LECTURE -CORPORATE MANAGEMENT

DIRECTOR=S DUTIES -

Introduction
Regional company law statutes vest directors, subject to any unanimous
shareholders agreement, with the power to manage the business and
affairs of the company. 1 This power to manage the business and affairs of
the company which may be done directly or indirectly through employees
and agents of the company, is not unfettered. Company law constrains the
actions of directors from abuse , imposing limitations exercise of this duty in
the form of statute and the common law.

Director=s duties
Directors stand in a fiduciary relationship to the company. In discharging
their function they p office.2

Statutory position
In new law jurisdictions, directors are under a two pronged statutory
obligation :

(nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
[to] act honestly and in good faith with a view to the best interests of the
company; and

(ooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo
[to] exercise the care diligence and skill that a reasonably prudent person would

1 Antigua & Barbuda, Companies Act No 18 of 1995, section 58 ; Barbados Companies Act Cap
308, section 58; Trinidad and Tobago Companies Act No of 1995 , section 60; Bahamas
Companies Act No 8 of 1992 section 85.

2 Gower &Davies, Principles of Modern Company Law [Thomson , Sweet & Maxwell ,17 th ed.]at
p. 380..
1
 exercise in comparable circumstances.3
In most jurisdictions this statutory requirement is also imposed on officers. 4
Section 2 of the Barbados Companies Act defines an Aofficer [in relation to a body corporate
as[ meaning]

(mmmmxcvi) the chairman, deputy chairman, president, or vice president of the

board of directors;

(mmmmxcvii) the managing director, the general manager, comptroller, the

secretary or the treasurer; or

(mmmmxcviii) any other person who performs for the body corporate functions
similar to those normally preformed by the holder of any office specified in sub -
paragraph (i) or (ii);

Directors
Directors are not trustees but they occupy a fiduciary position towards the company whose board
they form. Their liability in this respect is >trust like.= As Bowen LJ commented in Imperial
Hydropathic Hotel Co, Blackpool v. Hampton 5 When persons who are diector of a company are
from time to time spoken of by judges as agents, trustee, or managing partners of the company, it
is essential to recollect that such expressions are used not as exhaustive of the powers or
responsibilities of those persons , but only as indicating useful points of view from which they may
for the moment and for the particular purpose be considered- points of view from which they
seem for the moment to be either cutting the circle or falling within the category, but it is useful
for the purpose of the moment to observe that they fall pro tanto within the principles which
govern that particular class. A

3 Barbados Companies Act Cap 308 , section 95(1)(a) and (b); Trinidad and Tobago Companies
Act , section 99; Bahamas Companies Act , section 86. In St Kitts & Nevis Section 74 of
the Companies Act No 22 of 1996 imposes this duty on directors only.

4 Section 543 Antigua and Barbuda Companies Act ;

5 (1882) 23 Ch D 1 at p. 212.
2
Re City Equitable Fire Insurance Co Ltd. 6 Romer J stated :
AIt has sometimes been said that directors are trustees. If this means no more than that
directors in the performance of their duties stand in a fiduciary relationship to the
company, the statement is true enough. But if the statement is meant to be an indication by
way of analogy of what those duties are, it appears to me to be wholly misleading. I can
see but little resemblance between the duties of a director and the duties of a trustee or
will or of a marriage settlement. It is indeed impossible to describe the duty of directors in
general terms , whether by way of analogy or otherwise. .........

Shadow Directors
The Jamaica, Companies Act No 10 of 2004 introduces the concept of the shadow
directors. Section 2 thereof provides that a >shadow director= in relation to a company,
means Aa person in accordance with whose directions or instructions the directors of the
company are accustomed to act, so, however, that a person is not deemed a shadow
director by reason only that the directors act on advice given by him in a professional
capacity.@ This adopts the UK position reflected in section 741 of the 1985 Companies Act
and as shadows they are required to disclose their interests in transaction to the
subsidiary=s board. >Shadows= may include, a major shareholder or where a director
declines or is ineligible to be director because he is bankrupt. In the English decision Re
Hydrodam ( Corby) Ltd ,7 Millet LJ reviewed the key elements of the definition. 8 Thus to
establish that a defendant is a shadow director of a company, it is necessary to allege and
prove;
(4) who are the directors of the company, whether de facto or de jure;
(5) that the defendant directed those directors how to act in relation to the
company or that he was one of the persons who did so;
(6) that those directors acted in accordance with such directions;=
6 [1925] Ch 407.

7 [1994] 2 BCLC 180.

