Directors’ Duties in the UK
You are expected to research a specified topic reading and interpreting cases, journal articles and law reform policy reports. You are also expected to analyse the effect and operations of these laws and policies on companies and their stakeholders and you are expected to report on corporate legal issues using a Report format.
The duties of the directors are those recommendations that are enforced on directors through laws in relation to the procedure of carrying out their actions. These duties of the directors have come from the provisions of common law and these provisions are the part of many of corporate legislations all over the world. The basic purpose of these duties is to assure that there is no misuse of the powers that they have been provided with by the directors and they should be assured with integrity, honesty, care, and diligence and must be genuine with their intentions towards the company. The section 172 of the Companies Act 2006 (CA 2006), it belongs to the United Kingdom and there are some laws that have been included in the companies of the country. If the company adopts these legislations of this section then it will be able to include the factors that are non-exhaustive that have to be considered by directors to encourage the achievement of the company. However, the question that has risen over here is whether Australia by the Corporation Act 2001 (Cth) must adopt the provisions that have been set out in section 172 in relation to section 181 that enforces the same director’s duties.
According to the section 172 of CA 2006, there is a negotiation among the approach of pluralistic stakeholders that makes directors consider the stakeholders by taking legal decisions and the basic approach of the shareholders that puts emphasis on the apprehension of the market. This section simplifies the directors’ duties to pursue and assure the achievement of the company. This section provides them with directors’ actions of the company must be bonafide that will help in the promotion of the company. Relatively, the directors of the company must consider the effects of the decision and interest of the employees who work in the company. However, it does not mean that decisions that are made by the directors are not challengeable. It helps in developing the relationship of the customers with the company and the suppliers and the impression that the company has in public while maintaining the reputation and to deal with the members of the organization. The requirements of this section have been closely examined the lays down the recent business practices and the legal provisions that are available and in general they are applied to all the corporations in the whole world. The duties of the directors of the general laws are reinforced through the statutory duties. This is because of the fact that fiduciary law has the aim to prevent inappropriate manner rather than the remedy of the consequences.
Section 172 of the Companies Act 2006
According to this section, it has been explained that the directors are required to consider stakeholders’ interest when this interest has complied with the shareholders’ interest. Milman (2017) has pointed out that this section presents a move from “permission to obligation” while demonstrating the ancient common law as given in the case named Hutton v West Cork Railway Co (1883) 23 Ch D 654 to provide the directors with the permission in consideration with the interest of stakeholders although the actions are basically for company’s interest. The dominant obligation that has been provided in section 172 the interest of the company in compliance with the obligations, there must be some considerations that the directors should take that is the non-exhaustive factors. An argument was made by Flower that this section does not provide the stakeholders with the individual value that is present under the approach of the pluralist. Under the section, there are some tests that assure the dominance of shareholders over stakeholders that prevail strongly and therefore the narrow view of the CSR has been clearly portrayed. There are various cases that have interpreted this section and have an opinion that it does not come under the part of CA 2006 through the litigation the parliament want to address like in the case of R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020. Further, there was an argument made by Wells (2015) that there was an essential issue with the necessities of section 172 with respect to increasing the factors, objectivity is needed, no remedial right and in the decision making of the business, there must be some judicial reluctance. The ethical part of this section is different to the one that is provided and it also explains that “A profession that is liable to all is basically liable to none.”
Like that of United Kingdom, in the other way Australia has taken the review with respect to the governance of corporate has taken the initiative to meet the crisis of the corporate governance as stated in the Enron Case. There were two reports that have been published by the country with respect to Corporate Social Responsibility which states that ‘Enlightened Shareholder Value’ approach has been rejected. An argument was made which laid down the emphasis on “soft law“. The main section that resembles the section 172 in Australia is the section 181 of the CA 2001. This section provides that the director’s duty is to act bona fide and for a good use. For the purpose to search whether the duties of the directors in Australia or to be said that the section 181 of the CA must be amended and the main requirement is to know the duties of the directors that are contemporary and are present by the general statute and law. The powers of the shareholders are not limited and the directors’ power is extensive in the country named Australia. The courts had to take the decision to spread the powers widely to the directors to manage the organization. The court confirmed according to the case named Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. that the law gives the directors the power to decide that does not comply with the desire of the shareholders. The same thing has been provided in the case named Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1 and it explains that directors’ decision cannot be overruled by the purpose of its members where the powers were granted to them to manage company’s affairs. However, it does not state that the directors’ decisions cannot be tested. This can be done by imposing the section 180- 184 of the CA 2001. The interest of the company is focused on the duties that are given in section 181. Various requests have been done to amend the statutory duties so that they can make it clear that the directors can consider the activities and interest of the stakeholders. The codification of the duties of the directors was introduced first in the legislation of Australia through the Companies Act 1958 (cth) and it was the first type that came into the English speaking world. Under Corporate Social Responsibility according to the case named Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17, there was a statement that was presented by the court the directors will be responsible to breach the duty provisions that did not consider the maximization of profit. It has also been said that an avenue has been provided for the government through Australian Securities and Investments Commission (‘ASIC’) to enforce the breach of the duties of the directors. The ways of dealing with corporations with the corporate social responsibility have changed since many years and it is still coming up. The organizations have taken the corporate social responsibility truly. There was an argument that was held by Milton Friedman is that the companies who are in relation to corporate social responsibility have their profits maximized. Afterward, this statement was critically analyzed and it was stated that these corporations must make their profits at every cost. In order to make their profits maximized, the companies should take all the interest of the stakeholders into considerations. There are various reasons of why the corporations consider the interest of the stakeholders. It will help them in gaining benefits financially and being attentive towards the consumers will make them learn and innovate new products. It may increase the competitiveness of the company. If a company is a “good corporate citizen” then it may result in goodwill and public approval may also increase. It may also result in a positive way if the interest of the employees is taken into consideration .
