Part 5: Director’s Duties
I.
Director’s duties generally; duty of care and skill
A. Duties and ‘codification’
1. What are duties for?
Directors are responsible for the management of the company’s business, and
exercise all powers of the company to that end. Which is a potential for self-serving
behaviour
Duties seek to balance directors’ power with responsibility:
- Ensure acceptable behaviour and
- Protect shareholders/other stakeholders
But duties cannot be too strict:
 not seeking to dissuade appropriate people from acting as directors
 do not want to deter ‘appropriate’ risk-taking
2. Codification of duties
Duties pre-CA 2006 were predominantly in case law (Fiduciary duties, Common law
duty (of skill and care), Plus further statutory obligations/refinements)
Company Law Review followed Law Commission proposals for a legislative statement of
duties  CA 2006 ‘codifies’ directors’ duties:
- ‘General Duties’ of a director: ss. 171-177
- Other specific duties
3. Partial codification: significance of pre-CA 2006 cases
Statute relates back to existing case law for both interpretation and consequences
 Case law very important in interpretation and application of general duties: s.
170(3)&(4)
Statute acknowledges general duties based on common law rules and equitable
principles. Statute requires regard to be had to these in interpreting and applying
general duties
Consequences of breach unchanged: s. 178  No statutory statement of
consequences/remedies
4. Directors’ Duties: an overview (1)
The General Duties
- Duty to act within powers: s. 171
- Duty to promote the success of the company: s. 172
- Duty to exercise independent judgment: s. 173
- Duty to exercise reasonable care, skill and diligence: s. 174
- Duty to avoid conflicts of interest: s. 175
- Duty not to accept benefits from third parties: s. 176
- Duty to declare interest in proposed transaction or arrangement: s.
177
 All fiduciary in origin except s. 174
 More than one duty can apply at a time: s. 179 : E.g. Re Bradcrown ; Eclairs
Group v JKX Oil
5. Directors’ Duties: an overview (2)
Specific duties to be aware of:
- Declaration of interest in existing transaction or arrangement: s. 182
- Substantial property transactions: s. 190
- Loans to directors: s. 197
- Quasi-loans (plcs): s. 198
- Credit transactions (plcs): s. 201
Relief from liability:
- Authorisation and ratification: s. 180; s. 239
- Exclusion of liability: s. 232
- Relief by the court: s. 1157
B. To whom are duties owed?
1. To whom are the duties owed: the company
Duties owed to ‘the company’ (and therefore enforceable only by the company) : s.
170(1)
What is the company in this context? Separate entity? Shareholders? Individually or as a
group? Wider social/ economic grouping?

Shareholder Primacy –v- Stakeholding
- Shareholder primacy: directors run the company for the benefit of
shareholders
- Stakeholding: directors run the company for the benefit of all stakeholders
2. Duties owed to the company: enlightened shareholder value
S. 170(1) makes clear duties owed to company (i.e. separate entity)
But whose interests should directors have in mind in making decisions?
Shareholder primacy has been reconsidered in Company Law Review  ‘Enlightened
Shareholder Value’  Companies Act 2006
See s. 172 (1) : dual nature of company as entity and as association of members
 “the success of the company for the benefit of its members as a
whole”
 Then further factors to have regard to in fulfilling that duty
3. Are duties owed to shareholders?
Not usually: Percival v Wright  No duty to disclose information to shareholders. Not
even where director appointed by particular shareholder: Hawkes v Cuddy
But duties may arise where “special factors”: Coleman v Myers; Re Chez Nico; Platt v
Platt
Peskin v Anderson
 Members claimed directors should have warned them of impending sale
so they could have retained their membership and so received pay-out
 Held: no general duty to shareholders, affirming Percival v Wright;
accepted
that
duty
to
shareholders
could
arise
in
appropriate/specific circumstances
 No duty had arisen in this case; need special factors (e.g. personal position
of influence) to give rise to duties directly between director and
shareholder
4. Are duties owed to employees?
No duty owed to employees:
- CA 1985 s. 309 required director to have regard to interests of employees
as well as members, but no enforcement mechanism
- This provision not repeated in CA 2006
 Under CA 2006, employees are factor to take into account in promoting success
of company for benefit of members as a whole
 S. 172 ... have regard (amongst other matters) to …(b) the interests of the
company’s employees ….
