols have to be pursued. In the context of Section 171 of Company Act 2006, there
is a specific description of the 2 main tasks to be carried out by company directors. First, they
must be carried out in compliance with the Article of Association (AOA) or constitution of the
corporation. The second obligation to be fulfilled under section 171 is to execute powers
exclusively for the objectives for that they have been conferred on corporation. These are main
powers to be taken into account by every director in the exercise of their duties (Companies Act.
2006).
Section 172(1) sets out and implements substantial follow-up duties on director which
are to be discharged by every director; (a) the possible effects of any lengthy-term decisions on a

corporation; (b) a director first must control the preferences or interest of company's employees
personnel; (c) a director should try to cultivate the company's contractual relations with vendors,
consumers as well as others; (d) Every director of a corporation should always track the
cumulative effect of the corporation's practices on the society as well as environment; (e) Every
director is desirable for the corporation to uphold a credibility for higher standards of business
conducts, and (f) the requirement to behave equally for all company' members.In case of Lonrho
Ltd vs the Shell Petroleum Ltd, Lord Diplock, ruled in such case whereby not just shareholders'
interests or rights should be controlled by the directors of the corporation, they should also
recognize the creditors or lenders of company. In case of West Mercia Sofetwear Ltd
Liquidator vs Dodd, it had been held in such a case whereby, when insolvency threatens the
corporation, the company's director will begin to discover it in interests of the lenders
or creditors. Thus, in cases of insolvency, director's fiduciary responsibilities transfer to creditors
of the corporation.Thus, the interests of corporation must stay central to director, whatever
occurs except insolvency of a corporation. The Director should take all these measures to
improve the performance of the organization and the image of the organization and ensure the
well-being of its members in each decision (Hood, 2013).
Furthermore, this is also significant to monitor fraudulent activities that can actually
occur if their powers are not limited. It's generally says that a director is the ones who
manage substantial work inside the company and in this particular situation, if any incorrect
decision may cause a massive problem for the entity. It is important to monitor all this operation
so that unethical practice can be minimized within the enterprise. There is also another
explanation for the enactment of this specific section, including that it instructs the directors to
review the powers before making decisions in favor of the corporation.The probability of a risk-
bearing decisions would inevitably decrease, which would undoubtedly provide a way to achieve
the objectives. Directors would have to apply their attention to the firm because of the
application of such section on how their decisions will follow the requirements set out in the
company's constitutional. The key case is among Re Smith and Fawcett, in which the justices
have ruled that directors must behave in "bona fide." Through it, two rules have been added
which clearly demonstrate that, in any circumstances, decision-making outside the power would
raise legal problems towards them, whether or not decisions are in favor of the corporation
(Langford, 2019).

The other case of in the context a director operating outside the scope of the corporation's
constitution is the case law of Punt v Symons. This was stated in this case that directors had
taken a decision linked to issue of the shares for the intention of increasing the capital, although
it is necessary to understand here that directors did not hold this specific power in any situation.
It was decided that directors did not behave in good faith with the corporation as the control was
misused and the fine was levied.Another provision contained in sec.171 is that directors should
be prepared to conduct the function for which they appointed in the company. When either of
those situations exists where director may not conduct the job for which they appointed,
disciplinary action may be undertaken by the members of the corporation. Just a certain level of
job can be performed by the director, like hiring an auditor, having a responsibility to attend
meetings, attempting to keep details confidential and not attempting to make hidden income.
Also, do not take such decisions where they are unauthorized.One seminal case is between
the Towers vs Premier Waste Management Ltd (2011), which was resolved in that specific
case, court held that while the action made by the corporation did not pose any issue
for corporation (Perera, 2019). Yet, it was noted there was breach of service on the director's
hand. As a consequence, he must pay the corporation a sum equivalent on how much it would be
costing him in open market.
Organization demonstrations through two assemblages of individuals – its investors and
its top managerial staff. The governing body is accountable for the administration of the
organization's business; they settle on the vital and operational choices of the organization and
are answerable for guaranteeing that the organization meets its legal commitments. The job of an
individual executive is to take an interest in executive gatherings to empower the board to arrive
at these choices and ensure that the organization's commitments are satisfied. The chiefs are the
operators of the organization, designated by the investors to deal with its everyday issues. The
fundamental guideline is that the chiefs should act all together however commonly the board
may likewise appoint certain forces to singular executives. As operators, chiefs remain in a
guardian relationship to their head (the organization). Henceforth, executives have various
obligations which are currently systematized /recorded in sec. 170-177 Companies Act 2006.
The obligations of chiefs incorporate, for instance, the obligation to advance the
accomplishment of the organization (s. 172 CA 2006) and the obligation to keep away from

