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In 1980, the enactment of the unfair prejudice remedy and the subsequent dynamic case law development has added a fresh air to the old ideas concerning directors’ duties. Unfair prejudice law becomes a very broad type of directors’ duty.
B. Directors’ duties
The director’s duties are usually considered when a company fails for some reason. When a company becomes insolvent or is liquidated, for instance, questions may be asked about the reasons for such a failure. In such circumstances, the actions of the directors will inevitably be examined, questioned and challenged. As a result, the duties of directors have primarily been sculptured by judges, because of legal action taken by parties that have suffered a loss.[14]
The following duties represent the present liability that directors face in a personal capacity:
a. Fiduciary duty
Each director owes an individual duty to the company to act in the best way they can in the interests of the company. The scope of an individual director’s duty will, in part, depend on their role within the management of the company''s affairs. It is possible for a director to breach this duty if they knew of the likely serious consequences of their failure to act for the company.
This fiduciary duty is subject to two levels of legal analysis, depending on the nature of the duty. Directors have two types of relationship with their company: Directors act as trustees when they manage corporate funds. Alternatively, when agreeing and implementing a corporate strategy, directors act as agents of the company. In both instances, a director is required to exercise reasonable commercial judgement in acting on behalf of the company. Whilst a director must take a prudent approach towards their duties as a trustee, they can commit the company to dealings that might involve a commercial risk when acting as an agent. Regardless of which type of duty applies to directors, should the company be liquidated, the liquidator can enforce any breach of fiduciary duty by beginning proceedings against directors under s212 of the Insolvency Act 1986. The main types of fiduciary duty directors owe a company are as follows:
l Directors’ duty to the company’s creditors
The orthodox position, is that directors owe their fiduciary duties to the company though not to the creditors, present or future.[15] However, there is support for treating creditors in the same manner as shareholders, ie for defining the duty to act bona fide in the interests of the company as encompassing creditors’ interests in some circumstances.[16] Directors must be careful not to trade wrongfully under the Insolvency Act 1986, s 214. If a company is trading at a loss, the directors could be failing to minimize the loss to creditors. Failure to act or failing to attend a board meeting in such circumstances could make the director liable. Where a company is insolvent, creditors will take priority over the shareholders.
An example from the law reports is the case of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. Dodd was a director of two companies, a holding company and a subsidiary. The subsidiary company owed the holding company £30,000. Dodd authorised the subsidiary to make a payment of £4,000 to the holding company. As a result of this payment being made, the subsidiary company went into liquidation. The liquidator sought to recover the £4,000 from Dodd. It was argued that the payment was a breach of Dodd’s duty to the creditors of the subsidiary company. The subsidiary was insolvent when the payment was made. The judge agreed that Dodd was in breach of his duty and was personally liable to the creditors for the £4,000. One further point can be made. Where there is a creditors’ voluntary winding up, a director is under a duty, by section 99 of the Insolvency Act 1986 to lay a statement of the affairs of the company before the creditors’ meeting and to attend the meeting.
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