These notes are arranged in the order of the Edexcel IAL A2 Physics Unit 5 specification/syllabus. The purpose of these notes is to make sure all points in syllabus/specification are covered. Use t...
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Part 1 [Slide 19] Khoo Chiang Poh v Cosmic Insurance (1974) Facts • •
Khoo was appointed as MD for life under a pre-incorporation contract. The company purported to remove him under S152.
Issue Can Khoo e removed! "f so# is he entitled for dama$es! !ecision % Khoo can e removed under S152# ut he can&t sue for dama$es due to unsatisfactory
performance. "easoning
'ven where there is a contract that a director should hold office for life# it is anim#lied term that he shall only continue in office as lon$ as he performs his duties satisfactorily and in the interest of the company and its memers. The court held that Khoo had een motivated y self-interest in the dischar$e of his duties and that he had reached his fiduciary duty to the company. (e had not run the company on sound principles. (e did not consult the other directors in runnin$ the company and had i$nored the resolutions of )*D. "t was held that his suspension and removal were +ustified and his action for dama$es was dismissed. Part 2 [Slide 7] "e $ % & "oith 'td (197) Facts • •
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,oith director had entered into a service contract with his company providin$ for pension. The pension is to e $iven to his wife in the event of his death without ta/in$ into consideration whether the contract was for the enefit of the company. The li0uidator re+ected the claim when his eecutors put in a claim for the widow&s pension after ,oith&s death.
Issue "s the contract valid despite fulfillin$ all statutory re0uirements! !ecision % o. "easoning •
Directors must eercise their powers ona fide in what they consider# and not what the court may consider# is for the enefit of the company and not for their own interests or any collateral purpose. 3ny decision made y the directors must not e tainted with self-interest. The court held that the service contract in 0uestion was not reasonaly incidental to the usiness of the company. More importantly# Mr ,oith did not act for the est interest of the company. "n fact# he acted the 4est interest for his wife. "n other words# Mr ,oith reached his fiduciary duty which is the duty to act in the est interest of the company. (ence the court held that the contract is not indin$ to the company.
that can`t City Carton owed a 62.5 million det to "ntraco ecause it is in financial distres.Debt be fulfilled is worthless.) Multi-7a/ was controlled y the same shareholders and directors as City Carton. Multi-7a/ purchase the det from "ntraco and in return Multi-7a/ issued 289 of its shares to "ntraco. Multi-7a/ then went into insolvent li0uidation.
Issue % :hether the directors of Multi-7a/ were in reach of fiduciary duties for approvin$ the det
uyout of City Carton! !ecision % o. "easoning
:hen a oard of directors have made an honest usiness decision# it could not e accused to have reached its fiduciary duties to the company merely ecause the decision turned out to e a ad one on hindsi$ht. This case hi$hli$hts the difference etween ne$li$ence or wilful i$norance# and an honest ut poorly made decision that was acted out in $ood faith y directors. :hile directors are liale for reaches of trust and failure to act honestly and with reasonale dili$ence# the court reco$ni;es that circumstantial chan$es may render a decision made in the est interests of the company may have the opposite effect. This case also illustrates that the directors may ta/e the lon$ view in usiness dealin$s. 3 transaction which seems on the fact of it to e a ad one may e commercially +ustifiale if it leads to other lon$-term intan$ile enefits for the company. The court held that the #ro#er test in determinin$ whether the directors have acted ona fide was whether an honest and intelli$ent man in the position of a director in the whole of the eistin$ circumstances# have reasonaly elieved that the transactions were for the enefit of the company. The court reco$ni;ed that the transactions were not entered into solely or mainly for the purpose of enalin$ "ntraco to ac0uire the shares in Multi-7a/ at no costs to themselves# ut there was actually a enefit to Multi-7a/ in formin$ a strate$ic usiness alliance with "ntraco even thou$h the City Carton&s det was near-worthless. Therefore the court held that there was no reach of directors& duties involved. The court held that the word
[Slide 1,] -o Kang Peng v Scintroni. Cor# 'td (/,14) Facts • •
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(o Kan$ 7en$ was a former director and C'* of the company. (e si$ned an a$reement on ehalf of the company to pay )ontech 'nterprise Co >td for consultation services. (owever# this was a scam a$reement as no such services were rendered. The court found that the a$reement was used to channel money to a Chinese man as ries to procure usiness for the company. The court also found that only (o and two other directors had /nowled$e of the unauthori;ed payments.