irreconcilable situations (s. 175 CA 2006). As per s.171 CA 2006, an executive of an
organization has the obligation to act inside forces. This implies, an executive of an organization
must:
(a) Act as per the organization's constitution, and
(b) Only exercise powers for the reasons for which they are given.
In this way, s. 171 has two signs:
To start with, the executive must Act as per the constitution of the organization. The
constitution incorporates:
 Articles of Association: Articles of affiliation structure a record that indicates the
guidelines for an organization's activities and characterizes the organization's motivation.
The archive spreads out how errands are to be practiced inside the association, including
the procedure for delegating executives and the treatment of monetary records.
 Relevant goals: The natural "conventional" and "unique" goals will remain yet it will
never again be important for a gathering at which an exceptional goals is to be passed to
be called with 21 days' notification. Rather, the notification time frame will be equivalent
to that for customary goals - 14 days - barring the date of the notification and the date of
the gathering, except if the organization's articles require longer notification. This change
will apply to both open and privately owned businesses yet a notification time of 21 days
will at present apply for yearly regular gatherings of open organizations.
 Shareholder understandings: An investors' understanding is an understanding gone into
between all or a portion of the investors in an organization. It controls the connection
between the investors, the administration of the organization, responsibility for shares
and the insurance of the investors.
Second, an executive must exercise his forces just for the reasons for which they are
presented. This is the purported legitimate purposes principle. The correct purposes teaching
imply that:
Chiefs must act in compliance with common decency for what is in light of a legitimate
concern for the organization, and not for any insurance reason.

A few instances of the correct purposes principle can be given:
 Hogg v Cramphorn [1967]: in this case the chiefs made an offer assignment to stop a
takeover and to stay in charge of the organization. This was viewed as invalid.
 Howard Smith Ltd v Ampol Petroleum Ltd [1974]:in this case, there was a weakening of
offers in a takeover offer. This was held to be invalid.
 Basis Properties Plc v Stratford UK Properties LLC [2003]: for this situation there was a
toxin pill plan to secure the organization in case of a takeover. This was held to be
invalid.
Taking everything into account, if the chiefs utilize their forces with blended thought
processes, the court will look to figure out what the principle reason for their lead was. On the
off chance that the thought processes are seen as inappropriate, the demonstration of the chief
can be voidable. Notwithstanding, the investors may confirm the demonstration of the executives
except if the individual privileges of an investor are influenced. For example, in Re Sherborne
Park [1987], the individual privileges of an investor were influenced by an out of line
apportioning and, in this way, it was impractical to confirm the demonstration of the chiefs.
CONCLUSION
This has been inferred from the aforementioned study that, in all of the cases, directors
of are appointed for an apparent reason and has to do their jobs where they have been granted the
authority to do otherwise. When, as the case may be, director is allowed to take some particular
decision, then a prior authorization from the members is necessary.

REFERENCES
Books & Journals:
Pathak, A., 2013. Legal aspects of business. Tata McGraw-Hill Education.
Hood, P., 2013. Directors' Duties Under the Companies Act 2006: Clarity or
Confusion?. Journal of Corporate Law Studies. 13(1). pp.1-48.
Langford, R.T., 2019. Company Directors' Duties and Conflicts of Interest
(Introduction). Company Directors' Duties and Conflicts of Interest, OUP (2019).
Perera, S., 2019. Reconceptualising Shareholder Remedies to Mitigate the Problems Caused by
the Overlap between Section 994 and Part 11 Companies Act 2006. UCLJLJ, 8, p.1.
Online
Companies Act. 2006. [Online]. Available Through:
<http://www.legislation.gov.uk/ukpga/2006/46/section/171>