8 See for instance Companies Act of 1985 sections 317(8), 319; The Insolvency Act of 1986, ss
206(3)and 214(7).
3
 (7) that they were accustomed so to act.
A number of implications arise (i) a controlling shareholder, creditor and/ or banker is at risk of
being classified as a shadow director. 9
(ii) The relationship of parent- subsidiary may also give rise to a finding that the parent is
operating as a shadow director of the subsidiary company. There is uncertainty as to the extent
and nature of the fiduciary duty and the level of interference required. One- off instructions are
clearly not contemplated by the Act - >are accustomed so to act. = But is difficult to draw a
precise line. In Re Unisoft Harman J opined that >accustomed= refers to acts
not on one individual occasion but over a period of time and as a regular
course of conduct. In Re Hydrodam Corby, Millet J stated that there needed
to be a pattern of behavior in which the board did not exercise any
discretion or judgement of its own , but acted in accordance with the
directions of others. In Yukong Line v. Rendsbuge Investments Corporation
(No 2)10 Toulson J was of the opinion that shadow director owes fiduciary
duties to the company of which he is a director. In Kuwait Asia Bank v.
National Mutual Life Nominees Ltd 11
it was held that a shareholder with a
right to appoint two directors to a board of five members could not be a
shadow director. In Re Unisoft Group Ltd. ( No 3) Harman J=s dicta suggests
infers that the shadow director must control a governing majority at board
level.
In Secretary of State For Trade and Industry v. Deverell 12
the Court of
Appeal laid down the following guidelines: The purpose of the legislation is
to identify those, other than professional advisers, with real influence in
corporate affairs of the company. But it is not necessary that such influence

9 See for instance Re a Company ( No 005009 of 1987) exp. Copp ,[1989] BCLC 13., where
Knox J refused to strike out the liquidators claim to treat the bank as a shadow director stating
that the claim was not unsustainable.

10 [1998] 1 WLR 294.

11 [1991] 1AC 187.

12 [2001] Ch 340.
4
should be exercised over the whole field of its corporate activities. The test
is real influence. The label attached to the communication is irelevant.
Advice therefore can still amount to dierctions or insructions and there is no
requirement that the directors feel themselves compelled to comply with the
directions or instructions.

>[The obvious relevance to shareholders is that the expansion of the

category of director to include a shadow director extends the platform
upon which a minority shareholder action can be mounted. On the other
hand there are implications for the regional harmonization effort since the
concept is foreign to most jurisdictions of the Caricom.] Ancillary to this is
the fact that disparities already exist with respect to the residual Company
legislation 13, with the corporate legislation in some jurisdictions, such as
Jamaica, maintaining the English 1948 position( deservingly meriting their
description as >old law= jurisdictions) and others, like Barbados, Trinidad and
Tobago14 and Guyana15 embracing a decidedly Canadian approach.
Indeed, the Jamaica Companies Act is of 1969 vintage. 16
Consequently
shareholders action is likely to be thwarted in the absence of statutory
intervention by the presence of the common law rule of Foss and Harbottle.
Moreover, Foreign Exchange Control legislation in some jurisdictions still
requires shareholder residence as a criteria, creating a preliminary obstacle
in establishing locus standi.

De facto director

13 See further Walcott, A Shareholders And Take- Over Regulations In the Commonwealth
Caribbean.,@ (1995) Caribbean Law Review 210.

14 Companies Act of 1995.

15 Companies Act of 1991.

16 [1973] Rev.
5
A shadow director is to be distinguished from the less technical term >de -
facto= director According to Millet LJ a de-facto director
Ais a person who assumes to act as a director. He is held out as a
director by the company, and claims and purports to be a director,
although never actually or validly appointed as such. To establish
that a person was a de facto director of a company, it is necessary to
plead and prove that he undertook functions in relation to the
company which could properly be discharged only by a director. It is
not sufficient to show that he was concerned with management of the
company=s affairs or undertook tasks in relation to its business which
can properly be performed by a manager below board level. 17

This a concept is not unfamiliar to the Caribbean . It is implied in section 2

of the Jamaica Companies Act which provides that Aa director includes any
person occupying the position of director by whatever name, @ and in
Barbados, 18
by virtue of section 2 and section 81 of the Barbados
Companies Act.19 The position therefore is that shareholder= action is
available against directors and de -facto directors. The practical difficulty
however, as noted by Farrar, 20 is in distinguishing between functions which
can properly be performed only by a director and functions which can be
performed below board level and whether the action undertaken by the
person was referable to an assumed directorship or to some other capacity
such as manager, shareholder or consultant. 21

17 Ibid at p.183.

18 Re Kaytech International Plc , Secretary of State for Trade and Industry V. Kaczer [1999] 2
BCLC 351.

19 Cap 308 of 1982.

20 Farrar=s Company Law ( London: Butterworths 4th ed) p 336.

21 See for instance Re Sykes ( Butchers) Ltd , Secretary of State For Trade and Industry v.
Richardson [1998] BCLC 110; Re Richborough Furniture Ltd [1996] 1 BCLC 507.
6
Officers
Before the duties of directors is examined brief mention must be made of
the fact that in most jurisdictions this statutory requirement is also imposed
on officers. 22

Section 2 of the Barbados Companies Act defines an Aofficer [in relation to a

body corporate as[ meaning]

(mmmdccclxxii) the chairman, deputy chairman, president, or vice president

of the board of directors;

(mmmdccclxxiii) the managing director, the general manager, comptroller, the

secretary or the treasurer; or

(mmmdccclxxiv) any other person who performs for the body corporate
functions similar to those normally preformed by the holder of any office specified
in sub - paragraph (i) or (ii);

In Jamaica, Companies Act23 Section 2" Officer includes a director , manager or secretary.@
St Kitts & Nevis, the Companies Act,24 narrowly defines an >officer= as in relation to a body
corporate, >a director or liquidator.=
DIRECTORS= DUTIES

Duty of care diligence and skill?

