A convenient way of describing a director’s position is in terms of his agency function in relation to a principal, the company, exercised collectively through a board, or when the other directors have delegated functions to him, an agency for the board. Reference to the duties of an agent, particularly a managing agent, will often provide an answer to a director’s own question,‘Have I done the right thing?’, although it should be noted that the director’s office is particular and analogies with agency or other single legal concepts are, by themselves, insufficient. These duties may be classified as follows:
(a) obedience to lawful instructions;
(b) care and skill;
(c) personal performance; and
(d) good faith.
However, because a director is invariably in control or possession of substantial company assets, duties over and above those of a mere commercial agent are imposed on him. These are so-called fiduciary duties, arising out of trust principles, and are considered in the next chapter. Throughout the discussion it should be remembered that both agency and fiduciary duties are overlaid by the express and implied terms of any employment contract under which a director is serving and by powers or obligations created by the company’s constitution and, of course, by statute.
An agent acting under an express or implied contract with his principal is bound to carry out his instructions, and not to depart from them unless given a discretion1 [1]. Where his instructions or authority are indefinite or loosely drawn, he discharges his duty by acting reasonably and in what he considers to be in the best interests of his principal.
[1] Fraser v B N Furman (Productions) Ltd [1967] 3 All ER 57,[1967] 1 WLR 898, CA.
In a simple case, applying these rules to company management, if a director
is authorised by his board to enter into a contract but only at a fixed price,
and he purports to bind the company to a higher price (either carelessly or
because, perhaps, he stands to earn commission from the other contracting party),
he will be liable for not conforming to his instructions even though the company
may have to accept the contract as negotiated. The absence of sufficient authorisation
is a personal breach of duty for which he may be censured (or even sacked),
although he may have the appearance of authority sufficient to validate the
transaction from the third party’s point of view. The sources and extent
of instructions are dealt with in the preceding chapter. Note that, except
in the case of reliance on a managing director acting with the delegated authority
of the whole board, a third party is unlikely to be able to claim the benefit
of CA 1985, s 35A or s 35B to validate a transaction wrongly effected by a single director,
since these provisions refer to acts of the board of directors as a whole.
In many instances the question of ‘obedience’ is answered not by
reference to particular instructions of shareholders or of the board (since
there may be none) but by the standing instructions represented by the memorandum
or articles of association. If, for example, directors exceed the stated borrowing
powers of the company then, irrespective of third party rights, they will be
in breach of duty as agents of the company. Conversely, where directors act
in conformity with shareholders’ instructions, they are not considered
in breach of duty even if their actions are commercially unsound: Multinational
Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983]
Ch 258,[1983] 2 All ER 563,[1983] BCLC 461, CA; although query whether they
would be liable for eg wrongful trading at the suit of a liquidator.
Disobedience implies a definite instruction to do something different. This
raises two problems. First, the board or a particular director may have, as
a matter of construction of the articles, a wide discretion to manage the affairs
of the company. If the discretion is exercised in a proper manner, but in such
a way as offends a section of the shareholders, can this be said to be disobedience?
The question was discussed in the previous chapter in the context of interference
by the general meeting in powers properly delegated to the board, and answered
in the negative: see Chapters 6 and 8. Dissatisfaction with management is not
a ground to impugn a company agent acting within his allocated powers, which
is why directors can weather the random hostilities of an annual general meeting
with relative equanimity, unless the business of the meeting includes a resolution
to dismiss them!
Second, suppose the shareholders complaining of the directors’ conduct
constitute a majority of the membership of the company. Are the directors entitled
to ignore their wishes on the grounds that their implementation is not in the
best interests of the company as a whole? Fifty-one per cent of the shareholders
effectively control the company, and may remove the directors by ordinary resolution,
if the latter refuse to carry out their lawful directions: CA 1985, s 303.
Nevertheless, if the directors act rigidly in accordance with the interests
of only a section of the membership (even if a majority), they are fettering
their discretion – a discretion held by them in trust for the company
as a whole – and may be liable to the minority in certain circumstances
of oppression or unfair prejudice. However, in relation to the preferment of
a large shareholders’ interest, in a general sense: per Denning MR in Boulting
v Association of Cinematograph, Television and Allied Technicians [1963]
2 QB 606 at 626, CA:
‘There is nothing wrong in it. It is done every day. Nothing wrong, that is, so long as the director is left free to exercise his best judgement in the interests of the company which he serves.’
Where a decision is to be taken which affects different groups of shareholders in different ways, the directors’ duty is to act fairly and strike a balance between them: Henry v Great Northern Rly Co (1857) 1 De G & J 606.
An agent must display such reasonable care as an ordinary prudent man might be expected to take in the same circumstances on his own behalf: Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425 at 437. He is not, however, liable for errors of judgement. Where an appointed agent professes a particular calling, e.g. solicitor, accountant or surveyor, he must show the degree of skill appropriate thereto: Hart and Hodge v Frame Son & Co (1838) 69 Cl & Fin 193, HL. In company law, this is particularly true of auditors. However, a directorship as such has not been regarded as a profession for the purpose of imposing a requirement to exhibit special skills, and in this sense the duties are less onerous than those imposed upon an agent bound to show such skill as is appropriate for the duties he has undertaken [1].
