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First, directors should not profit personally when entering transactions on behalf of the company. Secondly, regardless of the nature of the transaction, it will be bad if it involved a director in a conflict between a personal interest and a duty to the company. The following considerations are relevant in this situation:
A company can only conclude a contract in which a director has a personal interest if there is a specific provision in the Articles or where the company approves the contract in a general meeting. In any event, a director must, by section 317 of the Companies Act 1985 declare the nature of their interest at a board meeting. A director is not permitted to retain a profit made as a result of the opportunities that have occurred because of their position in the company. It is irrelevant that the director, in making a profit for themselves, also made a profit for the company. This duty does not change if a director engineers a situation where they resign to avoid this duty. A profit can only be retained by the director if a resolution is passed to this effect in a general meeting or where the opportunity arose within the context of a personal capacity and not as a director.[19]
A director needs to make a full disclosure if they intend to sell their property to the company, otherwise the company can set aside the sale. Two further duties not mentioned in depth are: not to fetter directors discretion by, for instance, agreeing with an outsider to vote in a particular way at a board meeting, and to recognise directors have a collective responsibility towards the company’s members, not a duty to individual members.
b. Common Law Duties of Care and Skill
The common law duties of care and skill represent the courts’ attempts to regulate the entrepreneurial side of he director’s activities. [20]Directors, in performing their duties, are usually required to enter into business arrangements that carry an element of risk. Commercial reality is such that directors have to take a commercial view on some issues to provide for growth. In consequence, it is accepted that the duty of skill and care is less onerous than that of the relationship between trustee and beneficiary. During the past decade or so, the judges have widened the scope of the law as directors have been brought before them. A director is now expected to use reasonable care when carrying out the company’s affairs. The standard of reasonable care is more extensive for the executive director than the non-executive director. However, should a non-executive director be trusted in matters directly related to their personal expertise, they will be expected to exhibit a reasonable standard of care that is appropriate to their level of expertise.
One example from the law reports will illustrate this point. In the case of Dorchester Finance Co Ltd v Stebbing and others [1989] BCLC 498, the company had three directors, one of which controlled the affairs of the company on a full time basis. Of the other directors, one was a chartered accountant and the second had a considerable amount of experience in accounting. Both held non-executive appointments. These two directors were in the habit of signing blank cheques drawn on the company bank account. All three were held to be liable for the negligence and misappropriation of the active director, even though the non-executive directors acted in good faith. The judge considered there was a breach of the duty of care in this instance, because the non-executive directors (a) failed to attend board meetings, (b) failed to show an interest in the company’s affairs and (c) relied on the active director and company’s auditors.
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