The duties of care and skill imposed on directors may be minimal and is sometimes regarded as
being out of date. This is partly because historically directors were usually amateurs who had no

22 Section 543 Antigua and Barbuda Companies Act ;

23 No 10 of 2004.

24 No 22 of 1996.
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professional skills.25 In the decision of Re Brazilian Rubber Plantation & Estates Ltd , 26 Neville
J laid down a semi - subjective standard duty of care and skill to be measured according to the
expertise of the directors. In this case a rubber company made serious financial losses in a
speculative venture in rubber plantations in Brazil. The directors had no expertise in the business
of rubber plantations and they were sued on the grounds of negligence . Neville J.
AThere is admittedly a want of precision in this statement of a director=s liability . In truth ,
one cannot say whether man is guilty of negligence, gross or otherwise, unless one can
determine what is the extent of the duty which he is alleged to have neglected. A director=s
duty has been laid down requiring him to act with such care as is reasonable to be
expected from him, having regard to his knowledge and experience. He is, I think, not
bound to bring any special qualifications to his office. He may undertake the management
of a rubber company in complete ignorance of everything connected with rubber, without
incurring responsibility for the mistakes which may result from such ignorance; while if he
is acquainted with the rubber business he must give the company the advantage of his
knowledge when transacting the company=s business. He is not bound, I think, to take any
definite part in the conduct pf the company=s business......@

27
Later on in the decision of Re City Equitable Fire Insurance Co Ltd., a company suffered great
financial loss as a result of fraud by the chairman, Bevan. The liquidator brought an action against
other directors for negligently failing to detect the fraud. Two of the directors were in the end
found to be negligent. There was a clause in the articles of association to the effect that directors

25 Hicks & Goo, Company Law , Case & Materials [Oxford University Press (5th)]

26 [1911] 1 Ch 425.

27 [1925] Ch 407.
8
were to be exempted from liability for negligence except for losses caused by their own wilful
neglect or default.

Romer J stated :

AIt has sometimes been said that directors are trustees. If this means no more than that
directors in the performance of their duties stand in a fiduciary relationship to the
company, the statement is true enough. But if the statement is meant to be an indication by
way of analogy of what those duties are, it appears to me to be wholly misleading. I can
see but little resemblance between the duties of a director and the duties of a trustee or
will or of a marriage settlement. It is indeed impossible to describe the duty of directors in
general terms , whether by way of analogy or otherwise. .......... The care that he is bound
to take has been described by Neville J in Re Brazilian Rubber Plantations and Estates ...
as reasonable care to be measured by the care an ordinary man might be expected to take
in circumstances on his own behalf....... (i) a director need not exhibit in the performance
of his duties a greater degree of skill than may reasonably be expected from a person of his
knowledge and experience, and if they act honestly... director are not liable for mere errors
in judgement..(ii) A director is not bound to give continuous attention to the affairs of the
company. His duties are of an intermittent nature to be performed at periodic board
meetings,......(3) In respect of all duties that, having regard to the exigencies of the
business, and the articles of association, may properly be left to some other official, a
director is, in the absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly. ...@

9
Thus a director is entitled to rely on others. 28 Mere negligence does render a director in breach
of his duty of care diligence and skill. In Re Pavlides v. Jensen, 29 the plaintiff, a minority
shareholder, brought a derivative action against the directors and the company alleging that they
were negligent in selling the company=s mine in Cyprus at an undervalue. The defendants objected
challenging the plaintiff=s right to sue. The court held that mere negligence was not fraud on the
minority. It was open to the company in general meeting to decide not to sue, and that was the
end of the matter.
Danckwerts J;
AIt is contended on behalf of the defendant that the matters in respect of which the plaintiff
complains, and in particular the question whether proceedings should be taken against the
directors, is a matter of internal management of the company, with which, on the principle
stated in Foss v. Harbottle (1843) 2 hare 461., .... the court normally will not interfere......
on the facts of the present case, the sale of the company=s name was not beyond the
powers of the company, and it is not alleged to be ultra vires. There is no allegation of
fraud on the part of the directors or appropriation of assets of the company by the majority
shareholders in fraud of the minority. It was open to the company, on the resolution of a
majority of the shareholders, to sell the mine at a price decided by the company in that
manner, and it was open to the company by a vote of the majority to decide that, if
directors by their negligence or error of judgment has sold the company=s mine at an
undervalue , proceedings should not be taken by the company agasint the directors.
Applying therefore, the principles as stated by Lord Davey in Burland v. Earle , it is
impossible to see how the present action can be maintained...@

In the subsequent decision of Daniels v. Daniels, 30the directors= negligence ins selling company
assets to themselves at a gross undervalue, amounted to gross negligence.

28 Re Denham & Co Ltd.(1883) 25 Ch D. 752.

29 [1956] Ch. 565.

30 [1956] 2 All ER 518.

