Section 172 Of Companies Act 2006: Directors' Duty To Promote Company Success (essay).

The Importance of Fulfilling General Duties and Obligations of Directors

The directors in general terms are considered to be agents of the company as they are supposed to be appointed by the shareholders in order to manage the day-to-day affairs. Therefore, the rudimentary rule is deemed to be regarding the obligations of the directors as they should act in a manner that would be in the best interests of the company. The general duties of the directors under Companies Act include that they should act within their powers and along with such promote the success of the company by acting fairly. In addition to this, they should also exercise independent judgement and work in a manner that would exercise reasonable care as well as skill and diligence. The directors also have the duty to avoid any conflict of interests and work without accepting any benefits from the third parties as the proposed or existing transactions are supposed to consist of declaring interests with the company.

This particular segment critically evaluates Section 172 of the Companies Act 2006 and tries to understand whether it goes far enough in articulating the duty of directors in order to promote the success of the company. In conclusion, it summarizes the points that have been deliberated upon throughout the discussion.

The directors need to work in a manner that would promote the success and benefit of the company as a whole. However, these general duties need to be fulfilled as non-fulfillment would result in a breach as it gives the company numerous remedies which are inclusive of an injunction, damages and compensation. Therefore, failure to comply to the duties and obligations would be penalized and not disclosing the interest in prevailing transactions or arrangements with the company would carry the risk of a criminal fine. Under the common law regime, the directors need to act in good faith for the interests of the company. However, the primary problem is considered to be the legal abstraction as the interests of the company are fairly obscure as well as elusive. Therefore, reform is required as such would create a specification on what interests the directors have to fulfill for promoting the success of the company.

In accordance with the statements made by the authors, it can be noted that, Section 172 of the Companies Act demonstrates the success of the company through the promotion of the interests of the shareholders as such are taken into consideration. The diverse group of shareholders are deemed to create challenges for the company director as they have to take care of the interests of the stakeholders and this in turn, has the capacity of creating conflict with the interests of the company. Therefore, this particular section in the statute is considered to be an issue for intense deliberations as it concentrates on the corporate governance aspect rather than considering the company to be the ultimate beneficiary. However, it has been understood that the previous legislations as well as common law have already created provisions for the company directors that are compliant to the fit and proper clause as the conduct of the business activities need to be done fairly. The duty to promote the success of the company is considered to be of utmost importance as the director needs to act in good faith in order to promote the success as it would also help or assist the members of the company as a whole. Section 172 is considered to be inaugurated as the enlightened shareholder value approach as the directors try to fulfill their duty towards the company. Nevertheless, in order to promote the success of the company and benefit the company as a whole the directors need to take care of other matters as well and due to such; the legislation needs to be developed in a manner that would equate the interests of the shareholders with that of the company’s success as this in turn, would help in creating long-term interests for the company.

Implications of Section 172 on the Duty of Directors to Promote Company Success

However, it can be understood that the imposition of the subjective standard is supposed to require the principle of good faith as such is counterproductive to consistency. This is not created to set any threshold standard for the directors. Nonetheless, despite such, the compliance of section 172 is required as it creates due care and this helps in attaining the objective of promoting the success of the company. It can be highlighted through the case of Regent Crest plc v Cohen (2001) 2 BCLC 319. Hence, the subjective standard is considered to necessitate the consideration of the actions of the directors as such needs to be conducive in promoting the company’s success. Therefore, Section 172 of the statutory legislation tries to protect the company from any legal implications regarding a bad decision in the future. It also takes care of the interests of the company employees and requires the individuals to foster business relationships with the suppliers as well as the customers and the others. This is well-thought out to be impactful as the company’s operations are set to affect the community as well as the environment. Due to this, the desirability of the company needs to be maintained through the maintenance of the reputation as such would be for creating high standards of business conduct. Furthermore, the directors need to act in a fair manner as such would be determining the success of the company. Hence, it can be stated that the duties imposed through the particular section in question is supposed to have effect as it would be subjected to the enactment or rule of law as such requires the directors to consider the interests of the creditors of the company as well.

