Scottish Law Commission (Discussion Papers)

Part 14




Part 14 A Statement of Directors' Duties: Options for Reform

Introduction

14.1      The scope of this project includes considering the case for a statutory statement of the duties owed by directors to their company under the general law. In this part we consider criticisms made with regard to the inaccessibility of the present law, and then the various options open with respect to a possible statement of directors' duties, and the advantages and disadvantages of each. We ask consultees' views on these options. The scope of this project does not extend to suggesting any change to directors' fiduciary duties and in particular we have not been asked to consider whether any change should be made to the constituencies to whom directors owe their duties.^[1]
14.2      The following possibilities are considered:

Option 1: a comprehensive codification^[2]

Option 2: a partial codification^[3]

Option 3: a statutory statement for guidance only and not replacing the general law^[4]

Option 4: a non-binding statement of the main duties under the general law to be used in certain prescribed forms etc^[5]

Option 5: authoritative pamphlets^[6]

14.3      A draft Statement of Duties for the purposes of option 4 has been prepared and appears in Appendix A below. This statement includes a summary of the duty of care on one of the bases discussed in Part 15 below.^[7]

Criticisms of the inaccessibility of the present law

14.4      It is often said that the law on directors' duties is difficult for directors to find or understand because the principles are to be found in the case law rather than in a provision of the Companies Act, and that the law in this field should be more transparent. One of the arguments for codifying directors' duties is that it makes the law more accessible. It is said that law should be such that anyone who looks for it will find it and such that it can be explained to him in reasonably comprehensible terms. A layman should not have to look to his lawyer whenever he needs to know the basic principles. What a director needs is to know what to do before he acts, not afterwards, since he may be sued or subject to disqualification proceedings if he fails to comply with his obligations. Also, professionals can benefit from codification since it will reduce the need to examine earlier case law.
14.5      In other words, as the DTI's Consultative Paper states, the arguments for having a statutory statement of the duties of directors are to enable the duties to be more widely known and understood. It was for the same reasons that the Davey Committee recommended that the duties of promoters and directors with respect to company promotion should be codified. The Jenkins Committee too thought that a statement of directors' duties might well be useful to directors and others.
14.6      On the other hand it must be recognised that there are limits to the extent that directors will actually be assisted by reading a statement of their duties. First it must necessarily be expressed in general terms and it may need to be explained in order that they can apply it to their particular case. Second the statement would only cover the fundamental duties owed under the general law. It would not set out all the other duties imposed on directors by the Companies Act and other legislation.
14.7      There is no clear evidence as to the extent to which directors themselves regard this as a problem, though our proposed empirical survey will help to resolve this. For the present time, one can fairly assume that some directors, probably those without qualified company secretaries, find the present law difficult to understand.

Option 1: A comprehensive codification

General

14.8      Under this option we consider the pros and cons of codifying the duties of directors under the general law in the Companies Act.^[8] In this consultation paper, we use the term "codification" to mean a statement of law of this kind.^[9] The main advantages of codification in general are that :

it makes the law more consistent;

it makes the law more certain;

it makes the law more accessible, particularly to lay people: they have less need to have the law mediated for them through professionals; and

it makes the law more comprehensible.^[10]

To achieve these advantages the codification needs to be certain in its effect, clear in its expression and comprehensive in its scope.

Arguments in favour of codification

14.9      First, if codification is successfully achieved with the features identified in paragraph 14.8 above, it can be said to be fairer to the citizen who can find more easily, at least in general terms, what the law is before he does an act.
14.10      Second, it can also be said that codification leads to more predictability and that judges ought not to have the power to develop the law in a way which may result in a person coming under a liability which had not been imposed before and could not reasonably have been predicted.
14.11      Third, as appears from Part 9, it may be desirable to repeal some of the provisions of Part X of the Companies Act 1985 and place reliance on the duties of directors under the general law. The argument for adopting this radical solution would be stronger if the duties in question were set out in the Companies Act 1985 itself.
14.12      Fourth, the duties could be expressed in broad and general language which would be capable of being applied in a very wide range of situations. It would thus be capable of being developed as more and more examples were discovered which fell within the general terms.