Section 172 – Dominance of Shareholders
In order to consider the interest of the stakeholder by the directors, in Australia, there were no appellate decisions made in respect to the degree. However, the company might be liberal with the people who are in relation to it and so the company must do this while assuring that it is getting his own interest. The section 181 of the Corporation Act 2001 does not provide the directors’ obligation to another stakeholder. It has also been stated by Flower that there is the major advantage that this section provides is the flexibility that is provided by it . The replacement of the provisions of section 181 of the Corporation Act 2001 with the provisions of section 172 of the Corporation Act 2006 will be having some negative impact on the community of Australia. For example, the organization may prevent from choosing Australia as an incorporation place. Further, it has been stated that it may have a negative impact on the confidence of the investors if these provisions do not consider the shareholders’ interest. The investors of Australia have recently known that their currency is transferred in the direction of their own advantage and if any change is brought then the shareholders’ confidence will be affected. Further, it has been stated that the provisions of section 172 do not operate to assure the interest of the stakeholders as it has been discussed before and therefore there is no worth of its addition. In addition, there was an argument by Glover (2016) which stated that the enforcement of the duties through the section 172 might prevent the people who are talented from performing as directors. In a similar manner if this section is applied it might lead to an opinion that the legal proceedings might be simply originated against the directors for the decisions that are made by them and afterward thee business growth stays still. In the provisions of the sections that are introduced in the system of Australia, there might be some reductions in the accessibility of the insurance.
There must be no amendment of section 181 of the CA as in the same manner of section 172 of the Companies Act. The directors of the company are the guardians of the money of shareholders. Further, it has been stated that the duties of the directors have been brought up to protect the interest of the shareholders. Section 181 needs all the directors to perform in compliance with corporation’s interest and their purposes. If any of the stakeholders are not mentioned then it cannot be thought that the directors will not take any interest in them. In order to make the company in the long run then the directors of the company should take the interest of the other stakeholders into consideration. There are some directors who do not act well and are breaching their duty and are not managing the risk properly are stated to be in breaching because of diligence duty as mentioned in section 180. There are several companies in Australia indulge only to gain their profits and not looking at the stakeholders’ interest. These actions will result in negative aspect of the company. By not regarding the stakeholder’s interest, it will not only result in the argumentative reaction but also some litigations, government inquiries, and regulatory interventions. The section 181 of the Corporation Act 2001 has been criticized and it has been stated that they do not provide them with the obligations to other stakeholders of the directors. The major advantage of this section is the elasticity that has been given to it. The decisions that are made by the directors are best for the interest of the company. The directors of the company are the experts and are more knowledgeable in the making of the decision.
Cases Interpreting Section 172
The directors have been provided with flexible authority to adopt the changes and values and the expectations of the community. There was an essential issue with the necessities of section 171 of the Corporation Act 2006 with respect to increasing the factors, objectivity is needed, no remedial right and in the decision making of the business there must be some judicial reluctance. Further, this section contains various concepts and phrases that have not been tested by the court and they seemed to be unclear. Furthermore, the prescribed interests that have been listed which the directors should consider sums up with the process of decision making and adds a little benefit to it. Worst of all, the liability of the directors in respect to the company is concerned by the list of interest that has been prescribed that provides them with the threat the enforceability of duty. Although Corporation Act is an easy target, it not the correct place to consider the interest of the stakeholders by business. No such reason has been provided to the stakeholders to oblige and to apply to new companies and not on another business entities. Therefore the idea to alter section 181 of the Corporation Act 2006 must not be taken into consideration as it is sustained by some strong reason and must be correctly repelled.
Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17
Coffee Jr, John C., Hillary Sale, and M. Todd Henderson. “Securities regulation: Cases and materials.” (2015).
Deegan, Craig, and Marita Shelly. “Corporate social responsibilities: Alternative perspectives about the need to legislate.” Journal of Business Ethics 121.4 (2014): 499-526.
Du Plessis, Jean Jacques, Anil Hargovan, and Jason Harris. Principles of contemporary corporate governance. Cambridge University Press, 2018.
French, Derek, et al. Mayson, French & Ryan on company law. Oxford University Press, USA, 2014.
Gerner-beuerle, Carsten, et al. “The Law Applicable to Companies in Europe: Study and Possible Reform.” European Company Law 14.4 (2017): 148-149.
Glover, John. “Public Officials, Public Trusts and Fiduciary Duties.” Fiduciary duty and the Atmospheric trust. Routledge, 2016. 79-108.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Hutton v West Cork Railway Co (1883) 23 Ch D 654
Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1
Kraakman, Reinier, and Henry Hansmann. “The end of history for corporate law.” Corporate Governance. Gower, 2017. 49-78.
Kraakman, Reinier, and John Armour. The anatomy of corporate law: A comparative and functional approach. Oxford University Press, 2017.
McLaughlin, S. (2015). Unlocking company law. Routledge
McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920. Routledge, 2016.
Milman, David. “Stakeholders in modern UK company law.” Sweet and Maxwell’s Company Law Newsletter 397 (2017): 1-4.
Phillip Lipton, and Abe Herzberg, Understanding Company Law, (18th edition. Thomson Reuters, 2015)
Puchniak, Dan W., and Cheng Han Tan. “Company Law (2015).” (2016).
R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020
Schwartz, Mark S. Corporate social responsibility. Routledge, 2017.
Shepherd, Chris, and Ann Ridley. Company Law. Routledge, 2015.
Wells, Philip J. “Executive remuneration: regulatory reforms in UK company law.” International Journal of Law and Management 57.4 (2015): 300-339.
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