Directors' Duties: Unforeseen consequences of a statutory footing?

Directors' Duties: Unforeseen consequences of a statutory footing?

Placing directors' duties on a statutory footing opened the floodgates for debate about interpretation of these duties as to whether the new statutory duties conflicted with the old common law duties.

However, an overlooked issue is the way in which fiduciary duties are applied. The statutory duties ignores the distinction between executives and non-executives on the premise that parliament do not want directors falling in to less onerous categories. But this presumes directors owe fiduciary duties because they are directors. This seems contradictory to the well established notion articulated by the then Dr Finn that a person "is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary" (see Bristol and West Building Society v Mothew [1998] Ch 1 at 18).

This view comes across in other judicial statements such as Henderson v Merret Syndicates Ltd (No 1) [1995] 2 AC 145 HL at 205 where Lord Browne-Wilkinson stated that duties do not arise from a person's status or description. Similarly in America in the case of Chenery Corporation 318 US 80 *85-6 (1943) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law]  it was stated that to call someone a fiduciary was only the beginning of the analysis.

What the statutory duties potentially do is assume that all directors owe the same duties once they have been determined as a director. This creates the assumption that directors are fiduciaries because of their status rather than their nature or their nature of relationship with the company/principal. It also creates the assumption all directors owe the same duties although there is considerable doubt over this matter.

If one looks to what determines a director the case law is relatively clear that being "held" out as a director - at least in terms of de facto directors - does not make you a director. The courts have preferred an "equal footing" test to determine whether someone is a director - Kaytech International, Re [1999] BCC 390. This basically looks to see whether the individual has assumed the functions of a director and is a fact sensitive situation.

With this in mind if the law determines a director by their functions on a purely fact sensitive basis, imposing duties by law ignores the specific nature of the relationship. Thus Part 10 of the Companies Act 2006 subscribes to the idea that the fiduciary duties are prophylactic and imposed by law designed to react to someone assuming the role of director; rather than to reflect on the nature of the relationship.

These are very much some early thoughts and need to be developed further. If the legislation is suggesting, and I find no evidence yet to say otherwise, that all directors owe the same duties under part 10 is important to remember that although they are held to the same standard, the application of that duty will differ depending on whether they were executive or non-executive - Equitable Life Assurance Society v Bowley [2000] EWHC 2263 at [35]. 

For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.

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