live lecture: directors duties

- duties are owed to the company itself
- whoever has the managerial authority have authority to decide whether the company will sue
- model article s.3 and 4 : authority to run the company to its directors

- in most cases the directors use the authority to decide not to sue

2 possibilities to get a director into court:

Insolvency

- when the company becomes insolvent, liquidator in charge inherits the right to run the company, they would more probably to sue directors to breach of duty. In fact it is quite rare , no money left inside the company to spend to sue a director.

derivative claims
- probably the best hope to getting the director to be liable for breach of duties.
- it is a claim brought by shareholder or a group of shareholders, not by the company itself. The shareholder sue on behalf of the company, they bring their action in their own name, on behalf of and for the benefit of the company.
- it means that the benefits of the action will go not to the shareholder, but instead to the company itself.
- The company gets money, shares should rise in value, benefit shareholder indirectly
- the shareholder who sued get no special additional advantage
- free rider problem: each individual shareholder would rather sit back and hope others to sue.
- they are just bringing the claim if the director is willing to sue
- CL is not making it easy for shareholder to bring these claims before 2006.
- 2006 Act reforms:
1) put the rules in the Act itself - more accessible
2) try to liberalise the rules - to make the rules a bit more relaxed
- Now allow the shareholder to bring a claim against any breach of duties, it was not the case in the old law.
- old law, you also need to show fraud. (Simple negligence by a director did not amount to fraud.)
- floodgates? the government also introduce clear procedure: if they get permission from court they are permitted to sue. Safeguard to stop shareholder abusing the now easier derivative procedures.
- s.263 spells out the conditions:
-the long list of factors did not carry equal weight.
- the Act divides these long factors into 2 different types. (s.263(2): 3 mandatory bars: judge has no discretion, he must stop the claims), (s.263(3): discretionary factors)

Mandatory bars:
1) authorisation: if the shareholders authorised the conduct before the directors acted, then the claim must be refused
2) rectification: if after the director breach the duties, the shareholders collectively ratify in a meeting, the claim must be stopped.
3) would a hypothetical director decide that the claim should not continue? (e.g. it would harm the company commercially)
- v West street holdings, (size of the claim: if larger, more likely to sue. how strong is the claim? will the company be better off or worse off? will it harm the company's reputation,)

Discretionary factors:
1) is claimant bringing the claim in good faith? personal motive of their own?
2)
3) has the board looked at it and decided not to sue? (though the judge might not put much weight on this factor)
4) has the shareholder got personal remedy that they can pursue instead? (e.g. remedy on s.994: unfair prejudice, shares will then be bought off them. Mission Capital, Frontbar holdings and : court held that the better solution for the shareholder is use s.994)

Q&A
Why there needs to be 2 sets of requirements?
- mandatory and discretionary. Please focus on the 1st 2 mandatory bars
-


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