The judgment of
the English High Court in Madoff
Securities v. Stephen Raven [2013] EWHC 3147 (Comm) was delivered last
week, and is now available on BAILII. There is plenty of interesting dicta on
the duties of directors. In England, the duties are codified in s. 172 of the
UK Companies Act. 2006. (The new Indian Act also has a partial codification:
see for example, s. 166 of the Companies Act, 2013). The Corporate Law and Governance blog has highlighted some of the interesting aspects of the
decision, including the following discussion in paras 190-192 of the judgment,
where the learned Judge laid down the principles in regard to directors’ duties
in the context of “division
and delegation of responsibility for particular aspects of the management of a
company”:
the English High Court in Madoff
Securities v. Stephen Raven [2013] EWHC 3147 (Comm) was delivered last
week, and is now available on BAILII. There is plenty of interesting dicta on
the duties of directors. In England, the duties are codified in s. 172 of the
UK Companies Act. 2006. (The new Indian Act also has a partial codification:
see for example, s. 166 of the Companies Act, 2013). The Corporate Law and Governance blog has highlighted some of the interesting aspects of the
decision, including the following discussion in paras 190-192 of the judgment,
where the learned Judge laid down the principles in regard to directors’ duties
in the context of “division
and delegation of responsibility for particular aspects of the management of a
company”:
It
is legitimate, and often necessary, for there to be division and delegation of
responsibility for particular aspects of the management of a company.
Nevertheless each individual director owes inescapable personal
responsibilities. He owes duties to the company to inform himself of the
company’s affairs and join with his fellow directors in supervising them. It is
therefore a breach of duty for a director to allow himself to be dominated,
bamboozled or manipulated by a dominant fellow director where such involves a
total abrogation of this responsibility … In fulfilling this personal
fiduciary responsibility, a director is entitled to rely upon the judgment,
information and advice of a fellow director whose integrity skill and
competence he has no reason to suspect … Moreover, corporate management often
requires the exercise of judgment on which opinions may legitimately differ,
and requires some give and take. A board of directors may reach a decision as
to the commercial wisdom of a particular transaction by a majority. A minority
director is not thereby in breach of his duty, or obliged to resign and to
refuse to be party to the implementation of the decision. Part of his duty as a
director acting in the interests of the company is to listen to the views of
his fellow directors and to take account of them. He may legitimately defer to
those views where he is persuaded that his fellow directors’ views are advanced
in what they perceive to be the best interests of the company, even if he is
not himself persuaded. A director is not in breach of his core duty to act in
what he considers in good faith to be the interests of a company merely because
if left to himself he would do things differently.
is legitimate, and often necessary, for there to be division and delegation of
responsibility for particular aspects of the management of a company.
Nevertheless each individual director owes inescapable personal
responsibilities. He owes duties to the company to inform himself of the
company’s affairs and join with his fellow directors in supervising them. It is
therefore a breach of duty for a director to allow himself to be dominated,
bamboozled or manipulated by a dominant fellow director where such involves a
total abrogation of this responsibility … In fulfilling this personal
fiduciary responsibility, a director is entitled to rely upon the judgment,
information and advice of a fellow director whose integrity skill and
competence he has no reason to suspect … Moreover, corporate management often
requires the exercise of judgment on which opinions may legitimately differ,
and requires some give and take. A board of directors may reach a decision as
to the commercial wisdom of a particular transaction by a majority. A minority
director is not thereby in breach of his duty, or obliged to resign and to
refuse to be party to the implementation of the decision. Part of his duty as a
director acting in the interests of the company is to listen to the views of
his fellow directors and to take account of them. He may legitimately defer to
those views where he is persuaded that his fellow directors’ views are advanced
in what they perceive to be the best interests of the company, even if he is
not himself persuaded. A director is not in breach of his core duty to act in
what he considers in good faith to be the interests of a company merely because
if left to himself he would do things differently.
The law on
unlawful distributions of capital is explained, after considering Progress Property (which we had earlier discussed on this blog), in para 203:
unlawful distributions of capital is explained, after considering Progress Property (which we had earlier discussed on this blog), in para 203:
Whether a transaction infringes the rule is a question of
categorisation or characterisation based on substance, not form. The label
attached to the transaction by the parties is not decisive. Sometimes the
exercise for the court will be a purely objective one in which the subjective
intentions of the directors are irrelevant: for example a distribution
described as a dividend, but actually paid out of capital, is unlawful, however
technical the error and however well-meaning the directors who caused it to be
paid. But where what is impugned purports to be a transaction of a different
character to a distribution, such as for example a contract for the purchase of
assets or services, the intentions of the parties to the transaction are often
highly relevant to the categorisation exercise, being one in which the court is
inquiring whether the transaction was in substance that which it purported to
be. The question whether the transaction was in substance a disguised
distribution of capital may be heavily influenced by whether that was the
intention of the parties. In such a case an attempt to dress up a transaction
as something different from what it is, is likely to provoke suspicion, and may
lead to the conclusion that its true characterisation is a distribution of
capital, although not all cases involving some pretence or dressing up will
justify that conclusion. As Lord Walker put it at [30], pretence is often a
badge of bad conscience. On the other hand the court will not recategorise an
arm’s length transaction if the directors intended it to be in substance that
which its form purports to be.
categorisation or characterisation based on substance, not form. The label
attached to the transaction by the parties is not decisive. Sometimes the
exercise for the court will be a purely objective one in which the subjective
intentions of the directors are irrelevant: for example a distribution
described as a dividend, but actually paid out of capital, is unlawful, however
technical the error and however well-meaning the directors who caused it to be
paid. But where what is impugned purports to be a transaction of a different
character to a distribution, such as for example a contract for the purchase of
assets or services, the intentions of the parties to the transaction are often
highly relevant to the categorisation exercise, being one in which the court is
inquiring whether the transaction was in substance that which it purported to
be. The question whether the transaction was in substance a disguised
distribution of capital may be heavily influenced by whether that was the
intention of the parties. In such a case an attempt to dress up a transaction
as something different from what it is, is likely to provoke suspicion, and may
lead to the conclusion that its true characterisation is a distribution of
capital, although not all cases involving some pretence or dressing up will
justify that conclusion. As Lord Walker put it at [30], pretence is often a
badge of bad conscience. On the other hand the court will not recategorise an
arm’s length transaction if the directors intended it to be in substance that
which its form purports to be.
We hope to
discuss this interesting decision more elaborately in the coming few days.
discuss this interesting decision more elaborately in the coming few days.