 Only obliged to take into account and only so far as promotes success of the
company
 Duty is owed to company, not to employees
5. Are duties owed to creditors?
No duties owed directly to creditors while company is solvent; duties owed to company
only Multinational Gas. But creditors’ interests displace shareholder interests
when the company is insolvent West Mercia Safetywear Ltd v Dodd
Creditors
are
not
included
explicitly within s.172 factors
(although may come within other
groups)  West Mercia approach
recognised by s. 172(3)
Even when insolvent, arguably
duty still owed to company not
directly to creditors. There is no
duty to individual creditors e.g.
Yukong
See also s. 214 IA 1986 (wrongful
trading):
enforced
through
liquidator [see Part 11]
6. Are duties owed to
other stakeholders?
CA 2006 favoured ‘enlightened shareholder value’ approach not Stakeholding 
Fundamentally ‘shareholder primacy’ approach: Directors run the company for the
benefit of shareholders.
Interests included in s. 172 cover wide range of constituents; but interests only relevant
so far as promote success of company for benefit of shareholders Duty owed to
company, not to any (or all) of those constituents
C. Duty to exercise reasonable care, skill and diligence
1. Duty to exercise reasonable care, skill and diligence: s. 174
Origins in common law duty to exercise reasonable care (not a fiduciary duty)
A director must exercise reasonable care, skill and diligence: s. 174
Measured by a dual objective/subjective test - that which would be exercised by a
reasonably diligent person with the:
1. General knowledge, skill and experience reasonably expected of person
carrying out the functions carried out by the director (objective test)
2. General knowledge, skill and experience that director has (subjective test)
CA 2006 reflects pre-2006 case development and influence of director disqualification
a. Assessing the standard of skill and care in s.
174
Early formulation of common law duty required only a relatively lax standard of care
and skill from directors – essentially subjective standard  E.g. Re City Equitable
Fire; Re Brazilian Rubber
But even before 2006, later cases had strengthened standard and imposed minimum
objective expectation Norman v Theodore Goddard; Re D’Jan of London Ltd:
Introduced dual objective/subjective test (borrowed from law on wrongful trading in s.
214(4) IA 1986))- But only first instance authorities
Also influence of standards imposed in director disqualification e.g. Re Landhurst
Leasing
CLR concluded later cases should be preferred  s. 174 reflects these later cases
b. Assessing the level of attention required by s.
174
Early formulation of common law duty required only very limited level of
attention by directors E.g. Re City Equitable Fire; Re Brazilian Rubber
But even before 2006, later cases had strengthened standard E.g. Dorchester Finance
v Stebbing (Directors failed to attend meetings and pre-signed cheques)
Also influence of disqualification cases e.g. Re Continental Assurance; Park House;
Re Barings plc.
CA 2006 reflects these higher expectations diligent director knows about
company’s affairs and is involved
c. Assessing reliance on others under s. 174
Cases have consistently accepted that director entitled to rely on others e.g. Re City
Equitable; Dovey v Corey; Norman v Theodore Goddard
But director retains supervisory role even when relying on others; cannot
abdicate responsibility
See influence of disqualification cases: E.g. Re Barings plc. (No 5); Re Queens Moat
Houses ; Re Bradcrown
CA 2006 reflects these expectations: Diligent director may rely on others if
appropriate but supervises and checks things for himself
2. Striking a balance: breach of duty or just a bad decision?
Lax standard means difficult for shareholders to establish breach and easy for directors
to avoid liability; but ensures directors free from challenge for just making poor decision
(with benefit of hindsight).
