Law, Society, and Economy: Centenary Essays for the London School of Economics and Political Science, 1895-1995

By Richard Rawlings | Go to book overview

4
Codifying Directors' Duties*

MRS JUSTICE ARDEN


INTRODUCTION

My purpose in this essay is to consider the case for codifying the duties of a director of a company. I will begin by summarising the fiduciary duties of directors as they stand at the moment. Obviously any discussion of the precise content of those duties could fill the whole of this essay on its own. I propose to work on the basis that the main features are as described in Gower Principles of Modern Company Law.1

That work states that there are effectively four rules. First, directors must act bona fide in what they consider is the best interests of the company, and those are the words used by Lord Greene MR in Re Smith and Fawcett Ltd.2 Directors therefore cannot use their powers to benefit third parties or themselves. Secondly, directors must exercise their powers for the purpose for which those powers are conferred. This requirement has been applied, for example, in relation to the power to allot shares. It is not enough that the directors consider that the allotment of shares will be in the company's interests. The allotment must be for one of the purposes for which the power is permitted to be exercised under the company's constitution. Thirdly, directors must not in general fetter their discretion. This means that they must not enter into an agreement with a third party as to how they will exercise their discretion. To do so would prevent them from exercising an independent judgment at the appropriate time.

Fourthly, directors must not place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the company, unless the company gives its informed consent. This rule means that directors must not enter into contracts with their company unless they make full disclosure of their interests and the company duly approves the contract. If the necessary disclosure is not made, the contract is voidable at the instance of the company unless the right to avoid has been lost under the general law. There is a second and separate aspect of

____________________
*
A revised version of a lecture delivered on 27 November, 1995.
1
5th edn. ( London, 1992) by L. C.B. Gower with contributions from D.D. Prentice and B. G. Pettet, Chapter 21, 550-572.
2
[ 1942] Ch. 304.

-91-

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