As per the analysis of the statements made by the author, it can be understood that, the section 172 of the statute is supposed to promote the success of the company and it has done so by benefitting the members as a whole as it creates opportunities for the company to promote on social as well as environmental and governance objectives. Therefore, this particular section has created a mutual understanding of objectives. However, it can also be comprehended that, after the corporate failures, reform is necessary, as the duties of the directors in complying with the promotion of the interests of the company is considered to be essential. Therefore, in order to do so the corporate performance of the groups along with small suppliers as well as other features of corporate governance needs to be taken care of. It can be illustrated through the instance in relation to the case of R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020 as the case acknowledges the recourse section by the shareholders and is considered to create the basis for advice within the context of the shareholders as they are supposed to be on the lookout for influencing the board of directors for the decision-making process as such would help in understanding the factors that are associated with the success. the section in question is considered to be criticized for having the notion of success related or linked to the judgments of the directors and due to such, the shareholder interests are organized but not given too much importance. Therefore, in order to articulate the duty for the promotion of success of the company there should be a dialogue with the associated stakeholders as such would create mutual understanding and this would help in ensuring the success of the company as the directors would be transparent about the operational activities and the workings of the company in promoting success.

Challenges Faced by Directors in Promoting Company Success

Conclusion

Therefore, in conclusion, it can be stated that, a company is considered to act through two specific bodies of individuals, one is its shareholders and the other is through the board of directors. The board of directors are supposed to be in charge of the management as they need to make strategic as well as operational decisions by ensuring that the company meets its statutory obligations. Therefore, the role of the directors is considered to be related to participating in the board meetings in order to enable the board to reach to certain decisions that would make sure that the obligations of the company are fulfilled. It can be comprehended from the discussion that, although Section 172 of the Companies Act 2006 is considered to help in promoting the success of the companies through the duties of the directors it creates an illusion in reality, to the business community as well as regulators and other market players. The illusion is considered to be in the form of acknowledging of the interests of the stakeholders in corporate decision-making.

The claims concerning the unfair prejudice normally ascend when the majority shareholders (who in several instances are also the directors) utilize or misuse their powers in order to promote and endorse their own specific interests, thereby causing damage to the minority. In order to establish the presence or occurrence of unfair prejudice, one shall be required to demonstrate the fact that the concerned conduct actually recounts to the functioning of the particular business and causes an impact upon an individual in his or her capacity in the role of a shareholder. It should be noted that any claim on the grounds of unfair prejudice is actually brought in accordance to section 994, as provided in the Companies Act of 2006. This particular essay shall critically discuss the unfair prejudice remedy and how it has transformed the protection or safeguard that has been provided in respect of the minority shareholders.  

A minority shareholder cannot be considered to be entirely powerless. Specific provisions are always encompassed in the Companies Acts 2006 that influence and stimulate any minority shareholder to confine the extremes and extravagances of the majority. However, such provisions are not recurrently utilized against the majority shareholders who are determined and strongminded to give effect to their plans and policies. In such circumstances, the minority shareholder shall need relief and protection from the court. Hence, a statutory remedy has been provided in respect of the shareholders in the circumstance where any unfairly prejudicial conduct regarding the affairs and matters of any business corporation has transpired. Originally, the courts had been unwilling and disinclined to intervene in the decisions and pronouncements of the management because previously, the unfair prejudice remedy had a restrictive and deterring meaning. However, subsequent to the statutory alterations and modifications, which aimed at the elimination of such restrictions, the courts as well as the law are more in favor of making provision of relief in respect of the minority shareholders with the help of the unfair prejudice remedy. The unfair prejudice remedy is regarded as a chief source of protection and relief in relation to the minorities.