Strengthening of standard should make it easier to pursue ‘negligent’ directors and
uphold higher standards; but directors should not be at risk just for making wrong
decision
Will it still be difficult to pursue directors? Problems of enforcement (see later);
Reluctance of judges to question business decisions E.g. Burland v Earle; Re Bugle
Press; But directors may step over the line from poor decision-making, into
breach of duty if continue with actions despite evidence of problems e.g. Roberts v
Frohlich
II.
Sections 171-173
 Duties of fiduciary origin
In old cases director described as a trustee of company’s property  trustee owes
fiduciary duties.
Long recognised that director is not a trustee
Sealy (1967)
- Trust terminology because distinct fiduciary concept not yet developed
- Difference in function between director and trustee
But director is still a fiduciary
- Director has control (but not ownership) of property/assets in which
others have interest  fiduciary duties  fiduciary
- Similarities with duties of trustee but not identical, reflecting different
roles and responsibilities
Statute now imposes ‘general duties’, but applied, developed and enforced as if it
still fiduciary duty.
A. Duty to act within powers
1. Duty to act within powers: s. 171
Directors must act in accordance with the company’s constitution: s. 171(a)
(Requires directors to observe any limitations under articles).
Act by director outside powers given in the articles may still bind the company but
will be breach of duty under s. 171(a) (See later (Part 7) on company contracts)
 Directors must only exercise powers for purposes for which conferred: s.
171(b)
Origins: “Proper Purposes” rule  Re Smith and Fawcett
It is still a breach even if directors thought action in best interests of company
Punt v Symons & Co  Invalid allotment of shares when made to secure approval of
resolution in support of directors’ actions
Hogg v Cramphorn Invalid allotment of shares when made to defeat takeover bid
2. Identifying the ‘proper purpose’ for s. 171(b)
What is the ‘proper’ purpose? What if more than one purpose?
See Howard Smith v Ampol: Identify power - Ascertain limits within which may be
exercised- Identify “substantial” purpose for which it was exercised
 Court will give credit to bona fide opinion of directors and respect judgment as to
matters of management
 But court will look at situation objectively and doubt/discount assertions where
appropriate
 See if that substantial purpose is within the limits
Existence of ‘proper’ subordinate purpose does not rescue a power exercised for an
improper substantial purpose
 Eclairs Group v JKX Oil
3. Applying the proper purpose test
Howard Smith v Ampol  Shares allotted to raise capital but allotted so reduced
proportion of shares held by those threatening takeover. Held: substantial purpose
was to prevent takeover therefore allotment invalid
Extrasure v Scattergood  Transfer of assets from one company to another in-group.
Held: power was the power to deal with company’s assets; proper purpose was for
company’s survival and interests; here substantial purpose was to benefit other
company in group so improper purpose
But see Eclairs Group v JKX Oil  Board imposed restrictions on shares (using
statutory power arising when shareholders fail to respond fully to request for disclosure
of information about interests). Did so not simply to ensure information obtained but as
weapon against shareholders (who failed to provide disclosure) suspected of intending
to raid co.
 First instance: proper purpose test applied; substantive purpose was improper so
invalid exercise of power
 CA: majority held proper purpose test did not apply when exercise of power
resulted from shareholders’ own failure to comply; valid exercise of power
B. Duty to promote the success of the company
1. Duty to promote the success of the company: s. 172
Director must act in way he considers, in good faith, would be most likely to promote
success of the company for the benefit of its members as a whole,
Having regard to—
(a) long term consequences of action
(b) interests of the company’s employees
(c) the need to foster business relationships with suppliers, customers etc.