10
 Justice Templeman
AThe authorities which deal with simple fraud on the one hand and gross negligence on
the other hand do not cover the situation which arises where, without fraud, the directors
and majority shareholders are guilty of a breach of duty which they owe to the company,
and that breach of duty not only harms the company but benefits the directors. In that case
it seems to me that different considerations apply. If minority shareholders can sue if there
is fraud, I see no reason why they cannot sue where the action of the majority and the
directors, though without fraud, confers some benefit on those directors and majority
shareholders themselves. It would seem to me quite monstrous - particularly as fraud is so
hard to plead and difficult to prove-..@
The standard of care required by directors is significantly different from what is required in the
aftermath of collapse of Enron Co. Ltd., in the United States and the enactment of Sarbanne=s-
Oxley, legislation,31 so that >laxness is a thing of the past.=32 In the United Kingdom, a tightening
of the regulatory regime is evident in the stringent rules governing directors in an insolvency
under the insolvency Act 198633 and directors= disqualification legislation. In the Caribbean,
various law reform commissions are reviewing the adequacy of these rules. The influence of
Sarbannes - Oxley is evident in the Jamaica= private sector driven corporate governance code
and provisions in the Insurance Act.34 The Companies Act of Jamaica introduces the concept of
audit committees and independent ,non executive directors. Signs of change were evident in
Dorchestor Finance Co. v. Stebbing35 Where the court made a distinction between skill and

31 Re Cardiff Savings Bank, Marquis of Bute [1892] 2 Ch. 100.

* Dovey v. Cory [1901] AC 477 (HL)

32 Gower & Davies , Principles of Modern Company Law [ Thompson, Sweet & Maxwell 17th ed]
p. 433.

33 Section 214, Insolvency Act 1986.

34 Insurance Act No 2001 of the laws of Jamaica.

35 [1989] BCLC 498.

11
diligence. Foster J found that diligence was to weighed by an objective evaluation while skill
remained a subjective est. In Norman v. Theodore Goddard,36and Re D= Jan of London
Ltd..37and Justice Hoffman suggests that both elements of the duty were to be assessed objectively
using as a basis for his argument section 214 of the UK Insolvency Act. 38 In the Caribbean ,
section 214 cannot be considered as part of the common law . What therefore is the standard of
duty of care owed by directors? 39In the absence of Wets Indian jurisprudence on point arguably
the developments in the legislation and the various commercial codes will result in a standard
beyond that suggested by Re City Equitable Insurance. point i Kuwait Asia Bank v. National
Mutual Life Nominees Ltd40

Duty to act honestly and in good faith

This rubric summarizes the notion that directors are fiduciaries, enabling their conduct over the
property of the company to be tested against equitable standards. In this sense it operates as a
limitation on the directors= virtually exclusive power to manage the affairs of the company. The
strengths and weakness of the standard lie in its generality. It is a broad statement about what is
expected from directors and officers of the corporation. It weakness arises from the difficulty of
defining what constitutes prudent behaviour, good faith and the best interests of the corporation.

Common law position

The general statement of the duty of directors is when exercising their directorial powers the
directors must act bona fide in what they consider - not what the court considers is in the interest
os the company and not for any collateral purpose. In the Australian decision of Mills v.

36 [1991] BCLC 1027.

37 [1994]1BCLC561.

38 See also Cohen v. Selby [2001] 1 BCLC 176.

39 Sagicor v. A.S. Brydens Co. Ltd (Unreported decision, Bds. 2001).

40 [1990] 3 All E.R. 404.

12
Mills4142 tensions between the managing director of the company (who was also a large ordinary
shareholder) and his nephew who was a director and a holder of a large number of preference
share resulted in the managing director utilizing his votes and those of a family member to resolve
that certain accumulated profits be capitalized and distributed to ordinary shareholders in the form
of bonus shares. The effect being to ensure the managing directors continued control of the
company. C.J. Latham noted the difficulty of applying the test of acting in the interests of the
company where there are different classes of shares, for the character of the act must necessarily
adversely affect the interest of one class of shareholders and benefit the other, stated that in such
circumstances, the question becomes what is fair between the different classes of shareholders.
i.e. what is the moving cause. In applying this test he held that the exercise of the power was
proper.

The duty to exercise powers for a proper purpose.

Directors must not exercise powers for purposes other than for which the power was granted. If
directors issue shares of the company only for the purpose of conserving their own power, the
resolution creating the shares will be set aside or an injunction will be granted preventing the
holding of a proposed meeting. Before the court will intervene it must be established that the
directors acted from an improper motive or arbitrarily and capriciously. Hogg v. Cramphorn Ltd,
43
concerned an allotment of shares by the directors who attached special voting rights to
preference shares so as to thwart a hostile take over bid. Although the directors believed that the
acquisition of control by l of a prospective take over bidder would not be in the >best interests of
the company,= or its staff, the court held that it was an improper use of the director =s discretionary
and fiduciary power. Accepting that the board acted in good faith, the court noted that the

41 (1938) 60 CLR 150.