[1] See Chitty on Contracts (27th edn) vol. 2, paras 31–105.
The terms ‘care’ and ‘skill’ should not be used interchangeably,
because they refer to different standards of liability. ‘Care’ refers
to the pains and perception that a reasonable man would apply in handling his
own affairs. ‘Skill’ is the profession of art, the holding out of
a special ability. This varies with the type of agent employed, the client’s
expectations of him based on his qualifications and experience, and the custom
and practice of the particular business. It is difficult to transplant a satisfactory
uniform test for company law purposes, and the result at common law is a ‘lowest
common denominator’ standard of skill which statute has only recently
uplifted. Moreover, although ‘care’ is construed more objectively,
it does not seem likely that a court would necessarily hold that its exercise
by one person is the same as that by another. Does the ‘normal’ director
catch the Clapham omnibus any more?
Related to the concept of care is that of ‘diligence’. A director,
as with all agents, must exercise diligence, and a lack of diligence, i.e.
attention to detail and proper attendance, may indicate lack of probity.
Thus, if an agent suspects an officer of fraud or other misconduct, he may
be held liable for connivance if he does not cause appropriate investigations
to be made: Re Railway and General Light Improvement Co, Marzetti’s
Case (1880) 42 LT 206, CA. It is otherwise if there are no facts to put the
agent on inquiry: Huckerby v Elliott [1970] 1 All ER 189, 134 JP 175,
DC.
A principal selects an agent because he reposes trust and confidence in him
to carry out on his behalf a particular transaction or to act for him generally.
The maxim ‘delegatus non potest delegare’ therefore applies – an
agent may not delegate his job, only the details of performing it.
As a company board is directly appointed by the shareholders (except where
casual vacancies are filled by the directors themselves), they are entitled
to assume that the directors will not hand over their responsibilities and
discretions to others – unless the articles provide for delegation to
a managing director or committee. The ability of the board to delegate to subordinate
officers and employees the executive tasks of conducting the business may,
however, be inferred from the very discretion it has been given, or from the
circumstances of the case including the size and location of the company’s
operations: De Bussche v Alt (1878) 8 Ch D 286, 47 LJ Ch 381, CA. Where
no express or clearly implied authority has been given, delegation is not permitted:
Re County Palatine Loan and Discount Co, Cartmell’s Case (1874)
9 Ch App 691, 43 LJ Ch 588. The practice of delegation, is, however, widespread
and inevitable, and will be effective provided discretions are not parted
with except to a sub-agent, such as a managing director, contemplated by the
articles. Note that a purported delegation may be void as being inconsistent
with the articles themselves: Horn v Henry Faulder & Co Ltd (1908)
99 LT 524.
An ailing company with a board of modest talents may be advised (or pressured
by its lenders) to seek outside management help. Care must be taken to ensure
that there is no abdication by the directors of their powers over their principal’s
affairs in favour of a third party who has not been expressly authorised by
the principal (or, strictly, the shareholders) to intervene. Thus a firm of
management consultants engaged by the board to advise on particular problems
should not be permitted to take over the direction of the business or deal
with the company’s assets. This could result in personal liability for
the original directors if further problems or losses occur.
An agent is in a fiduciary position to his principal and as such he must
act bona fide and must not allow his interest to conflict with his duty: Kelly
v Cooper [1993] AC 205,[1994] 1 BCLC 395. This fiduciary obligation,
which is quite onerous, extends particularly to property belonging to the
principal over which the agent has control. It also covers the making of
a secret profit.
The rule of good faith applies to company directors as part of their fiduciary
responsibilities but is not peculiar to them: Cook v Deeks [1916] 1
AC 554, 85 LJPC 161, PC. Conflicts of interest must be resolved in favour of
the company. If any agent or officer of a company or firm makes a profit for
himself without having disclosed his dealing, he is liable to account to his
principal for the money received. There are elaborate mechanisms for disclosure
of transactions both under statute and contained in articles of association,
which allow a director to retain his interest.
Because of the wide-ranging nature of the director’s office, it is sometimes asserted that he has the powers of a ‘managing agent’: Re Faure Electric Accumulator Co (1888) 40 Ch D 141 at 151. In practical terms all this appears to mean is that whereas an ordinary commercial agent’s authority is restricted to executing his principal’s instructions (which may, however, be of broad definition, eg if given under a general power of attorney), a director has a positive duty to apply a degree of discretion to the resources under his control and manage them to advantage. A failure to ‘manage’ is therefore in theory a breach of duty but courts have been reluctant to apply the benefit of hindsight to overturn decisions made in the course of operating the business and in good faith, even though the consequences are unsatisfactory for the company: Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, 68 LJ Ch 699, CA; Howard Smith Ltd v Ampol Petroleum [1974] AC 821 at 832, PC. Poor management is an incident of investors’ risks: see Re Elgindata Ltd [1991] BCLC 959 at 994. The label ‘managing agent’ is therefore only of legal significance in relation to the extent of the authority with which a board of directors or individual officers are clothed in dealing with third parties.
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