(d) impact on the community and the environment
(e) desirability of company maintaining reputation for high standards of
business conduct
(f) need to act fairly between members
Fundamental and flexible duty: Item Software v Fassihi
2. S. 172: a subjective test
Did director act in way that he, in good faith, believed to be best for company? : Re Smith
and Fawcett  Not questioning genuine management decisions (Charterbridge
Corporation Ltd v Lloyds Bank)
Not about imposing court’s view: Regentcrest v Cohen
Regentcrest v Cohen: Directors waived claim against one of number; directors honestly
believed it in interests of the company so to preserve unity at time of financial difficulty
Held: subjective test. Not about whether action was best for the company (or whether
court would have taken different decision) but whether director believed it best for the
company. But did recognise that action may be so manifestly unreasonable as to cast
doubt on director’s stated belief
 Unless extreme decision, will be very difficult to challenge director’s subjective
view
3. S. 172: promoting the success of the company
Previous formulation required directors to act ‘in interests of the company’  the
company’s own separate interests, or interests of members as a group, or both? See e.g.
Gaiman
S. 172 incorporates dual nature of the company as separate entity and association
of members
 “promote the success of the company”
 “for the benefit of its members as a whole”
a. For the benefit of the members
Benefit of members as whole, not individual members And directors must have
regard to need to act fairly between members of a company (s. 172(1)(f))
‘Benefit of members’ still flexible  S. 172(1)(a) recognises importance of long-term
consequences
S. 172(2) recognises company may be established for purposes other than benefit of
members; if so subs (1) read accordingly
 Where company established for more than one purpose, director must conduct
balancing exercise
 e.g. Stimpson v Southern Landlords
b. S. 172: taking other interests into account
When considering how best to promote success of company for benefit of members,
directors must have regard to:
(a) long term consequences of action
(b) interests of the company’s employees
(c) the need to foster business relationships with suppliers, customers etc.
(d) impact on the community and the environment
(e) desirability of company maintaining reputation for high standards of
business conduct
(f) need to act fairly between members
S. 172 provides non-exhaustive list “... amongst other matters...”
“Enlightened shareholder value”, not stakeholding  Obligation still owed to company;
no duties owed to (even expressly included) constituents: Ensures directors are
accountable (‘responsibility to all = accountability to none’)
 Educational rather than restrictive in essence
3. Interaction of s. 171(b) and s. 172
S. 171(b) and s. 172 now distinct duties
Pre-2006 formulated as one: Re Smith & Fawcett
Directors can breach both (s. 179) or one or the other
 Can breach s. 171 despite acting in good faith to promote success of
company: S. 171 provides objective back-stop, even where directors acting in
what they considered best interests of co (E.g. Eclairs Group v JKX Oil)
 Can breach s. 172 even if acting within scope of powers, if not acting to
promote success of company: S. 172 is a fundamental and overarching duty
C. Duty to exercise independent judgment
 Duty to exercise independent judgment: s. 173
Based on duty not to fetter(limit) future judgment: E.g. Boulting
 Directors must exercise independent judgment: s. 173 : Directors must not enter into
contract that prevents later consideration of duties
But s. 173 does not prevent directors making decision to bind company to future course
of action even though this will restrict future decisions
Fulham Football Club (following Thorby v Goldberg): Directors agreed company
would support planning application if made. Then wanted to oppose application;
claimed agreement not binding as fettered discretion. Held directors had not fettered
discretion; had exercised discretion properly at earlier point, which bound company to
course of action.
III. Sections 175-176
A. Duty to avoid conflicts of interest
1. Duty to avoid conflicts of interest: s.175
Director 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
(s. 175(1))
Applies in particular to the exploitation of any property, information or opportunity of
the company (s. 175(2))
 The ‘corporate opportunities doctrine’
Origin = fiduciary principle not to permit conflict of director’s interests with those
of company
 Aberdeen Railway v Blaikie Bros; Bray v Ford
At common law, two related rules : ‘no conflict’ (must not allow conflict of interests) and
‘no profit’ (must not profit from position)
 S. 175 does not distinguish between the two rules
 Instead different situations split between ss. 175-177
2. Situations where s. 175 will not apply
There is no breach if the situation cannot reasonably be regarded as likely to give
rise to a conflict of interest (s. 175(4)(a))
 “a real sensible possibility”: Boardman v Phipps
No breach if the directors have authorised the arrangement (s. 175(4)(b))
 See later on authorisation
S. 175 does not apply if the conflict arises because a director is entering into a
contract (or other arrangement) with the company or has an interest in such a
contract  In this situation s. 177 applies instead (s. 175(3))
3. Conflict of interests: strict approach
Director must not use corporate property, information or opportunities for his
own benefit (now s. 175(1)-(2)) Strict application: fiduciary principles
Regal (Hastings) v Gulliver: Vendor of cinemas required purchasing company
(subsidiary of RHL) to have paid-up capital of £5k. RHL couldn’t take up £5k but took
£2k; rest taken up by directors and others. Cinemas bought then sold as a going
concern. Profit made by RHL, directors and others. RHL (under new controllers)
brought action against former directors to recover profit
a. Regal (Hastings) and the House of Lords
Held: directors used knowledge and opportunity gained through position and
made profit therefore liable
It is irrelevant that: Directors had acted in good faith; Company could not take
advantage of opportunity; Company could have ratified actions; new shareholders
obtained windfall.
