Understanding A Director’s Duties Under The Company Act 2006 Is Crucial For Compliance.

Director Duties under s171 of Company Act 2006

1. Paragraph one

The director duty that is likely to be invoked is confined under s171 of the Company Act 2006. According to s171, company directors are obligated to act in accordance with the company's constitution and to utilize their powers solely for the purposes for which they have been conferred. In Emma's case, she was elected as a company director with the primary responsibility of manufacturing and selling dinosaur toys. Emma was required to operate in line with such a directive and should engage in any other business only with the approval of the other directors or as specified in the company's constitution. Additionally, to the section requirement, a director is required to execute their powers solely for the purposes for which they were granted. In light of the facts in the first paragraph, Emma appears to deviate from the task she was chosen to do on behalf of the firm, given that the corporation objected to making and selling dinosaur toys at the time she was granted the opportunity to act as a director. Contrary to the company's stated objective, Emma has chosen to expand into the sale of other prehistoric toys such as sabre-tooth tigers, which were not originally included in the company's stated objective. As stated in Hogg v Cramphorn (1967), notwithstanding the directors' alleged good faith in the share allotment, this was deemed illegal given their principal objective of avoiding a takeover proposal and retaining control. The ruling judge concluded that regardless of their motivation to further the firm's interests, the directors abused their fiduciary duties, which required them to operate in the best interests of the company. The case is strikingly similar to Emma's because, while expanding the company's sales of other prehistoric toys may have been intended to promote the company's success, as required by s172, her undertaking entailed an improper use of her fiduciary duty because she was only to act within the powers conferred on her to channel her duties.

2. Paragraph two

For this section, the duty triggered is s172 of the Act, which specifies that a director's primary duty is to promote the company's success. When attempting to promote the company's success, there are crucial variables that must be regarded first and foremost by the director. Among these issues are the long-term implications of the director's choice and the necessity to foster business relationships with customers, suppliers, and others. Subject to the long-term effects of the director's decisions, it's worth noting that this area was sparked by Emma's decision to hire the additional 100 personnel tasked with assisting her in her business expansion quest. At first glance, the decision appears to be attractive, especially with the lure of a 5000GBP sign-on incentive for the top toymakers. However, the long-term effects look to be detrimental to the company's success, as the company would almost certainly struggle to pay the additional 100 employees in the long run. Nonetheless, the case facts demonstrate that Emma proposes to reduce investor payouts for the following fiscal year in order to fund the salary of the newly employed staff. Not only would such a proposal jeopardize the company's business relationship with investors, but it would also discourage investors from doing business with the company. As specified in the above statement, it is reasonable to argue that Emma disregarded the s172(1)(c) clause, which requires directors to nurture the company's relationship with investors. In addition to the foregoing discussion, the court stated in Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd (2003) that a directors' resolution passed without proper consideration of creditors' interests by certain directors would have been subject to challenge had the company been declared insolvent at the time the resolution was passed. The case is an attempt to demonstrate that when directors reach a resolution, they must consider the interests of investors, and in doing so, they will promote the company's success.

3. Paragraph Three

Director Duties under s172 of Company Act 2006

In this section, the particular director obligations applicable to Emma's situation include s176, which requires directors to refrain from accepting advantages from third parties, and s174, which requires directors to exhibit care, skill, and diligence. Pursuant s176, a director must ensure that they do not accept any offers from third parties based on their role in the company in order to retain their integrity and avoid grounds for conflict of interest with the company. Directors may come across offers in the form of discounts that, while initially enticing, end up being adverse to the business in the long run. Emma's agreement to sign the five-year contract in order to obtain the discount is a flagrant violation of her director's obligation not to take benefits from third parties. The discount on its own is a classic example of a third-party offer, since it is prudent to note that it came with a condition requiring her to sign a five-year contract in order to qualify for the discount. Acceptance of a bribe, as determined in Novoship (UK) Ltd v Mikhaylyuk (2012), is a typical case of a breach of a director's fiduciary duty of loyalty. Thus, it would be logical to assume that 'Grandma Cop' bribed the director into contracting with it via the discount. Similarly, accepting the discount and therefore signing the five-year deal with 'Grandma Cop' without properly contextualizing the fundamental concerns to be addressed and thereby promoting the company's success constitutes a violation of s174. A director is obligated to use care, diligence, and skill in carrying out their obligations, as specified in the section. Emma fell short of these standards because it would commit Nye Industries to significant non-dinosaur toy manufacturing operations for the next five years.

4. Paragraph four

Emma is unaware that Natalie has been convicted for indulging in fraudulent activities when she hires Natalie to perform the post of chief toy designer. As the case demonstrates, Natalie's role was critical because the project required significant capital expenditure. In that regard, a personal opinion is that Emma should have thoroughly vetted the individual who would be entrusted with such a role. When she chose the individual, she should have conducted a thorough background check on the concerned persons prior to getting the post. As a result, Emma falls short of the s174 requirement that she take due care and diligence while in her position. A prudent director would be reasonable and fair in picking someone to deal with large sums of money. They would look at the individual's prior records, including experience in that field, before making a choice. Emma was supposed to seek expert counsel whenever necessary, as long as it did not impair her independent judgment, as stipulated in s173. Additionally, she was to do an investigation to establish whether Natalie would be capable of carrying out the task Emma entrusted her with. In direct contrast to what was expected of Emma, she blindly chooses Natalie to handle enormous sums of money, demonstrating her lack of skill and diligence. Consider the case of Re City Equitable Fire Insurance Co Ltd (1925), in which the court sought to determine whether the directors used due care, diligence, and competence. In the aforementioned instance, a managing director was convicted of fraud, while fellow directors who acted honestly but were deemed negligent for leaving the firm in the hands of the managing director were convicted of negligence. Judge Romer J noted that in addition to behaving honestly in carrying out their responsibilities, directors must also demonstrate a certain level of skill and diligence.

5. Paragraph five

Emma has committed a breach of s175 of the act which makes it necessary for a director to avoid areas that would bring them into conflict with the interests of the company. This can be drawn from her conduct of failing to accept the proposal of contracting ‘Eric Corp’ but instead offering the opportunity to her friend who is a director of a rival company. Conflict of interest must not necessarily imply that Emma would directly benefit from the transaction. As, long as a director uses an opportunity to benefit themselves, their relatives or friends, they will have engaged in a conflict of interest. In relation to the case facts, Emma utilized the opportunity that would have otherwise been provided to another company in providing it to her friend who was a director in a rival firm. The conduct did not only constitute breach of her duty to avoid conflict of interest, it also constituted a breach of s172 which imposes a duty to promote the success of the company among directors. Realistically, it is prudent to argue that a director intends to promote the success of the company for which they represent while at the same time they offer contracts to their rival companies. Emma, in her act of involving the director from a rival company would just but promote the success of the rival company rather than that particular company. In Boardman v Phipps [1967] for instance, it was questioned whether the Boardman and Phipps had breached their duty of avoiding conflict of interest even if it was realized that the company had made profit and the two had the beneficiaries’ consent. It was held that there was a possibility that the parties breached the duty given that the beneficiaries may have approached the two for advice with regards to purchase of the shares.  A similar ruling was observed in Bray v Ford (1896) where it was established that a person in a fiduciary position should not put himself in a position where his duty and interest conflict. Emma thus breached her duty to avoid conflict of interest with the company.