Issue % Do such payments made in the interests of profit maimi;ation constitute a reach of
"n cases where the company rin$s a claim a$ainst its directors for improper acts in which the company has no /nowled$e of# the court states that it would not $enerally e sensile or realistic to attriute /nowled$e to the company whom itself was the victim of the a$ent&s or employee&s dishonesty# and if the attriution would have the effect of defeatin$ the ri$ht of the company to fromthat a dishonest or knowled employee. -recover To prove companya$ent has no ge of the decision: )oth a decision of a ma+ority of directors at a oard meetin$ and an informal decision ta/en y all of the directors of a company were attriutale to the company and would e indin$ on the company. "t was not disputed that there was never any formal oard approval of the a$reement and the payments# and on the evidence# only three directors /new aout the a$reement. "n cases where an innocent third party rin$s an action a$ainst the company for the improper acts of the directors# the company should e ound y the improper acts as the acts of the wron$doer directors would e attriuted to that of the company. •
Directors Duties: - The court ac/nowled$ed that while the ries that were paid to a third party were intended to enefit the company financially at least in the short term# and a court would $enerally e slow to interfere with commercial decisions made y directors# a director would not e re$arded as havin$ acted ona fide in the company&s est interests where such director had en$a$ed in dishonest activity. - The est interests of a company do not involve only profit maimi;ation# and certainly is not profit maimi;ation y all means. - "t was as much in the interests of the company to have its directors act within their powers and for proper purposes# to otain full disclosure from its directors# and not to e deceived y its directors. - There could e no dout that a director who caused a company to pay ries and# therefore# ran the ris/ of the company ein$ su+ected to criminal liaility was not actin$ in the company&s est interests.
3s this was a ris/ which 4no director could honestly elieve to e ta/en in the interests of the company# the ma/in$ of such payments constituted a reach of director&s duties to act in $ood faith in the interests of the company. [Slide 1,] !0nast0 'ine 'imited (In 'iuidation) v Su*amto Sia (/,14) "easoning :hen a company is in roust financial health# its directors are entitled to pay $reater heed to what is est for the shareholders. (owever# where there are mountin$ concerns over the company&s financial health# then the directors will need to pay more heed to the creditors& interests. The court ruled that the directors must consider the interests of the company&s creditors as soon as they have reasons to dout their company&s continued solvency# and not +ust when the company is technically insolvent or close to it. The court held that the two directors reached their fiduciary duties as directors when they pled$ed away their company&s only asset at a time when its solvency was in 0uestion. The court found that the security transactions imperiled Dynasty&s aility to satisfy its liailities# and severely compromised its aility to meet its oli$ations under the various sales and purchase a$reements. The court further found that Sia 4/new that y pled$in$ the shares as collateral for loans to himself and third parties# he had directly +eopardised or pre+udiced Dynasty&s aility to repay the liailities that it owed to its creditors. The court therefore held that Sia reached his fiduciary duty y wholly disre$ardin$ the interests of Dynasty&s creditors. -
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12 Cite S1+7 C3 a director is reuired at all times to act honestl0 5hich means to act 6ona ide to #romote or advance the interests o the com#an0 /2 8he court has to decid e 5hether or not the a ct is in inter ests o com #an0 Su6e ctive or o6ective:
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Clear evidence of elief that a decision is in the company&s est interests will e sufficient to demonstrate compliance with the duty and to overcome the fact that the decision was viewed y the court as patently unreasonale. (owever# in the asence of such conclusive evidence of elief that su+ective duty to act in the est interests of the company contains an element of o+ectivity ased on the stren$th of the reasons $iven y the director for elievin$ that the decision was one that enefited the company. This is to say# that the court will not sustitute its own view of what a director should have done for the directors& own decision. "nstead the court is concerned to identify whether or not the director acted honestly in the eercise of his power. a Self interest vs Company&s interest % cite ,oith case % don&t cite aove stt (onest ut poorly made decision that cause the company lost money % cite Multi-7a/ case c Scam a$reement % cite (o Kan$ 7en$ case d "nterest of the company vs interest of the creditors when usiness is down % cite Dynasty case
[Slide 1;] -o5ard Smith v 3m#ol Petroleum (1974) Facts (oward >td and 3mpol >td were oth tryin$ to ta/e control of Millers. • • Directors of Millers considered that it would e in the est interests of company to e ta/en over y (oward. (owever# (oward=s ta/eover id could not succeed as 3mpol controlled sufficient shares in Millers to • loc/ the id. Directors of Millers issued new shares to (oward# which diluted 3mpol&s holdin$s to the point where it •
could no lon$er loc/ the ta/eover. Issue % "s the directors eercisin$ their power for proper purpose! !ecision % o. "easoning The court stated that it was necessary to determine the 4sustantial purpose for which a power was • eercised. • 3 director will e in reach of his duties if the sustantive purpose is outside the nature and limits of the power to which he is accorded under the company&s constitution# even if such improper purpose is in the est interests of the company. Shares were issued to strate$ic shareholders for the purposes of defendin$ a ta/eover id# rather than to raise capital for the company# which was an improper use of the power to issue shares. [Slide 1<] "egal (-asting) v =ulliver (194/) Facts • Several directors and the company (Regal) each invested their own money into a cinema. • @ollowin$ the ta/eover# the directors and the company made si$nificant profit. Issue % :as there a reach in the directors& fiduciary duty ecause they ac0uired personal profits even when the company also ac0uired $ain! !ecision % ?es. "easoning 3 director may not retain a profit made y reason and in the course of his fiduciary relationship with the company. "f an opportunity to ma/e a profit or otain a enefit comes to the director ecause he is a director# that profit or enefit must e disclosed to the company and approved. "n the asence of such disclosure and approval# the director is liale to account for that profit. The court held that the directors had not disclosed their intention to ac0uire the shares to the shareholders and otained the approval of the shareholders to their action. 3ccordin$ly# the directors were in reach of the duty not to ma/e a secret profit. 3lthou$h there was no dispute that the directors were honest and well-intentioned# and there were no ad faith# the rule of 4no secret profit is still applied ecause even if there is no realistic possiility of conflict etween the interest of company and the duty of the director# so lon$ as a director has made a profit in the course of his fiduciary relationship with the company# the directors still have to account for the profits# and thus they had to hand ac/ their $ains to the company.
>ord McMillan set out a two-fold test pertainin$ to the duty of directors to avoid a conflict of interest in which in order to estalish a liaility it was necessaryA
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4That what the directors did was so related to the affairs of the company that it can properly e said to have een done in the course of their mana$ement and in utilisation of their opportunities and special /nowled$e as directorsB and That what they did resulted in a profit to themselves.