Strict application means no need to consider motive; clear deterrent to selfserving behaviour by directors
“The rule … in no way depends on fraud, or absence of bona fides …. The liability arises
from the mere fact of a profit having, in the stated circumstances, been made. The
profiteer, however honest and well intentioned, cannot escape the risk of being called
upon to account.” (Lord Russell)
b. S. 175: some classic cases
 Clear misappropriation of company opportunity
Cook v Deeks: Directors formed new company to take over contract of old company.
Held: opportunity came to directors in their capacity as such and must be held for the
old company  “[Those] who assume … control of a company’s business must
remember that they are not at liberty to sacrifice the interests which they are
bound to protect …”
 Making use of information obtained as director
Industrial Developments v Cooley: C approached in his capacity as director of IDC. It is
Irrelevant that company unlikely to have been able to take on opportunity  “… a
deliberate policy and course of conduct which put his personal interest … in direct
conflict with his pre-existing and continuing duty as managing director …”
c. Willingness to take a more flexible approach?
Might the court be prepared to examine the situation more closely to see if genuine risk of
conflict?
 Lowry & Edmunds argue in favour of more flexible approach
What if there is no ‘maturing business opportunity’?
In Canadian Aero Service director liable on facts but court held various factors to
consider: position or office held, nature of the corporate opportunity, knowledge
possessed, circumstances in which obtained, whether it was special or private,
termination of the relationship with the company
See also Island Export Finance Ltd v Umunna
What if opportunity rejected by company?
In Peso Silver Mines v Cropper director could take on opportunity when board had
rejected it in good faith
d. S. 175: return to a generally strict approach?
 Strict obligation
Bhullar v Bhullar: Directors bought land that would have been of interest to company.
Held: directors obliged to communicate existence of opportunity to the company;
even though knowledge of opportunity came to directors outside scope of
directorship
 Requiring undivided loyalty
O’Donnell v Shanahan: Irrelevant that company might not have been interested in
taking up opportunity; director still has obligation to inform company
 And duty to inform company that director has breached duty?
Item Software v Fassihi: Duty under s. 172 requires director to inform company of his
own breach of duty
3. Continuing duty after resignation
Duty continues after resignation: s. 170(2)
Director is subject to the s. 175 duty even after ceases to be a director in relation
to the exploitation of any property, information or opportunity of which became
aware at a time when he was a director
Cannot avoid breach by simply leaving and then taking up opportunity  e.g. IDC v
Cooley
But cannot stop director moving on to new positions and using own skills. Law needs to
balance protection of company with freedom of director to exploit own knowledge and
abilities
4. Resignation and s. 175
Breach depends on director’s conduct and intentions prior to departure
 Balston Ltd v Headline Filters: No breach: H decided to make product only after
departure
 CMS Dolphin v Simonet: Breach: although S could pursue opportunity after
departure, provided did not leave in order to take up opportunity, on facts was clear
continuity of work

What steps did director take before departure?
