Directors are the key management body of the company and as such, there are required to take strategic decisions of the company, to determine and execute corporate policy and to make the company a success, using their skills. In performing these functions, directors have to consider a range of factors, some of which can be broad like considering the impact of the company’s operations on the community and the environment under Section 172(1)(d) of the Companies Act 2006. At the same time, there are a complex range of duties of the directors that are related to the corporate governance paradigm and this has only put more responsibilities and duties on the director. Earlier, directors’ roles were predominantly related to management of companies, and as Tricker writes, and he also notes thatwhile management is about running business, “governance is about seeing that it is run properly. All companies need governing as well as managing.’ This puts the directors in the role of the manager as well as the trustee and it accords with the modern developments in corporate governance that are now translated into law through both statutory provisions and equitable principles. If you require assistance in understanding these complexities, our team is there to provide expert business dissertation help in place to guide you through the intricacies of corporate governance.
One of the reasons why it may be said that the directors are placed in somewhat untenable situation is because of the scope of the duties, which in the case of directors are both fiduciary as well as statutory. Directors are therefore liable to breach of both statutory and fiduciary duties. One of the problems with the imposition of fiduciary and statutory duties on directors is that it leads to a situation where there are multiple sources from where duties are derived, leaving the director exposed to legal repercussions for breachof duties in any of the sources; duties can be contractual, fiduciary and statutory. It may be noted that a number of statutory duties take on equitable principles.The duties of the directors that are now statutorily incorporated in Companies Act 2006 are based on existing equitable principles; for instance, Section 170 of the Companies Act 2006 providesthe duty to promote the success of the company; other duties include duty to avoid conflicts of interest; to declare interests in a proposed transaction; to not accept benefits from third parties without the knowledge of the company, to name a few.
Although directors’ duties are described as straightforward by the Court of Appeal in Towers v. Premier Waste Management Limited,some of the duties can be vague, broad and ambiguous; for instance Section 172 provides the general duty of the director to promote the success of the company; this duty itself contains a list of duties like director must have regard to the long term consequences of any act [Section 172(1)(a)];the interests of company employees [Section 172(1)(b)]; the need to foster good business relations[Section 172(1)(c)]; and the impact of the company’s operations on the community and the environment [Section 172(1)(d]. These duties, particularly the last mentioned, are described by Keay as vague and amorphous in their wording.Keay asks what the inclusion of the words ‘community’ and ‘environment’ mean and how the director is supposed to discharge his duties with respect to these stakeholders. However, being a statutory duty, the director is at risk of legal proceedings being instituted against him for the breach of duty. When read with Section 178, which provides that the director has civil liabilities for the breach of duty, it may be said that the broad range of duties in Section 172 makes the role of the director almost untenable and puts him or her at risk of adverse legal repercussions for failure to comply with the duty.
Indeed some of the duties of the directors are straightforward as mentioned in Towers v. Premier Waste Management Limited. For instance, Section 175 provides that a director would be in breach of duty if he or she puts themselves in a position that creates a conflict of interest. This is a straightforward duty as it can be assessed on the basis of the facts that can show a conflict of interests. In one case, the court held that if director takes advantage of corporate opportunities that come in the way of the company for their own self-interest, then he can be made to account for the profits made to the company. This is straightforward. Another example of a duty that is straightforward is contained in Section 171, which provides that the directors shall exercise their powers for the purpose these were conferred. This can be linked to the Articles of Association and are easily identifiable.However, as Keay pointed out, how is the duty of the director towards the community and environment be assessed? Indeed, Section 172 itself creates a number of factors and duties that the directors are required to take into account when making decisions relating to the management of the company and their decisions are to be made after taking these into account. If some of these duties are broadly or vaguely framed, then there is a risk of adverse legal repercussions. Courts have also expanded the scope of directors’ duties to a significant extent. This is particularly relevant to the nature of the standard of care; in Re City Equitable, the court held that the duty owed by the director is that of a reasonable person who does not know the business; however, this duty was expanded in Re D’Jan, where the court held that the duty of care owed by the director is that of a reasonably diligent person with the knowledge, skill and experience to be expected of a person carrying out similar functions as the director and with similar knowledge, skill and experience of the director.