[Slide /1] Personal 3utomation &art Pte 'td v 8an S5e Sang (/,,,) "easoning
"t is estalished law that a director may not otain for himself any property or usiness advanta$e that properly elon$s to his company or for which it has een ne$otiatin$. "t is a clear reach of duty for a person to set up a competin$ firm to ta/e advanta$e of contracts that should have $one to the company of which he is a director. This oli$ation persists even after the director concerned has resi$ned# at least where the resi$nation can e said to have een prompted y the wish to otain the property or usiness advanta$e for himself. The fact that the company could not itself have succeeded in $ettin$ the property or usiness opportunity is irrelevant. [Slide //] I!C v Coole0 (197/) Facts • •
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Mr Cooley had een employed y "DC as a MD to develop contacts and usinesses. (e was approached y a third party who did not wish to deal with his employer# ut wish to employ him personally. Mr Cooley then resi$ned his post due to
Issue % :as Mr Cooley in reach of his fiduciary duty as director! !ecision % ?es. "easoning
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"t was held that Cooley had allowed his own interest to conflict with "DC y fa/in$ illness so that he could leave "DC&s employ and ta/e the enefit of a contract for himself in which he was offered in his private capacity while ne$otiatin$ with the third party. (e was ordered to account for the enefit he had received under the contract for reach of director&s duty. "t may e ar$ued that Cooley was approached in his private capacity# did not utili;e any corporate facilities in otainin$ the contract for himself# and that "DC had virtually no chance of landin$ the contract# and hence it is unli/ely that he had here ta/en a corporate opportunity over "DC. )ut the court held that the reasonin$ are irrelevant# ecause Cooley had 4one capacity and one capacity only in which he was carryin$ on usiness at that time. "nformation which came to Cooley while he was MD and which was of concern to the plaintiffs(IDC) and relevant for them to /now# was information which it was his duty to pass on to the plaintiffs. The court also held that
[Slide /4] Peso Silver &ines 'td v Cro##er (19) Facts • •
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7eso is a minin$ company and Cropper is the MD of 7eso. 7eso was offered certain minin$ claims ut turned it down in the interest of 7eso after careful consideration. Cropper wasdid. then approached y a $eolo$ist to form a new company to purchase the claims# which they 3fter control of 7eso chan$ed# the new oard sued former director Cropper for reach of its fiduciary duty and an accountin$ of his profits from the purchase.
Issue % :as Cropper in reach of his fiduciary duty as director! !ecision % o. "easoning •
The case su$$ests that a director may usurp a corporate opportunity where the company has ona fide re+ected the proposal and the director is approached in a private capacity# without the necessity of disclosure to the company# and hence this will not amount to a reach of the directors& duties. "t was held that the decision of the 7eso directors to re+ect the opportunity had een made in $ood faith and for sound commercial reasons in the interests of the company. They could therefore eploit the opportunity themselves. The court found that there was no duty to account as Cropper had not ac0uired any confidential information aout the minin$ claim from his position on the oard and that he had een approached not in his position as a director ut as a memer of the pulic. "n addition# Cropper used his own resources# not 7eso&s# to invest in the $roup that purchased the prospector&s offer. The court held that there had een no reach of Cropper&s fiduciary duties as director and thus no liaility to account for the sharesprofits. Corporate mana$ement who ta/e advanta$e y usin$ their positions as directors or officers to appropriate a usiness opportunity# even in situations where the company is unale to accept the opportunity#have a conflict of interest. "f they divert the opportunity to themselves# they will reach their fiduciary duty to the company and e liale to account for any profits or other $ain that they ma/e as a result. % IDC Case *n the other hand# if the oard of directors# actin$ in $ood faith and in the company=s est interests# re+ects the opportunity# it may e availale to directors or officer in their private capacities. "n such circumstances# directors and officers who privately pursue such opportunities must scrupulously avoid usin$ any confidential information or other corporate resources availale to them in their capacities as memers of mana$ement. % Peso case
3:3 >td set up a forei$n echan$e operation# and Koval was hired to run the operation. Koval was effectively unsupervised and ran up massive liailities. The oard were assured y the mana$ement and the auditor aout the losses in the operations. "t turned out that Koval was in fact losin$ money and concealin$ this fact from his superiors# and his activities caused sustantial losses to 3:3. The company sued its auditor for ne$li$ence. The auditor pleaded that the company had een contriutorily ne$li$ent too.