42 See for instance section 95(1)(a) and (b) Barbados . Section 99 Trinidad and Tobago. Bahamas
section 86

43 [1967] Ch 254.
13
primary purpose of the scheme was to ensure control of the company. The essential element of the
scheme and indeed its primary purpose was to ensure control of the company by the directors and
those whom they could confidently regard as their supporters.= In Howard Smith Ltd v. Ampol
Petroleum Ltd.,44on to the Privy Council from the Supreme Court of New South Wales , Lord
Wilberforce stated .. [It] is not disputed , the issue was clearly intra vires the directors . But, intra
vires though the issue may have been , the directors= power under this article is a fiduciary power:
and it remains the case that an exercise of such a power though formally valid, may be attacked on
the ground that it was not exercised for the purpose for which it was granted. AIn Harlowe=s
45
Nominees Pty Ltd. V. Woodside (Lakes Entrance ) Oil Co Ltd An issue of shares in the
company was upheld as being the legitimate exercise of a power, albeit for defeating an attempt to
gain control of the company, in order to secure the financial stability. In Teck Corporation Ltd v.
Millar,46 47
The Supreme Court of Canada upheld a scheme to avoid a takeover bid which
involved the issue of a large parcel of shares to another entity thus displacing Teck=s majority
control. The court in finding that there was no improper purpose found that the director=s
purpose was to obtain the Abest agreement they could while.... still in control. Their purpose in
that sense to defeat Teck. But, not to defeat Tecks= attempt to control it , rather it was to
foreclose Teck=s opportunity for obtaining for itself the >ultimate deal=. The distinction between
the Canadian authority and the decision of Howard Smith is a tenuous one . Lord Wilberforce
distinguished the Canadian decisions by saying that they involved considerations of management
within the proper sphere of the directors while in Howard Smith the directors= sole motivation
was to dilute the majority power. However in both cases the objective was to water the majority
control.
The meaning of Bona fides
Directors must act bona fide in the interests of the company and not for any collateral purpose.
They must behave as honest businessmen in similar circumstances would act.AAn honest business

44 [1974] AC 621.

45 (1968) 121 CLR 483.

46 [1972] 33 DLR (3d) 288.

47 (1968) 121 CLR 483.

14
judgement will not be deceived48 They must act in what they think, not the court thinks, is in the
interest of the company.49 The burden of proving mala fides is on the proponent. If the directors
are also shareholders the law realistically allows them to take their own interests into account and
in such an action . The test is.AWhat is the moving cause of the action of the directors@
A director must act bona fide in what he believes. i.e. subjective test

Interests of the Company

This is an objective standard and the phrase in the interests of the company means the company a
a commercial entity to be judged with reference to present and future shareholders. In Savoy
Hotel 50the inspector for the Board of Trade believed this to mean [i.e. interests of the company]
that the directors must act in the interest of the A.... shareholders present and future, a long term
view against the short term interest of the present members.@ It appears that although directors
owe no fiduciary duty to shareholders, they must act in their interest and as managerial practice
dictates the interests of employees and creditors as well. In Greenhalgh v. Arderne Cinemas Ltd51
the phrase was interpreted as the company a a general body rather than a commercial entity. The
duty to act in the interests of the company includes a duty to inform the company of any activity,
actual or threatened, which damages those interests52

The proper purpose rule

,,,another aspect of the rule that directors must act bona fide towards the company, is the
requirement that they exercise their legitimate powers for the purposes delegated to them. 53 Some

48 Re Smith & Fawcett Ltd.[1942] Ch 304.

49 Regentcrest plc(in liq) v. Cohen [2001] 2 BCLC 80.

50 80 WN (NSW) 1021.

51 [1951] Ch 286.

52 British Midland Tool Ltd v. Midland International Tooling Ltd [2003]2 BCLC 523.

53 Punt v. Symons& Co. Ltd.[1903] 2 Ch 506.

15
academics argue that this is a completely separate head of directors= duties at which the court
looks objectively at the purpose of a particular power and then determines whether on the
evidence the directors used the power for that purpose irregardless of whether they were acting in
good faith.
In addressing the application of the proper purpose doctrine one must look at the various powers
vested in the company directors e.g.: (1)Power to issue shares share allotment(ii) the power to
convene meetings and (iii) the power to issue dividends.
The most common application of this doctrine is the power to issue share. So that power
falls to the board of directors. 54- Directors may determine the shares to issued and the time and to
whom such shares are to be issued. Hence where a director improperly exercises his power of
allotment, such an allotment is voidable.

Contracts between a director and his company55

(1) Contracts involving directors

As directors are like trustees , unless expressly allowed they must not make a profit from their
56
position. permitted. This is in accordance with Keech v. Sandford SA contract made up by a
company with one of its directors or with a company or firm in which his is interested is voidable
at the instance of the company. In Aberdeen Railway Co. v. Blaikie Bros 57an agreement to
manufacture iron chairs was set aside on the ground that the chairman of its board of directors
was a managing partner.
The rationale for this is that in the discharge of his duties one must not place oneself in a

54 B=dos see. s. 29.

55 Failure to comply with statutory provision renders a director liable to $500 in Trinidad. Jamaica
liable to a fine of $100 ;

56 (1726) Sel Cas. King 61.

57 [1843-60] All ER. 249.

16
situation where your interest and duty conflict and in accordance with equity a director is
prohibited from dealing unless he can point to full disclosure. 58It requires interalia that a director
or offer of a company who is a party to a material contract or proposed material contract with the
company to disclose in writing or request to have entered in the minutes the nature and extent of
his interest. Statute in some jurisdictions has obviated the need to rely on the common law and
equitable principles in order to determine of the degree of disclosure required. The onus is on the
director to point to full disclosure. Failure to satisfy this requirement may lead to loss of office
avoidance of contract or loss of profits. It is possible for a director is give general notice.

Section 89 Barbados :

(1). A director or officer of a company

(jjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjj
who is a party to a material contract ot proposed material contract with the company; or

(kkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkk
who is a director or an officer of any body, or has a material interest in any body, that is a party to
a material contract or proposed material contract with the company,

must disclose in writing to the company or request to have entered in the minutes if
directors the nature and extent of his interest.