Arguments against codification

14.13      There are arguments against codification in the sense given. First, codification is a difficult process and successful codification may not be achieved. Where the law has become settled and can be stated without much difficulty, codification can be achieved and brings benefits. An example of codification of this kind is the Sale of Goods Act 1893. Experience however shows that the success of codification is subject-specific: not all codification can be achieved or works. In the early years of the Law Commissions, for instance, much effort was put into producing a contract code but the project proved to be too ambitious. There is therefore a risk that codification may be a lengthy exercise and differences of opinion may emerge as a result of which it is impossible to achieve a consensus. For example, a director is in breach of duty if he misappropriates information which he receives and should have reported to his board,^[11] but the circumstances in which he ought to report information he receives to his board have not been defined by the courts and there are likely to be differences of view as to what those circumstances should be.
14.14      As regards the duty of care, the usual difficulty in stating the law is to define the ambit of the duty and to specify the persons to whom the duty is owed. That difficulty does not exist in this case because all that it is desired to state is the duty of directors to their company. That leaves the standard of care, which is the only other matter that would have to be covered by the codification. That is unclear under the present law, but once the underlying policy is decided upon, there is no difficulty in stating it.^[12] However what is being considered under this option^[13] is a total codification of all the duties governed by the general law whether they are the duty of care or the fiduciary duties. Fiduciary duties cannot be codified without either being stated in detailed terms in which case there will be a loss of flexibility, or being stated in general terms in which case the statute may have to be interpreted by the courts and the result is that the law may not be much more accessible than it is at present.
14.15      Second, codification is unlikely to result in a comprehensive statement of the law. There are bound to be cases where the codified law has to be interpreted and is not clear on its face.^[14] Accessibility is then only superficially improved since a lay person can never be sure what the law is unless he looks elsewhere or seeks professional advice. If he does proceed on the basis that the codification is complete he may be seriously mistaken and misled.
14.16      Third, codification does not always lead to predictability because judges have to interpret the law. Parliament cannot be expected to foresee every situation that might arise or to pass legislation to cover every case. Even when the law is statutory, there is scope for the courts to fill in gaps in the law. Courts have to supply an answer when they are asked what a statute means in a given situation. The view of the courts as simply giving effect to law made by the Legislature is increasingly unrealistic in modern society due to the complexity and volume of legislation being made.
14.17      Fourth, codification might well lead to a loss in flexibility. This is one of the points that concerned, for instance, the Davey Committee. The law of fiduciaries is dynamic and needs to be adapted to new situations: for instance the law has not yet had to define the connection with the company that is necessary to render a director liable to account to the company for the benefit of an opportunity which he receives for his own account while he is a director of the company. Moreover, when duties are codified, people will tend to ask whether as a matter of statutory construction they apply to a given situation rather than whether the situation is one caught by the policy or principle behind the decided cases. Furthermore, if there is a comprehensive codification there is a real risk that a situation occurs which is outside the statutory code but where the law ought to have applied. The courts cannot rewrite what is there or substitute a provision which they think Parliament should have enacted. Judicial evolution of the law is brought to a stop, and it ceases to be possible without further legislation to bring the law in line with changing social conditions.^[15] In addition codification in substitution for the existing law could well lead to uncertainty in what the law is. This would involve directors taking legal advice which is likely to result in an added cost for business. It could also lead to more litigation.
14.18      Loss of flexibility is mitigated if the codification is in broad and general language. However the danger of this is that if the language is truly of this description it would not make the law accessible. The lay person will still need a professional to mediate it for him, and inform him of the decisions of the courts as to what fell within the language.
14.19      This may be less of a problem in a civil law system where the courts, in looking at statutory provisions, can often qualify their application or develop rules or obligations which are additional to those provisions.^[16] In English law the method of interpretation traditionally has been more restrictive.
14.20      Fifth, the advantage of improved accessibility, without the disadvantage of loss of flexibility, can be more effectively achieved in other ways, such as options 3, 4 and 5 below.
14.21      And finally, with codification, a difficulty that might arise is in amending it, if the need arose, because this would require primary legislation.

