Friday, 1 October 2010

UK: Scotland: directors' duties, board ratification and the Companies Act 2006

The opinion of Lord Hodge in Eastford Ltd. v Gillespie and anor [2010] CSOH 132 was given yesterday. It is noteworthy because there is discussion of directors' duties under the Companies Act (2006), including Section 175 (duty to avoid conflicts of interest), and consideration of whether the 2006 Act altered the pre-existing rules on ratification by a board of a director's unauthorised acts (it did not, Lord Hodge found).

With regard to Section 170(4) of the 2006 Act - which provides that "The general duties [in Sections 171 to 177] shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties" - Lord Hodge stated (at paras. [13] to [14]):

This subsection seeks to address the challenge which the Law Commissions and the Company Law Review had identified, namely of avoiding the danger that a statutory statement of general duties would make the law inflexible and incapable of development by judges to deal with changing commercial circumstances. Parliament has directed the courts not only to treat the general duties in the same way as the pre-existing rules and principles but also to have regard to the continued development of the non-statutory law in relation to the duties of other fiduciaries when interpreting and applying the statutory statements. The interpretation of the statements will therefore be able to evolve. The statutory statement of the general duties of directors is intended to make those duties more accessible to commercial people. I see nothing in the statutory provisions, including section 180(5) (which provides that, subject to specified exceptions, the general duties have effect notwithstanding any rule of law), which suggests that Parliament intended to alter the pre-existing rules on ratification by a board of a director's unauthorised acts.

I am supported in my opinion by Lord Glennie in West Coast Capital (Lios) Ltd Petr [2008] CSOH 72, (at para 21) in which he expressed the view that section 171 of the 2006 Act did little more than set out the pre-existing law on the subject. I also derive some support from leading company law textbooks such as Gore-Browne on Companies (at para 15[8A]) and Palmer's Company Law, which (at para 8.2309) suggests that older cases remain relevant to the interpretation of the statutory duties "since the codified duties are generally formulated in a way that quite faithfully reflects the older case law". The statutory formulations do not, by a side wind, alter the law of agency or prevent ratification of the unauthorised acts of a director".
Update (1 October 2010): I have been reminded that Lord Hodge first considered the matters noted above in respect of this case last year: see [2009] CSOH 119. His views on board ratification and the significance of West Coast Capital have not changed.

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