(2) (2)
(3) The disclosure required by subsection (1) must be made, in the case of a director of a
company

58 Barbados Companies Act section 89 & 90; Trinidad and Tobago section 93;
17
(a) at the meeting at which the proposed contract is first considered;
(b) if the director was not then interested in a proposed contract, at the first meeting
after he become so interested;
(c) if the director become interested after a contract is made , at the first meeting after
he becomes so interested; or
(d) if a person who is interested in a contract later becomes a director of the company,
at the first meeting after he becomes a director;

(3) the disclosure required by subsection (1) must be made, in the case of an officer of a
company who is not a director

(a) forthwith after he becomes aware that the contract or proposed contract is
considered, or has been considered, at a meeting of directors of the company

(b) if the officer becomes interested after a contract is forthwith after he becomes so
interested; or
(c) if a person who is interested in a contract later becomes an officer of the company,
forthwith after he becomes an officer

(3) If a material contract or proposed material contract is one in the ordinary course of the
company=s business, would not require approval by the directors or shareholders of the
company, a director or officer of the company must disclose in writing to the company, or
request to have entered in the minutes of meetings of directors, the nature and extent of
his interest forthwith after the director or officer becomes aware of the contract or
proposed contract.

(4) A director of a company who is referred to in subsection (1) may vote on any resolution
to approve a contract that he haas an interest in if the contract
(a) is an arrangement by way of security for money loaned to obligations undertaken
by him, for the benefit of the company or an affiliate of the company;

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(b) is a contract that relates primarily to his remuneration as a director, officer,
employee or agent of the company or affiliate of the company;
(c) is a contract for indemnity or insurance under section 101;
(d) is a contract with an affiliate of the company;; or
(e) is a contract other than one referred to in paragraphs (a) to (b)

but, in the case of a contract described in paragraph (e), no resolution is valid unless it is
approved by not less than two- thirds of the votes of the shareholders of the company to
whom notice of the nature and extent of the director=s interest in the contract is declared
and disclosed in reasonable detail.@

Duty not to make a secret profit

A director as a fiduciary, is accountable to the company for any secret profit which he has made
by reason of that position. Keech V. Sandford 59reveals the strictness of the rule of equity and it
is independent of outside considerations of bona fides or whether the director took a calculated
risk , or whether the cest tui que trust could have recieved the benefit of the profit. Where
directors acquire for themselves property or rights which they are regarded as holding in equity on
behalf of the company, they cannot by using their votes as shareholder cause the company to wave
its right.

Cook v. Deeks[1916] 1 AC 554.

Here a derivative action was brought by Cook on behalf of himself and all other shareholders
against the respondents alleging that the action s of the directors in seeking to wind the company
up, and also using their voting power to ratify their conduct demonstrates that the chances of the
company pursuing the claim against the directors in its own name were ? The Toronto
Construction Company was joined as a defendant, a procedural step which enabled the company
to be a >party to the suit in order to be bound by the result of the action and to receive the money

59 (1726) Sel Cas t King 61.

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recovered in the action. If the company were not bound they could bring a fresh action for the
same cause if the action failed, and there were subsequently a change in the board of directors and
in voting power .An attempt by the directors to ratify their conduct was unsuccessful, not simply
because they used their own power to ensure a favorable result, but rather because the directors
were using their voting belonged in equity to the company. The result of such conduct would
have been an oppression of minority rights.

Corporate Opportunities
Corporate fiduciaries and officers normally consider a range of commercial opportunities as a
function of their office. One must determine the point at which such opportunities may be said to
"belong" to the company. If an executive resigns from a corporation at what point does the
implicit contract in respect of the obligations between the company and the executive, terminate?
At what point is a former employee free to capitalize on information gleaned while in the services
of the corporation. The implicit contract will, in general extend beyond the termination of
employment. Market forces are relevant e.g. degree of competition, nature of venture to name a
few. One of the major cases in Anglo-Canadian law is that of Regal (Hastings) Ltd v. Gulliver.60
In this case Lord Russell of Killowen stated :
AThe rule of equity which insists on those, who by use of a fiduciary position make a
profit, being liable to account for that profit, in no way depends on fraud, or absence of
bona fides; or upon such questions or considerations as whether the profit would or
should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to
obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did
for the benefit of the plaintiff has in fact been damaged or benefitted by his action . The
liability arises from the mere fact of profit having, in the stated circumstances, been made.
The profiteer, however honest and well intentioned cannot escape the risk of being called
upon to account.@

Viscount Sankey laid down the conflict test: stating

60 [1942] 1 All ER 378.

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 "The general rule of equity is that no one who has duties of a fiduciary nature to perform
is allowed to enter into engagements in which he has or can have a personal interest
conflicting with the interests of those he is bound to protect.."
In Industrial Development Consultants Ltd v. Cooley.61a director who took advantage of a
contract personally was held accountable even though it was clear that the representative of the
company did not want to do business with consultants, but were prepared to deal with Cooley in
his private capacity. Roskill J. held that the director was accountable to the company for the
whole of his benefits under the contract or alternatively liable in damages for breach of his service
contract. NB the court noted that damages under this head would be small be advise the
possibility that the company would have secured the contract was remote. He embarked upon a
deliberate course of dealing which put his personal interest as a potential contracting party in
direct conflict with his pre- existing and continuing duty .
The strict rule was relaxed in Peso Silver mines v. Cropper.62 Here the court held that the
directors did not violate the conflict rule because there was a bona fide vote of the board of
directors. Thus a director is free to make a investment on his own account after the company has
considered the proposition and bona fide decided against it obvious this is dependant on
"informed consent". the directors have received all relevant information In Canadian Aero
Service Ltd v. O= Malley 63.
Judge Laskin identified relevant factors in determining standards of loyalty, good faith and
avoidance of duty.