Took active (even if preliminary) steps: Shepherds v Walters; Colman Taymar v
Oakes
No active steps: Foster Bryant v Bryant
Nuanced approach welcomed e.g. Lowry & Sloszar
5. S. 175: authorisation
Cases suggested that no breach if Board authorised director to pursue
opportunity E.g. Queensland Mines v Hudson. This so even though breach would
have needed ratification by company in general meeting, not board
Recognised by statute:
 No breach if authorised by Board: s. 175(4)
 Private company: can authorise provided not prohibited in articles
 Public company: needs provision in articles
 If authorised then no requirement of shareholder approval
 S. 180(1)(a)
Provision pragmatic but has received some criticism
 e.g. Hannigan
B. Duty not to accept benefits
1. Duty not to accept benefits from third parties: s. 176
 Part of no conflict-no profit principle
 Overlaps with s. 175 ; can breach more than one duty: s. 179
Benefit must be conferred by reason of being a director or doing (or not doing)
anything as a director
E.g. Boston Deep Sea Fishing v Ansell: Dr of BDSF received commission on orders
placed for company; also, as sh/hdr of another company, received bonus for obtaining
orders for company from BDSF. Had to account for both commission and bonus.
 Prevents bribes etc. Bribes also criminal offence under Bribery Act 2010
No breach if benefit not reasonably regarded as likely to give rises to conflict of
interest (s. 176(4)); would exclude trivial benefits
Duty continues notwithstanding resignation: s. 170(2)
2. Can breach of s. 176 be authorised?
S. 176 does not provide for authorisation by board but there is overlap between s. 176
and s. 175  S. 175 allows authorisation by board
It would seem that transaction falling within s. 176 not capable of authorisation
under s. 175: Remains possibility of ratification (by company in general meeting)
if ratifiable breach
(See later on ratification)
IV.
Transactions with the company; remedies and relief
A. Duty to declare interest
1. Duty to declare interest in proposed transaction or arrangement:
s. 177
If director has interest in contract with the company, then clear conflict of interest: “selfdealing”  E.g. Aberdeen Railway v Blaikie Bros
Company entered into contract with partnership; same person was director of company
and partner in partnership; contract voidable  despite being a conflict of interest
this situation is excluded from s. 175 (s. 175(3))
S. 177 requires a director who is directly or indirectly interested in a proposed
transaction or arrangement with the company to declare the interest to the other
directors. This reflects position pre-2006, where companies’ articles routinely allowed
director to disclose interest to board in advance and so ensure no breach of duty
2. S. 177: nature of declaration
Must declare interest to other directors
 Must be of any interest, direct or indirect
 Must be of the ‘nature and extent’ of that interest
Declaration can be made: in meeting, by notice in writing, by general notice. Further
declaration must be made if circumstances change (s. 177(3)) and the Declaration must
be prior to transaction (s. 177(4))
3. When is declaration under s. 177 not necessary?
The declaration is not necessary if:
-
Other directors aware of interest: s. 177(6)(b)
the director not aware (and did not ought reasonably to be aware) of
transaction: s. 177(5)
cannot be reasonably regarded as likely to give rise to a conflict of
interest : s. 177(6)(a)
company has only one director - there are no ‘other directors’ for
declaration to be made to - But director must still comply with other
duties e.g. s. 171 & s. 172
Also note s. 231 if contract is with sole member who is also a director: Contract must be
in writing or terms set out in a written memorandum or recorded in the minutes of the
first meeting of the directors after contract. Failure to comply is offence by every officer
of company in default but validity of contract not affected (s. 231(3)-(6))
4. What is the effect of s. 177?
If director discloses interest in accordance with s. 177 there is no breach of duty:
Contract cannot be set aside; but If director fails to disclose under s. 177: Contract
voidable. In this case the company has choice whether to avoid or affirm; however the
company cannot avoid if undue delay, or restitution impossible, or third party rights
have intervened
The Director is liable for profits he has made, or for losses incurred by company
as a result of failure to disclose
New duty to disclose arises under s. 182
5. Interest in existing contract: s. 182
S. 177 applies only to ‘proposed’ transactions or arrangements, does not apply once
contract entered into by the company
S. 182 requires declaration to directors from the Director who has interest (direct or
indirect) in transaction or arrangement entered into by the company must make
declaration of nature and extent of interest to other directors as soon as reasonably
practicable. It is a Criminal offence to fail to do so.
