Codification of Directors' Duties: An Act to Follow?

• Author: Fraser Dobbie
• Position: LLB Candidate: Law and Accountancy Programme, University of Edinburgh
• Pages: 13-29

CODIFICATION

OF

DIRECTORS'

DUTIES:

AN

ACT

TO

FOLLOW?

FRASER DOBBIE*

Introduction

Companies,

as

legal

persons,

have

capacity

to be

party

to

transactions,

however,

they

clearly

do

not

have the

ability

to

act

for

themselves.

For

a

company

to

be

bound

to

such

a

transaction

an

agent

is

required.

That

agent

normally

takes

the

form

of

the

board

of

directors] (or

a

delegate

of

that

board).

The

board

takes

this

function

due

to

the

obvious

inefficiency

that

would

be

caused

were every

shareholder's

consent needed

to

bind

the

company,2 which

would

be

impracticable

in

all

but

the smallest

of

companies.3

Although

it

is

obviously

necessary

to

have such

a

body

of

agents

it

is

also

essential

that they

are

not

able

to

abuse

their position

by

acting

for their

own

benefit.

Therefore,

the

law

must

find

a

balance

between

constraining

the

powers

of

directors

so

as

to

prevent

any

abuse

of

their

position,

whilst not

taking

away

from

the

efficiency that they

provide.4

Company

law

has

long looked

to

provide

a

body

of

duties,

restrictions, checks

and sanctions with

the

aim

of

striking

that

balance.'

This

article

considers

the

impact

of

the

recent

reform

to

UK company

law.

The

evaluation,

and

its

resulting

commendations

and

criticisms,

are

of

note

to all

common

law

jurisdictions

in

gauging

the

attractiveness

of

such

reform

and in

considering

the

means

by

which

it

may

be

carried

out.

LLB

Candidate:

Law

and

Accountancy Programme, University

of

Edinburgh.

John

de

Lacy, "The

Concept

of

a

Company

Director: Time

for

a

New

Expanded

and

Unified

Concept?" (2006)

JBL

267,

at

267.

2

Paul

L

Davies,

Gower

and

Davies

'Principles

of

Modern Company

Law

(7'h

ed,

Sweet

&

Maxwell,

2003),

at 370.

3

Blanaid Clarke,

"Corporate Responsibility

in

Light

of

the

Separation

of

Ownership

and

Control"

(1997)

4(1)

DULl

50,

at

56.

Ibid.

According

to

Clarke, this

balance

has

not yet

been

achieved. Clarke,

note

3,

at

76-

©

2008

Fraser Dobbie

and

Dublin University

Law

Society

Trinity

College

Law Review

Striking

the

Balance

An

effort

to

strike

a

balance

between

vigilance

and

efficiency

is

apparent

across

a

number

of

statutes

in

the

UK

such

as

the

Companies

Act

1985,

the

Insolvency

Act

1986

and

the

Company

Directors Disqualification

Act

1986.

This

effort

is

also

evident

in

a

plethora

of

cases

in

which

various

duties

and

restrictions

have been

progressively imposed

on

company

directors.

Further

restrictions

are

enunciated

in

the

corporate

governance

rules,

contained

in

the

Combined

Code

as

enforced

by

the

Listing

Rules.

6

It

has,

however,

been argued that

the

legislature's

attempts

to

provide a

sufficient

body

of

regulation

are

excessively

retrospective,

often

taking

place

in

the

immediate

wake

of

corporate

scandals.

7

This

retrospective

legislation

leads

to

a

regulatory

framework

which

is

relatively

rigid

and

often

vulnerable

to

imaginative interpretation,

particularly

with

regard

to

problems

which

are

not

envisaged

by

the

legislature.

This

is

particularly

evident

in

relation

to

overly

stringent accountancy

standards,

and

appears

to

have

the

effect

of diminishing

efficiency

in

a

company.'

It

is

important

to

note that

this

is

only one

of

many

issues

in

relation

to

standards

of

conduct

by

directors. Both this

and

further

issues

will

be

discussed

and

examined

in

this article.

The primary

rule

which

constrains

directors

is

found

in

section

303

of

the

Companies

Act

1985.

This

relates

to

the

premature

removal

of

directors

by

ordinary

resolution

in

a

general meeting

and also attempts

to

influence

the

conduct

of

directors

by

forcing

them

to

act

in a

way

that

is

satisfactory

to the

shareholders. However,

such

a

rule cannot

be sufficient

in

ensuring

that

directors never

step

over

the

mark

as,

in

most

companies,

the

shareholders

have

very

little

knowledge

of

the

minutiae

of

the

company's

dealings.

9

In

fact,

the

threat

of

loss

of

office

is so

slight

that

it

probably

has

no

major impact

on

the directors' decisions

as

they

are

made,

instead providing

a

mere

retrospective

remedy

to

the

diligent

shareholder.

Consequently,

there

are

in

place

a

number

of

directors'

duties. These

were

traditionally

based

in

the

common

law,

however,

they

have

recently

been

codified

in

the

Companies

Act

2006,

which

will take full effect

in

2008.

6

lbid,

at

61.

7

Christine

A

Mallin,

Corporate

Governance

(2

nd

ed,

Oxford

University Press,

2007), at

1-5.

Committee

on

the

Financial Aspects

of

Corporate Governance,

Report

of

the

Committee

on

the

Financial

Aspects

of

Corporate

Governance

(Gee,

1992).

9

Clarke,

note

3,

at

5;

Adolf

A

Berle and

Gardiner

C

Means,

The

Modern

Corporation

and

Private

Property

(2nd

ed,

Harcourt,

Brace &

World,

1968),

at

244-245.

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