To conclude, there has been an increase in the number of duties, the number of sources from where duties can be derived and the scope of duty of the directors. Not only that, directors are also required to take into account a number of factors before making any decisions and the wording of Section 172 itself where these duties are mentioned are somewhat broad. This creates a regime within which directors are exposed to risk of litigation and legal repercussions particularly as directors are also liable for the breach of any of these duties.
The existing legal framework does not arguably meet the challenges of modern economy and business climate. It has been observed that management of companies does not have sufficient understanding of the Companies Act 2006. Legal capital issues have cropped up in respect to controversies in company law and corporate governance. The reason could be that the priority was given to the reform of capital maintenance regime through the 2nd Company Law Directive of the EU, and reforms in public companies were not carried out. According to this Directive, dividends are to be paid out of accumulated net realised profits. It also provides for an additional balance sheet test to determine the amount available for distribution by referring to reserves reflected in the company’s accounts. Lord Sainsbury, in the Hansard Publication, 2006, columns 188–189, stated that this approach is based on technical considerations in regard to development in accounting standards. The standards made published accounts more useful for capital market investors. However, they suit less for determining distributable reserves. It is also argued that legal capital doctrine is outdated and that superior modern solvency-based approach is better aligned with real concerns of the creditors. This may affect provisions that would be insufficient for long-term liabilities, including pensions. According to Lord Sainsbury, in the Hansard Publication, 2006, columns 188–189, this is the reason why the legal capital reformation aimed by the Companies Act 2006 did not include provisions around distributions to shareholders by way of dividend, with the cautionary purpose of curbing companies from paying dividends upon a solvency statement.
The Companies Act 2006, s 836 provides for determination of distributable reserves by linking it to profits and losses, assets, liabilities, provisions, share capital and share reserves, which are the paying relevant accounts. However, it does not provide specifically for companies to differentiate realised and unrealised profits, or distributable and non-distributable profits in their accounts. This may create issues around transparency around dividend policy. The Companies Act 2006, s830 provides for distributions of dividends or any other kind must only be made out of surplus profits beyond the legal capital. The calculation of profits, assets, liabilities, and losses will follow the generally accepted accounting principles. However, they could be different accounting methods that could lead to different assessments of whether a company has profit or not. In Re Halt Garage, Oliver J held that creditors can assume that payment made as remuneration is so in substance, and must not be a disguised distribution to shareholders. The Companies Act 2006, s847 provides that in case of any unlawful distribution, the recipients or members must repay. However, if there is a good faith based negotiated transaction and the negotiation is done at arms’ length, that transaction cannot be undone. This raises the question of unjust enrichment. A shareholder will be personally liable if he knowingly receives unlawful returns. They are accountable as constructive trustees, and cannot retain such returns, which would otherwise be a breach of capital maintenance rules. They will incur strict, restitutionary liability. However, concerns around determining liability of the recipient may arise. The requirement of knowledge may mean that dividends are only likely recoverable from parent companies and from members of the management of company. This is arguably too narrow. Shareholders might not have compelled payment, or might have no knowledge of the unlawfulness. Irrespectively, they may have received a windfall that may do not have any consideration, or that the company did not have power to pay. Thus, applying principles of unjust enrichment, any unlawfully paid dividends must be potentially recoverable from all recipients. This is supported by the case of Wrap (UK) Ltd v Gula, ignorance of the law about unlawfulness of dividend payments cannot be a defense. This may be treated as a breach of duty, and a member is liable to restore wrongfully money received. In Bairstow and Others v Queens Moat Houses Plc, the court held that remedy to unlawfully paid dividend is available only to the company and against shareholders who have actual or constructive knowledge about it. This supports the argument that unlawfully paid dividends must be potentially recoverable from all recipients.