However if has made declaration under s. 177, does not need to make further
declaration under s. 182
B. Substantial property transactions
1. Substantial Property Transactions
Normally self-dealing requires disclosure to board (s. 177). But if relates to a
substantial property transaction, then requires shareholder approval: s. 190
S. 190 applies where director or connected person acquires a “substantial non-cash
asset” from the company, or the company acquires such from the director or connected
person
So requirements of a Substantial Property Transactions are:
1. Acquisition or sale of property/interest
2. Where that is a ‘substantial non-cash asset’
3. Between co and director/connected person
2. When does s. 190 apply?
S.190 applies if sale or purchase by company of substantial non-cash asset
to/from director or connected person
 Only applies if a substantial non-cash asset. A Non-cash asset is any
property/interest other than cash (s. 1163) and Substantial (s. 191): means “of
value that exceeds either
 (a) 10% company’s asset value and exceeds £5k, or
 (b) £100k”
 Only applies if transaction concerns director or connected person. Connected
person is define in ss. 252-6 and includes members of director’s family (spouses,
children, parents etc.), partners, connected companies, connected LLPs etc.
3. What does s. 190 require?
Director must obtain approval of shareholders, disclosure to the Board is insufficient
(E.g. British Racing Drivers Club v Hextall Erskine) - Shareholders must approve allimportant terms (E.g. Demite v Protec Health).
 Example of application
Re Duckwari plc.: O Ltd contracted to buy development property for £495k. C (dr of O
Ltd and D plc.) offered to pass it on to D plc. at cost, with C to receive 50% of any profits
on development. Board of D plc. accepted offer; not approved by sh/hrs. D plc. bought
property then market fell; D plc. sold off property for £177k.
Held: C, other directors of D plc., and O Ltd (connected person) all liable for full
loss to D plc.
4. Effect of Substantial Property Transactions

Failure to comply: Effect on transaction
Transaction voidable (s. 195(2)), unless restitution is not possible, the company
has been indemnified or a Third party rights would be affected
If transaction subsequently affirmed by general meeting “within a reasonable
period”, then transaction no longer voidable: s. 196

Failure to comply: Liability
Director/connected person liable to account for any profits made and indemnifies
company for any loss (s. 195(3)).
Unless connected person can show he did not know the relevant circumstances
constituting the contravention: s. 195(7)
Liable for full loss, even that caused by depreciation  Re Duckwari
5. Exceptions to SPT provisions

Statutory exceptions to rule (s. 190-194):
1. Certain group transactions:
-
Transactions between holding company and wholly-owned subsidiary
Transactions between 2 wholly-owned subsidiaries
2. Transactions between company and person in his capacity as member of the
company
3. Transactions on recognised investment exchange through independent broker
4. Transactions relating to entitlements under director’s service contract or for loss
of office
5. Transactions where company in winding-up/administration
C. Loans, quasi-loans etc.
1. Loans, Quasi-loans & Credit Transactions
These transactions require the approval of members
Loans: s. 197 are available for all companies  Loans to director (or giving of
security/guarantees in connection with a loan)
Quasi-loans: s. 198 are available for public companies only  Quasi-loans to
director/connected person
A quasi-loan is an arrangement where company meets some financial obligation of
person on understanding that it will be reimbursed later: s. 199
Credit Transactions: s. 201 are available for public companies only  Credit
transactions to director/connected person. Credit transactions include hire purchase,
conditional sale agreements etc.: s. 202
Effect of breach as for SPTs
2. Exceptions to the loan etc. provisions
-
Loans to meet expenditure on company business up to £50k: s. 204
Loans to fund defence of legal proceedings for breach of duty in relation to
co (provided to be repaid if director loses case): s. 205
Loans to fund defence of investigation or action by regulatory authority: s.