Issue % :ere all directors liale! !ecision % o# only chief eecutive director was liale. on-eecutive directors are held not liale. "easoning •
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The court reco$ni;ed that eecutive directors had more powers than non-eecutive directors# and non-eecutive directors were not epected to dischar$e directorial duties in a detailed and /nowled$eale manner. (ence# the non-eecutive director in the case was not found ne$li$ent. @urthermore# it was reco$ni;ed that an eecutive owed a hi$her standard of care than a noneecutive director. Conse0uently# an eecutive director had a more onerous tas/ to show that his or her reliance on mana$ement was reasonale. ,o$ers C su$$ested that non-eecutive directors may only e epected to pronounce on matters of policy and may rely on mana$ement to inform of anythin$ important# and hence they could not e as well-informed aout a company&s affairs as an eecutive director who was involved with them on a daily asis. Thus# non-eecutive directors should e +ud$ed y a lower standard of care.
[Slide ;] >ng Cho5 -ong v PP (/,11) Facts • •
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*n$ Chow (on$ was the non-eecutive chairman of 3irocean Eroup >imited. Thomas Tay# the C'* and eecutive director of 3irocean# was rou$ht to the Corrupt 7ractices "nvesti$ation )ureau for investi$ations on alle$ations of corruption a$ainst 3irocean. The company secretary contacted all the directors of 3irocean and informed them of SEF&s re0uest for a clarificatory statement on Thomas ein$ the su+ect of C7") investi$ations. *n$ informed her that he was playin$ $olf# and that he would a$ree to any announcement issued y 3irocean if 7eter Madhavan another independent director of 3irocean and a lawyer y profession approved it. 3irocean sent out an alle$edly misleadin$ pulic statement later that ni$ht# which led to three directors includin$ *n$ ein$ char$ed.
Issue % :as *n$ in reach of his fiduciary duty as director! !ecision % ?es. "easoning •
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The char$e was in relation to Mr *n$ havin$ approved the release of an announcement y 3irocean Eroup to Sin$apore 'chan$e without first havin$ si$ht or /nowled$e of the statement. :hilst there are provisions in the companies act that provide for allowances to allow directors to $et eternal advice and information# they are still epected to supervise and determine for themselves if the advice and information is reliale# thus the duties that they owe to the company are non-dele$ale and the ultimate responsiility for these duties lie solely with the directors. The court held that althou$h Gthere are limits to the etent of /nowled$e and epertise a director may e epected to have# and that some reliance may e placed on the advice $iven y professionals# each director of a listed company has a solemn and non-dele$ale duty of due dili$ence to ensure compliance with mar/et rules and practicesG. The court noted that *n$ had consciously adicated from his responsiilities when he dele$ated his responsiilities to 7eter Madhavan# and was either indifferent to his wider responsiilities or failed to appreciate them# which amount to a criminal offence under the 3ct or a violation to a director&s 4solemn and non-dele$ale duty of due dili$ence to ensure compliance with mar/et rules and practices. *n$ was char$ed with# pleaded $uilty to and was convicted of# failin$ to use reasonale dili$ence in the dischar$e of his official duties as a director of 3irocean under S15H1. •
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Madhavan won an appeal a$ainst his conviction for his role in filin$ misleadin$ re$ulatory statements from 3irocean. (e was ac0uitted on of all char$es relatin$ to nondisclosure and misleadin$ disclosure. The court held that the evidence did not show that the information omitted or undisclosed was materially price-sensitive. ud$e of 3ppeal Chao (ic/ Tin allowed a criminal revision petition y Mr *n$ and set aside his conviction# orderin$ that the dine# which Mr *n$ had already paid# e refunded
to him. (e said that it would 4constitute a serious in+ustice if the conviction were allowed to remain# considerin$ that other directors involved in the case have since een ac0uitted of their char$es.