The Need for Reform in Corporate Governance

It must be noted and specified that the remedy relating to unfair prejudice is the most significant and (simultaneously) a prevalent remedy that is available in respect of the minority shareholders. The above said remedy primarily ascends in small private business corporations. Section 994, as provided in the Companies Act of 2006, where the remedy relating to unfair prejudice has been provided, specifically mentions that any member in connection to a business corporation, might make an application in respect of the court through petition for a specific order based upon the ground (i) that the affairs or matters of the company have been conducted and steered in a way that is unfairly prejudicial or detrimental to the interests and welfare of the members, or (ii) that any proposed or actual action or omission to act of the business corporation has been prejudicial or detrimental. Section 996 of the above said Act mentions that court shall be able to grant relief as a remedy.

In regard to filing petitions, it has been stated in section 112 of Companies Act 2006 that the members of any company shall possess a right to file petition in accordance to section 994 of the above said Act. However, sub section 2 of section 994 permits the non-members (in respect of whom the shares have been transmitted or transferred by the operation of the law) to file petition for the purposes of relief in accordance to the section, like the trustees and personal representatives in the bankruptcy, as was demonstrated in the case of Re McCarthy Surfacing Ltd, Hecquet v McCarthy [2006] EWHC 832. Thus, if not inside such extension, any non-member shall not have the ability to file petition in accordance to section 994, in the circumstance where the specific registered shareholder holds the position of a nominee and the individual having the beneficial interest in relation to the shares, pursues to file petition. However, it must be noted that in the case cited as Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191, it had been ruled that any specific nominee shareholder can be regarded as a legitimate and valid petitioner. In the case, the court rejected to cancel a petition due to the fact that it was questionable and debatable as to whether the ‘interests’ or welfare of a specific nominee shareholder had the capability of encompassing the contractual and economic interests of the particular beneficial owners in relation to the shares. It should also be noted that no prohibition exists upon the ability of any majority shareholder to pursue a petition. Nonetheless, it was specified in the case of Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171 that it would be presumed by any court that any specific majority shareholder would have had the position of influencing the concerned course of conduct. In the case of Richardson v Blackmore [2006] BCC 276, it was said that the court might decline a relief in spite of the instance that the specific settings are advantageous and favorable in relation to the claim of the petitioner.

Recourse Section by Shareholders

In regard to the conduct of the affairs of the company, it should be noted that in the case of Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, it had been stated that no complaints could be raised against the conduct and practice of the shareholders concerning the disputes amidst themselves, and hence, a shareholder shall not be able to pursue a petition. In accordance to Harman J, the actions of the company should be separated from the actions of a person, who acted in personal capacity, as the latter would not be able to receive relief as per section 994 of Companies Act 2006. In the case of Saul D Harrison & Sons plc [1994] BCC 475, it had been stated that for evaluating as to whether the company’s affairs have been steered or conducted in a way that would be unfairly prejudicial in relation to the interests and welfare of the petitioner, shall be regarded as an objective issue. Although, in the case of RA Noble & Sons Clothing Ltd [1983] BCLC 273, it had been stated that it would not be compulsory for the particular petitioning shareholder to demonstrate that anybody performed actions in ‘bad faith’ or else with the intent of causing detriment or prejudice, however, the courts shall consider the prejudice or detriment as unfair if any hypothetical reasonable spectator or bystander would consider it to be unjust or unfair. The test relating to unfairness is indispensable because of the fact that the particular courts are normally unwilling and reluctant to intervene with the management and regulation of the business corporation. Therefore, the courts shall not delve into the trivial or technical violation of fiduciary responsibility by the specific directors. For any petition to be successful, it should be proved that the conduct has been unfair.

Conclusion

To conclude, it should be said that the certain specific instance relating to unfairly prejudicial conduct include mismanagement, misappropriation of assets, non-payment of dividends and others. It must be said that any claim on the grounds of unfair prejudice is actually brought in accordance to section 994, as provided in the Companies Act of 2006. This particular essay has critically discussed the unfair prejudice remedy and how it has transformed the protection or safeguard that has been provided in respect of the minority shareholders.

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