Previous consideration of codification

14.22      It is to be noted that in its consultation paper on Fiduciary Duties and Regulatory Rules^[17] the Law Commission asked consultees whether they would be in favour of codifying fiduciary duties and expressed the provisional view that it would be impractical and undesirable to do this, given the nature and prophylactic function of fiduciary obligations. This view was virtually unanimously supported on consultation and in its final report^[18] the Law Commission concluded that its provisional conclusion was correct and that codification should be rejected. This report of course was directed to the question whether fiduciary duties in general, rather than the duties of directors, should be codified, but the Law Commission did not reject codification on the basis of this distinction. As explained above, two authoritative company law committees, the Greene Committee and the Jenkins Committee, have considered and rejected the idea of a comprehensive codification of fiduciary duties.^[19]

Consultees are asked whether there should be a comprehensive statutory codification of the duties owed by directors to their company under the general law.

Option 2: Partial codification of directors' fiduciary duties

14.23      It is clear that the duties with respect to corporate opportunities are not completely settled and that it might be dangerous for that reason to convert them into statutory duties since a case might arise which could not now be foreseen where they ought to have applied. In those circumstances there is a case for codifying the duties which are not in doubt such as the duty to act in what the director considers to be the company's best interests. This is the course that has been followed in Australia. As can be seen in Appendix H, section 232 sets out the duty of a director to act honestly, to exercise reasonable care and diligence, and not to make improper use of information or his position. Section 232(11) concludes by providing that section 232 is in addition to, and not in derogation of, any rule of law relating to the duty or liability of directors. So far as we can ascertain, this partial codification has not caused difficulties in practice in Australia. We also note that in the Corporate Law Economic Reform Bill 1998, recently published by the Australian Government, it is proposed to replace section 232 with statutory duties to exercise care and diligence, to act in good faith and for a proper purpose, and not to misuse the position of director or information obtained. It is again proposed that these provisions should have effect in addition to, and not in derogation of, any rule of law relating to the duty or liability of a director. This formulation is very similar to that used by the Jenkins Committee in their recommendation on directors' duties, which we have discussed in paragraphs 13.7-13.10 above.
14.24      The argument against this course is that the result may be confusing to the layman when he discovers that there are duties which are not set out in the statute.^[20] Uncertainty as to the law will continue, and the aim of improving accessibility to the law will only be partially achieved.

Consultees are asked whether they consider that the duties of directors should be codified in part only and, if so, whether such codification should extend to the duty to act in the company's best interests,^[21] or to some other, and if so which, of the duties described in Part 11 above.

Option 3: Statutory statement of directors' duties not replacing the general law

14.25      Another option would be to have a statutory statement of the main propositions established in the case law in the field of fiduciary duties which, like the statement of directors' duties proposed by the Jenkins Committee,^[22] does not replace the general law.^[23] On the face of it, the advantage of this course would be that it would make part of the law more accessible but yet would not cause the law to lose any of its flexibility since it would always be open to the court to use the general law.
14.26      As we have pointed out above,^[24] there are difficulties in this course. If the general law remains, then the director finds himself subject to two regimes - one under the general law and one under the statute. If the new regime created by statute is in fact wider (in respect of the matters to which it applies) than the relevant general law, his duties are increased.
14.27      A further difficulty with this option is that it could mislead someone who read it into thinking that he could not be liable for doing something not mentioned in the statutory statement. Alternatively he might argue, with some force that if that which he did and which constituted a breach of duty was not mentioned in the statement he ought to be treated more leniently as a result.
14.28      There is a further legislative possibility that consultees may wish to consider if the real reasons for having a statutory statement where the general law is preserved are:

(1) to enable readers of the Act to have a summary of the main duties; and

(2) to make it clear to a reader of the legislation that there are duties imposed on directors by the general law and that they are not to be found in the Act.