206
Loans or quasi-loans up to aggregate total of £10k: s. 207; credit
transactions up to total of £15k
Credit transactions in ordinary course of company's business on normal
terms: s. 207
Intra-group transactions: s. 208
Loans or quasi-loans made by moneylending company in ordinary course
of business on normal terms: s. 209
Homeloans made by moneylending company in ordinary course of
business for borrower’s principal private residence on normal terms for
employees: s. 209
D. Remedies and relief
1. Remedies for breach of duty
Remedies not codified – look to existing principles: s.178
Remedies (as appropriate)
- Return of company’s property taken in breach of duty : JJ Harrison (Properties)
Ltd v Harrison
- Account for profits made through breach: Guinness plc. v Saunders ; Murad v
Al-Saraj
- Liability of stranger (recipient/accessory liability): Third party may be liable if
received property transferred in breach fiduciary duty e.g. Belmont, or if
dishonestly assisted in breach
- Recission of contract: Contract in breach of fiduciary duty is voidable
- Equitable compensation: Gwembe Valley Development Co Ltd v Koshy
- Common law damages for loss
2. Relief from liability: ratification
Duties owed to the company, so the company can choose to accept breach;
Acceptance must be by shareholders (unless falls within s. 175 or s. 177 where
authorisation/disclosure to directors). It is only effective if full information given and no
oppression: North-West Transportation v Beatty
May authorise breach in advance: s. 180(4); if so then no breach of duty arises 
Sharma v Sharma
Or ratify breach after event: ratification s. 239
 Must exclude votes of director/member and connected members
 May be non-ratifiable breaches e.g. causing unlawful act: Re Exchange
Banking Co; misappropriation of company’s money: Cook v Deeks ; this
preserved by s. 239(7)
The Distinction between ratifiable and non-ratifiable breaches criticised e.g.
Worthington
3. Relief from liability: exclusion of liability
 Statute prevents contracting out of liability: s. 232
 Provision purporting to exempt director from any liability resulting from
negligence, default, breach of duty or breach of trust is void
 But some indemnification provision permitted
 Qualifying third party indemnity provision: s. 234
 Qualifying pension scheme indemnity provision: s. 235
4. Relief from liability: relief by the court
 If court considers director acted honestly, reasonably, and ought fairly to be
excused may relieve the director in whole or in part
 S. 1157
 Test of honesty and reasonableness essentially objective
 Coleman Taymar accepted honesty could be subjective but Bairstow of
view that both elements objective
 Director can choose to apply in advance of any claim against him
 Application by the courts
 Dorchester Finance Co Ltd v Stebbing (director had not acted ‘reasonably’)
 Re D’Jan of London (although negligent, director had acted
‘understandably’ i.e. honestly and reasonably)
 See also Re Duomatic
 Applies to all breaches of duty
 Except, arguably, wrongful trading
 Re Produce Marketing
E. Enforcing directors’ duties
1. The problem of enforceability
 Establishing breach duty and likely remedy only the start
 Often problems of enforcement
 During life of company
 Directors have powers of management
 Shareholders have very limited ability to act in respect of wrongs
done to the company
 See Part 6
 On liquidation
 Liquidator may be able to take action
 Misfeasance procedure
 Wrongful/Fraudulent trading: see Part 11
 Disqualification: see Part 11
2. Misfeasance Procedure: s. 212 IA
 S. 212 applies where:
 Company in winding up
 Officer of co has misapplied, retained or become accountable for any
money/property of the co, or
 Officer of co guilty of any misfeasance or breach of fiduciary or other duty
in relation to co
 Application made by:
 official receiver or liquidator or creditor or contributory
 Procedural provision:
 summary remedy, no new right/liability: Bentinck; Cohen
 Still have to show breach of duty under general law: DKG
 Court can order contribution to assets by way of compensation as it thinks fit: s.
212(3)