Percival V Wright  53283

Percival v Wright

Duties of Directors and Relevant Case Law The directors’ duties to the company were governed by the common law of negligence and the equitable principles of fiduciary duties before the CA 2006. The CA 2006 has brought an important change of codification. [1] This codification of the general duties of a director was brought forward by the law reforms bill as introduced to the parliament on November 1, 2005. The explanatory notes to the bill show the apprehension of the draftsmen that the exercise of the codification will serve as insulation to the development of the directors’ duties. The general duties will be interpreted in the same manner as the common law rules or equitable principles and in interpreting and applying these general duties regard shall be had to corresponding common law rules and equitable principles. [2] In this work an endeavour has been made to discuss the directors’ duties as conferred by the CA 2006 in a codified form. The directors have the duties to work within the powers, to exercise the reasonable skill and care, and to work for the success of the company. They also have important duties to the shareholders and owe certain duties to the creditors in case of the insolvency of the company. These duties of the directors have been discussed along with the relevant case law.

Directors Duties to the Shareholders In general the directors do not have any contractual or fiduciary duty to the shareholders of the company. But if there is a bid situation the City would be concerned on takeovers and mergers and the stock exchange is beginning to look critically at the sort of insider dealing which took place in the Percival v Wright [3] where a listed company is concerned at least and has set up a dealing code for the directors. [4] Lindley L.J. said in the Re Lands Allotment Company [5] regarding the position of directors towards shareholders, “Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since t stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees, and it has always been held that they are not entitled to the benefit of the old Statute of Limitations because they have committed breaches of trust, and are in respect of such moneys to be treated as trustees". [6] Swinfen-Eady J. held in the case of the Percival v Wright [7] regarding the directors’ duties towards the shareholders

“The directors of a company are not trustees for individual shareholders and may purchase their shares without disclosing pending negotiations for the sale of the company's undertaking" [8] . The decision in the case of the Percival v Wright [9] has been criticised a lot that it should not be deduce that the directors can never be placed in a fiduciary relationship to the . If the shareholders authorise the directors to negotiate for them, then the directors owe a duty in the case of a takeover bidder. The establishment of an agency relationship may be sufficient in the case of a family company, which depends on the whole surrounding circumstances and the character of the responsibility which the directors have assumed in a real and practical sense. [10] The family characteristic of the company is the most important reason to impose fiduciary duties on the directors towards the shareholder, this happened in the New Zealand in the case of Coleman v Myers [11] , in which Mahon J did not follow the decision of the Percival v Wright [12] , he stated the following: “It seems an untenable argument to suggest that the shareholders on an offer to buy their shares are not perforce constrained to repose a special confidence in the directors that they will not be persuaded into a disadvantageous contract by nondisclosure of material facts. [T]here is inherent in the process of negotiation for sale a fiduciary duty owing by the director to disclose to the purchaser any fact … which might reasonably and objectively control or influence the judgment of the shareholder in forming the decision in relation to the offer." [13] As it has been discussed that the directors do not have any fiduciary duty to the shareholders, but some of the judges are of the view that directors have some discrete duties to the company’s shareholders and these duties are fiduciary in character. The directors have to fully inform and should avoid misleading the shareholder when their action or approval is required. The disclosure will relate to material considerations having an effect on the management of the company. [14] According to Mr Flannigan the decision in the case of the Coleman v Myers [15] by the court of appeal of the New Zealand is based on the wrong analysis. The shareholders complaint was that the director had failed in disclosing about their financial plans to get all the share of the company, through non disclosure and misrepresentation. According to the court, failure was the breach of the fiduciary duty which arose on the basis of the facts. The court distinguished the Percival v Wright [16] that the directors do not have any fiduciary duty to the shareholders. Mr Cook said that Percival v Wright [17] , “would merely exclude any automatic fiduciary duty, leaving open the possibility of such a duty falling on a director in particular circumstances".

There is no fiduciary obligation on the directors because the relationship between the and the directors is not of a limited access in general but in some circumstances a limited access can exist. [18]