14.29      The Act could theoretically provide not merely that the statement does not replace the general law but also, unlike the Jenkins Committee proposals, that it does not impose any liability on a director and only provides information. This would avoid the situation in which directors are exposed to two sets of rules and in which the statutory rules turn out to be wider than the rules under the general law. It would have the advantage that there would be some recognition in the Act, which covers most of the other important areas of company law, that directors owe significant duties under the general law.
14.30      However there are other difficulties in the course under consideration. First, the summary may not represent the law as developed by the courts and so (unless amending legislation is passed) the advantages of increased accessibility to the law and increased transparency will be more apparent than real. Second, it is most unusual for a statute to contain provisions which do not set out the law but merely give guidance. If a statement of duties of directors were set out in the Companies Act 1985, but it was also stated that the statement could not result in the imposition of any liability on a director, the statement would be non-legislative material of this kind. The traditional view is that a statute should not contain material of this nature.^[25] We cannot at this stage test whether this traditional approach applies to a statutory statement of duties for directors: indeed the question whether Parliament would entertain any departure from the traditional position may depend on the level of consultees' support for it. In case the traditional approach cannot be distinguished, consultees who opt for this option on this basis may wish to indicate their second choice.
14.31      Another problem with this option is that traditionally a statute has only been used for provisions which have legal effect (this would include converting a rule previously found in case law into a statutory rule), and there may be difficulty in persuading Parliament to permit a statement which in effect is purely for guidance to be inserted into a statute.^[26] Most non-legislative material can now be given in explanatory notes, which under a new practice are to be produced with bills and Acts of Parliament.^[27] Because of this approach, it is probable that even if this option receives overwhelming support the Commissions would wish to recommend an alternative option as well and so consultees who favour this option are asked to state their views on the other options in case this option proves not to be available.

Consultees are asked whether they would favour a statutory statement of directors' duties in the Companies Act 1985 which does not replace the general law and, if so, whether the statement should impose liabilites on directors in addition to those to which they are subject under the existing law, or merely convey information for guidance.

Option 4: A non-binding statement of the main duties of directors to be used in certain prescribed forms etc

14.32      The purpose of this option would be to give the Secretary of State power to insert a succinct statement of the main duties of directors into a number of official documents that the company has to produce or file and to require companies to include the statement as an annexe to their articles of association. To enable consultees to see what the option involves so far as the annual accounts and certain specified prescribed forms are concerned, Parliamentary Counsel has drafted a section, section 309B, which appears in Appendix A. Under this section the Secretary of State can include the statement in forms and documents prescribed under section 10(2) (statement by first directors and secretary), section 288(2) (consent to act as a director), section 363(2) (annual return) and section 680(1) (application to register a company not formed under the companies legislation).
14.33      We also set out in Appendix A a statement of the duties to illustrate this option. At an early point the Statement makes clear its status: it expressly states that it is not a complete statement of the law and that the law is subject to change.^[28] The final paragraph of the statement makes it clear that the statement does not affect the law. It also confirms that the fact that a director signs a document in which such a statement is included, acknowledging that he has read the statement, will not affect the duties he owes.
14.34      The statement of duties summarises the following duties, which we regard as the principal duties which a directors owes to his company:

paragraph 3 - the duty to act in good faith in what the director considers to be the best interests of the company;^[29]

paragraph 4 - the duty to comply with the company's constitution;^[30]

paragraph 5 - the duty not to make secret profits;^[31]

paragraph 6 - the duty not to fetter any of his discretions;^[32]

paragraph 7 - the duty to account for a benefit he receives as a result of a transaction entered into by the company in which he has an undisclosed interest;^[33]

paragraph 8 - the duty of care skill and diligence;^[34]

paragraph 9 - the duty to have regard to the interests of employees;^[35] and

paragraph 10 - the duty to act fairly as between different shareholders.^[36]