Sections 593 – 597 provide for issuing of shares in return for assets. Corresponding provisions are also found in Directive 2012/30/EU. A public company must pay for an independent valuation. Section 596 provides for nominal value of the shares. Each share is assigned a nominal or par value to enable each holder to measure his interest in and liability to the company. This is found in the common law rule that shares are not to be issued at a discount on their nominal value. This, however, does not provide for absolute limits to what a share could be bought in cash. The nominal value could be different from the value of the share market determined by public investors and value of the assets. This reduces the par value rule meaningless. They are mostly ignored by investors and considered irrelevant. Creditors focus more on the shareholders’ interest instead on the nominal share capital. This issue is somewhat applicable with the issue associated with the Companies Act 2006, s761 that provides requirement as to minimum share capital, which is irrelevant for a public company. This has reduced the minimum capital requirement to an unburdensome form that is not satisfactory as it may force the public companies to adopt numerous non-beneficial procedures to that effect.
Eilís Ferran has rightly observed to revisit legal capital because of difficulties in applying legal rules on distributions and the need to protect creditors’ interests in respect to solvency standards. To conclude, the existing regulatory framework is arguably complex and not easily understood, with inherent controversies in the legal provisions. Together with the issues around corporate governance, legal capital is exposed to risk of abuse and misuse.
Dig deeper into A Comprehensive Guide to Rules and Regulations Governing Corporations in the United Kingdom with our selection of articles.
The Companies Act 2006
Bairstow and Others v Queens Moat Houses Plc: CA 17 MAY 2001.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443.
Ooregum Gold Mining Co of India v Roper [1892] AC 125.
Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC 55.
Towers v. Premier Waste Management Limited[2011] EWCA Civ 923.
Re City Equitable [1925] Ch 407.
Re D’Jan of London[1994] 1BCLC 561.
Re Halt Garage [1982] 3 All ER 1016.
Wrap (UK) Ltd v Gula [2006] EWCA Civ 544.
Burrows A, Principles of the English Law of Obligations (Oxford University Press 2015).
Ferran E and Look Chan Ho, Principles of Corporate Finance Law (Oxford University Press 2014).
Law J, A Dictionary of Law (Oxford University Press 2015).
Letsas G and Colm O'Cinneide, Current Legal Problems 2010, Volume 63 (Oxford University Press 2010) Lista A, ‘Directors’ duties in the UK’ in Research Handbook on Directors’ Duties (Edward Elgar Publishing 2014)
Midgley K and Ronald G. Burns, Business Finance and the Capital Market (Macmillan Press Ltd 1972)
Reuvid J, Investors' Guide to the United Kingdom (Gmb Publishing 2007).
Tricker B, Corporate Governance: Practices, Procedures, and Powers in British Companies and their Boards of Directors (Aldershot: Gower Publishing 1984)
Ferran E, ‘Revisiting Legal Capital’ (2019) 20(3) European Business Organization Law Review 521-545.
Keay A, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s “Enlightened Shareholder Value Approach”’ (2007) 29 Sydney L. Rev. 577, 586.
Lowry J, ‘The Duty of Loyalty of Company Directors: Bridging the Accountability Gap Through Efficient Disclosure’ (2009) 68 (3) The Cambridge Law Journal 607.
Payne J, ‘Unjust Enrichment, Trusts and Recipient Liability for Unlawful Dividends’ (2003) 119 Law Quarterly Review 583-607.
Sealy LS, ‘Directors' Wider Responsibilities-Problems Conceptual, Practical and Procedural’ (1987) 13 Monash UL Rev. 164.
It is observed that students take pressure to complete their assignments, so in that case, they seek help from Assignment Help, who provides the best and highest-quality Dissertation Help along with the Thesis Help. All the Assignment Help Samples available are accessible to the students quickly and at a minimal cost. You can place your order and experience amazing services.
DISCLAIMER : The assignment help samples available on website are for review and are representative of the exceptional work provided by our assignment writers. These samples are intended to highlight and demonstrate the high level of proficiency and expertise exhibited by our assignment writers in crafting quality assignments. Feel free to use our assignment samples as a guiding resource to enhance your learning.