Clause 157
Company Law Reform Bill [Lords]
3:30 pm
Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)
The clause, based on the existing equitable principle, creates a duty that directors must
“act in accordance with the company’s constitution, and...only exercise powers for the purposes for which they are conferred.”
A report provided by Linklaters said that the use of the words
“purposes for which they are conferred”
could create problems, as the purposes could be unclear.
Mike O'Brien (Solicitor General, Law Officers' Department; North Warwickshire, Labour)
It is right that the clause codifies the general duty of a director to act in accordance with the company’s constitution and to exercise powers for proper purposes. If the duty were left out of the statutory statement of duties, it would remain part of the common law, and that would do nothing to improve the accessibility of the general duties.
To determine the purposes for which a power is conferred, the articles are an obvious starting point, as it is from those that directors derive most of their powers. Typically in practice, the powers granted to directors by the company’s constitution are drafted in general terms and do not precisely state the purposes for which they are to be exercised. The courts have explained that the process is not an exact one, involving the laying down of precise limits beyond which directors cannot pass. Instead, if a particular exercise of a power is challenged, the courts will determine the substantial purpose for which it was exercised, and reach a conclusion as to whether that purpose was proper or not. The case of Howard Smith Ltd. v. Ampol Petroleum Ltd. is the key one in this area.
In doing that, the courts will necessarily give credit to the good-faith opinion of the directors and respect their judgment on matters of internal management and, indeed, how the company engages in external operations. The courts will take into account the nature of the power and the business practice. That having been done, the ultimate conclusion has to be the side of a fairly broad line on which the case falls. That is typical of the courts’ approach to corporate disputes, giving due respect for directors’ business judgment and not making a close examination of their actions in favour of a more broad-brush approach, so that the directors can have an element of freedom of judgment in how they make a decision.
Nevertheless, whether a power has been exercised for a proper purpose is a question of law, and the directors’ opinion of the propriety of their action is not conclusive. For example, a purpose may be improper even if the directors consider that it is in the best interests of the company. I hope that that explanation deals with the hon. Gentleman’s concern.
Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)
We have made clear our problem with general codification issues, and that will come up again, but in relation to the definition of purposes, I thank the Solicitor-General for his clarification.