(1) Position or office held

(2) Nature of the corporate opportunity its ripeness specificity and the director's or managerial
officers relation to it.
(3) The amount of knowledge possessed

61 [1972]1 WLR 443.

62 (1966) 58 DLR(2 nd) 1.

63 (1973) 40 DLR(3d) 371.

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(4) The circumstances in which knowledge was obtained
(5) Was the knowledge special or private
(6) The circumstances under which the relationship terminated? Retirement or resignation.

It is clear that a criterion for business opportunity is property rights. Economic theory suggest
that if an executive appropriates an investment opportunity for private account which had been
anticipated by participants in capital markets as belonging to the firm..Then the market price of
the equity will fall resulting in loss to the shareholders. Economic theory applies several other
tests can be therefore be formulated.

(1) line of business test

(2) test of fairness in dealing with the company in Canadian Aero Services

The president and vice president of the plaintiff company had been engaged on behalf of
(Canaero) in negotiating for a large aerial surveying and mapping contract with the government of
Guyana. Instead of securing the contract for Canaero they resigned and formed their contract.
The Supreme Court of Canada held that their fiduciary duty had survived their resignation and
that the duty was enforceable against the company and the directors. The remedy took the form
os an award for damages for breach of duty rather than an account os profits.
New Zealand Netherlands Society >Oranje= Inc. v. Kuys64 illustrates that a director may
secure a release or immunity from potential accountability by proper negotiation with a competent
organ of the company. The decision of Regal Hastings was applied and followed in Canadian
Aero Service v. O=Malley and Industrial Development Consultants Ltd v. Cooley. In both of these
decisions the officers in question had an expressed mandate from the board to negotiate on behalf
of the Company and actively pursued the contract on the companies behalf . Regal Hastings
involved a self-assumed undertaking on the part of the directors.
The definition of Aopportunity@ has been interpreted to include information65 and that the
officer was guilty of diverting an opportunity even though the gas board informed the director

64 [1973] 1 WLR 1126.

65 Industrial Development Consultants Ltd v. Cooley( Birmingham Assiizes) [1972] 1 WLR 443.
22
that they would not deal with the company [i:e the principal] under any a circumstances.In
determining whether there has been a breach of fiduciary duty the court will examine.
(i) office or position held
(ii) Nature of Corporate opportunity i.e: its ripeness, its specific nature and the
directors or officers relationship to it.
(iii) Amount of knowledge possessed.
(iv) Circumstances in which information was obtained - e.g. [intervening resignation]
(v) whether the information known only t the individual

Island Export Finance Ltd. v. . Umunna 66 Hutchinson J endorsed the apporach in Canadian Aero
Service Ltd. V. O= Malley . In this case the managing diector resigned as managing director and
subsequently tification by general meeting is the only way of legitimating any contemplated action
by the director. Even if the action is question was properly disclosed to and ratified. The
Director is still under an obligation to Act Bona fides in the interests of the company. Whether
honest belief is material the law is not clear. in Boardman v. Phipps where House of Lords was
divided three - two on the issue of whether to apply Regal Hastings principle whether the
fiduciary acted >honestly and in the best interests of his beneficiary.@ House of Lords held them
liable to account for their personal profit. Honest belief was irrelevant. A Director may secure a
release or immunity from potential accountability by proper negotiation with a competent organ of
the Company. SEE. New Zealand Netherlands Society >Oranje= Inc. v. Kuys where the former
secretary was held to have made >special arrangement= releasing him from his fiduciary duty not to
profit from a position of trust. where a company has had the opportunity to consider the
proposition and did indeed so and bona fide declined to pursue it. Then the director is entitled to
make an investment on his own account. Peso Silver Mines Ltd v. Cropper. This represents a
relaxation of the rule in Boardman v. Phipps.
The rules that a director may not profit from his office nor place himself in a conflict of
interest may operate rigidly to interfere with legitimate business action.on the other hand the way
have been opened by Regal Hastings to foster evasion of these principle by allowing the parties
concerned to operate successfully through other companies or subsidiaries .Regal Hastings
stated that liability was dependant upon that the opportunity came to the director in the course of
66 [1986] BCLC 460.
23
his management ,that he made a personal profit,In Regall - one of the directors was exempted
because he made no personal profit. It may be possible therefore to avoid liability by diverting an
opportunity to a dummy corporation.

BRIBES
Where a director receives a secret profit in the form of a bribe or commission with respect to a
particular transaction, it is clear following AG For Hong Kong v. Reid 67 that the director will hold
that bribe as constructive trustee for the company. The company is entitled to recover both the
bribe and any assets representing the secret profit .Bribe for this purpose does not connote any
corrupt motive on the part of either the giver or the receiver, but merely that a third party dealing
with a company through one of its officials has given something in cash or kind to that official
without the knowledge and consent of the company.68
Remedies include recission of contract, an action for money had received, and damages. The
Company must elect before Judgment whether to bring an action for damages (debt). An official is
liable to instant dismissal and will forfeit any claim he may have to a commission pertained the
transaction concerned.

