Question:
By referring to case law and academic opinion, critically discuss the statutory duties of directors of private limited companies as provided by the Companies Act 2006 and how directors may avoid liability for breaches of their duties.
Answer:
Introduction
In this report we will discuss about the legal responsibilities of directors of private limited corporations as stated by “the Companies Act 2006” and how directors might avoid liability for “breaches of their duties”.
Companies Act 2006 – director’s duties
According to “the Companies Act 2006”, “section 170” of states the wide-ranging duties of the directors which they owe towards the organization are been set down from the “sections 171 to 177 of the Companies Act” .
“Duty to take action for Proper Purposes”
“Duty to act for proper purposes” is one of the duties of “directors” which are stated in “section 171 of Company Law 2006”. As per this section the “directors” need to utilize their authorities inside the “corporation constitution” as well as just for the sensible reasons towards the greatest advantage of the corporation. The “directors” should watch the structure of the corporation whilst they carrying out “director’s” authorities and they should implement their authorities’ “bonafidely” for the greatest concern of entire corporation as well as in this obligation directors are likewise obliged to take action for the greatest concern of investors. Also, “directors” are legal representatives of corporation, so they can't utilize their authorities ahead of the corporation’s charter and for their own advantages. This guideline in effect provides a solution for the investors towards prosecuting “directors”. In those cases where directors use wrongly their authorities and their actions are not as per the constitution of the corporation investors could confront them in the courtroom (legislation.gov.uk, 2006).
This regulation is again clarified in the case of “Hogg v Cramphorne” where the “directors” of aimed corporation deliberately distributed latest shares of the corporation to those individuals who could contradict the fright takeover biding. The main motive for this distribution was that they wanted to spare their employments within the board. It was stated that the “directors” didn’t utilize their authorities correctly and the latest allocation of “shares” were not done not in light of honesty, thus the court pronounced this allocation is void (Boyle, 1965).
In one more case, “Howard Smith Ltd v Ampol Petroleum Ltd” it was stated that the principle reason following “issuance of latest shares” to decrease the rate of 2 investors stake within the organization, who declined the aiming take-over biding. “Lord Wilberforce” had held that the new allocation of “shares by director” in this sort of condition can be put aside in spite of the fact that there was no self-centeredness included. Since, their intent around the time of allocation of “new of share” was depended on “malafide”. It was furthermore held that for this situation that any action or resolution of “directors” which is not contained by the organization's charter is identified as invalid action, in case it just go beyond of director authorities, then it is pronounced as avoidable choice (accaglobal.com, 2006).
“Duty to Promote the Success of the Company”
According to “section 172(1) of the Companies Act 2006” it states and enforces noteworthy responsibilities on a “director”, which means a “director” have to carry out; (a) The probable outcomes of his any choice in the extended haul on a corporation, (b) A “director” should observe concerns of the organization's staffs at first, (c) “director” should attempt to encourage the corporation’s commerce associations by dealers, clients and with others, (d) A director of a corporation ought to dependably observe the general effect of the corporation’s processes on the society and the surroundings, (e) A “director” has an interest of the organization keeping up a repute for higher values of commerce carrying out, and (f) The requirement to act reasonably as among the every individuals from the corporation (legislation.gov.uk, 2006).
“In Lonrho Ltd v Shell Petroleum co Ltd [1980] 1 WLR 627, Lord Diplock”, it was said that the organization's directors ought to not just observe investors interests; they ought to consider regarding organization's creditors also. “In Liquidator of West Mercia Sofetwear Ltd v. Dodd” it was said that when bankruptcy move towards an organization, then organization's director ought to begin to consider in light of a legitimate benefit of the creditors. Thus, in the instance of bankruptcy, the director's statutory responsibilities shift in the direction of the corporation (accaglobal.com, 2006).
“Duty to use Independent Judgment”
According to “section 173 of the Companies Act 2006” it specified the responsibility on “director” of “independent judgment” as well as this section requires that the “directors” should carry out an independent judgment regulation and should not bind their prudence under anyone’s impact. They are indebted of their duties towards organization not towards any person. They should just function and observe the organization's benefit, undertakings and dependably utilize their autonomous assessment to the greatest advantage of the business instead of other individual's concerns (Steinfeld & Ritchie, 2007).