If I am wrong in this, I would think that Order 2 rule 1 can be invoked wherein it is
provided that where in beginning or purporting to begin any proceedings or at any stage in the
course of or in connection with any proceedings, there has, by reason of anything done orleft
undone, been a failure to comply with the requirements of the rules, ... the failure shall be treated
as an irregularity and shall not nullify the proceeding, any step taken in the proceedings or any
document, judgment or order therein.

67 AG For Hong Kong v. Reid [1994] 1 AC 324.

68 Mahesan v. Malaysian Housing Society [1978] 2 WLR 444 .AG For Hong Kong v. Reid
[1994] 1 AC 324.

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 It does not seem to me that either the writ or the Statement of Claim filed by the plaintiffs
should be regarded as a nullity. I would refer too to the general principle on which leave to
amend is granted as stated in Bowen L.J. in Cropper v. Smith [1883] 26 Ch.D. 700 at pp. 710,
711 -

AIt is well established principle that the object of the Court is to decide the rights of the
parties; and not to punish them for mistakes they make in the conduct of their cases by
deciding otherwise than in accordance with their rights ... I know of no kind of error or
mistake, which is not fraudulent or intended to overreach the Court ought not to correct if
it can be done without injustice to the other party. Courts do not exist for the sake of
discipline, but for the sake of deciding matters in controversy and I do not regard such
amendment as a matter of favour or grade ... it seems to me that as soon as it appears that
the way in which a party has framed his case will not lead to a decision of the real matter
in controversy, it is as much a matter of right on his part to have it corrected if it can be
done without injustice, as anything else in the case is a matter or right.@

With this principle in mind, I would, if it were necessary, grant the plaintiffs leave to
amend the writ to insert a claim for damages in negligence. See Cave v. Crew [1893] 62 L.J. Ch.
510 and United Telephone Co. v. Tasker [1888] 59 L.T. 852.

Do the Plaintiffs have a reasonable cause of action

Over a long period of years it has been firmly established by many authorities that the
power to strike out a Statement of Claim as disclosing no reasonable cause of action is a summary
power which should be exercised only in plain and obvious cases: Lord Pearson in Drummong-
Jackson v. British Medical Association and Others [1970] 1 All E.R. 1094 at 1101. The learned
judge went on to say that he thought Areasonable cause of action@ in the relevant rule means a
cause of action with some chance of success when only the allegations in the pleading are
considered. If when those allegations are examined it is found that the alleged cause of action is
certain to fail, the Statement of Claim should be struck out.

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 Put in the words of Salmon L.J. in Nagle v. Feilden [1966] 1 All E.R. at p. 697 the
plaintiffs= Statement of Claim against Colybrand should not be dismissed and they should not be
driven from the judgment seat unless their case against Colybrand is unarguable.

Before discussing this question I will set out the sections of the Companies Act on which
much of the argument was focussed.

Sections 226 and 228 enact:

A226 (1) Subject to subsection (2), a complainant may, for the purpose of prosecuting,
defending or discontinuing an action on behalf of a company, apply to the court for leave
to bring an action in the name andon behalf of the company or any or its subsidiaries, or
intervene in an action to which any such company or any of its subsidiaries is a party.

(2) No action may be brought and no intervention may be made under subsection (1)
unless the court is satisfied

(a) that the complainant has given reasonable notice to the directors of the
company or its subsidiary of his intention to apply to the Court under
subsection (1) if the directors of the company or its subsidiary do not bring,
diligently prosecute or defend or discontinue the action;
(b) that the complainant is acting in good faith; and

(c) that it appears to be in the interests of the Company or its subsidiary that
the action be brought, prosecuted, defended or discontinued ...

228 (1) A complainant may apply to the court for an order under this section.

(2) If upon application under subsection (1) the court is satisfied that in respect
of a company or any of its affiliates

26
 (a) any act or omission of the company or any of its affiliates effects a result,

(b) the business or affairs of the company or any of its affiliates are or have
been carried on or conducted in a manner, or

(c) the powers of the directors of the company or any of its affiliates are or
have been exercised in a manner that is oppressive or unfairly prejudicial to
or that unfairly disregards the interests of any shareholder or debenture
holder, creditor, director or officer of the company,

the court may make an order to rectify the matters complained of ...@

Section 227 provides that in connection with an action brought or intervened in under
section 226 the Court may at any time make any order it thinks fit; and subsection (3) of section
228 that in connection with an application under that section the Court may make any interim or
final order it thinks fit including a variety of special orders among which is an order compensating
an aggrieved person [section 228(3)(j)].

Other sections of the Act to which I will refer are 229, 236 and 373.

Section 229(1) enacts that an application made or an action brought or intervened in under
Part 1 [section 1 to 236] may not be stayed or dismissed by reason only that it is shown that an
alleged breach of a right or duty owed to the company or its subsidiary has been or might be
approved by the shareholders of the company or its subsidiary but evidence or approval by the
shareholders may be taken into.

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