14.35      A number of matters about the statement of duties require comment. First, the object has been only to summarise the duties.^[37] It does not purport to set them out comprehensively. Second, the statement of duties does not set out the no-conflicts rule,^[38] apart from the director's duty to account if he has an undisclosed and unapproved conflict of interest.^[39] As we have seen there is no duty as such on a director not to place himself in a position where his duty and interest conflict: rather if he does so, the company may seek to set aside the transaction. Breach of the rule would primarily involve the company being entitled to avoid the resulting contract, but consistently with the statement being a statement of duties, and not remedies, the statement of duties only sets out the directors' duty to account for any benefit from the transaction (unless he is permitted to retain it under the company's constitution or the company in general meeting has given its informed consent).^[40] Third, nothing is said about the ability of the company to release a claim or to ratify a wrong.^[41] Fourth, the statement does not refer, in relation to the duty of care, to the way in which the courts approach questions of commercial judgment.^[42] This is important because the view was expressed in Part 3 that any statutory statement of the duty of care should refer to the possibility of release and ratification and incorporate a business judgment defence.^[43] The desirability of this is a matter on which the proposed empirical survey may shed light, and on which consultees views would be welcome. Finally in drafting the statement the view has been taken that section 309 of the Companies Act 1985 does no more than set out a duty which directors must perform as part of their duty to act in the company's best interests and that it does not create any duty to consider the interests of the employees in general separate from those interests.^[44]
14.36      We envisage that such a statement could be brought to the attention of directors in a number of ways:

(1) The Secretary of State could make regulations requiring a statement of the duties of directors to appear in the directors' report, just as the Cadbury Code and SAS100 now require a statement of the financial and accounting responsibilities of directors to appear in the accounts.^[45] This is provided for in draft section 309B(2) in Appendix A.

(2) The Secretary of State could make regulations inserting the statement into various prescribed returns, such as the annual return and consent to act as a director (draft section 309B(1)). By signing the return, a director would acknowledge that he has read the statement (draft section 309B(3)(b)). The Secretary of State could also be given power to require all directors to sign this statement in the annual return.^[46]

(3) The Secretary of State could make regulations requiring companies to annex the statement of duties to their articles of association.^[47] The company would not be able to alter the annex because it would not be part of its articles for the purposes of the statutory power to alter the articles by special resolution.^[48] If the statement of duties were to be revised the regulations could be amended.

14.37      The Secretary of State would need power to make these regulations. Appendix A sets out by way of illustration a draft section 309B for the purpose of giving the Secretary of State power to make regulations to require the statement of duties to be added to specified prescribed forms or to be inserted into the accounts.^[49]
14.38      A similar approach to the suggestion in paragraph 14.36(1) above was recommended by the King Committee in relation to securing compliance with its Code of Corporate Practices and Conduct, which suggested that an appropriate statement in the annual financial statements would read:

The directors' endorse, and during the period under review, have applied the Code of Corporate Practices and Conduct as set out in the King Report. By supporting the Code the directors have recognised the need to conduct the enterprise with integrity and in accordance with generally accepted corporate practices.^[50]

14.39      If the Secretary of State by regulation required the directors' report to include the statement of the duties of directors, and a company produced accounts which did not comply with this regulation, every person who was director at the relevant time would be guilty of an offence and liable to a fine.^[51]
14.40      This option would not make informative pamphlets unnecessary.

Consultees are asked:

(i) whether they consider that the draft statement in Appendix A sets out the principal duties of directors under the general law;^[52]

(ii) whether the statement should refer to the possibility of the company in general meeting ratifying the breach of duty or releasing a claim that it may have;

(iii) whether they consider that such a statement should mandatorily be annexed to the company's articles;

(iv) whether they consider that such a statement should be required to be included in the Directors' Report attached to the company's annual accounts;

(v) whether they consider that a director should sign that he has read the statement when he signs a return confirming that he has been appointed a director;

(vi) whether they consider that each director should be required to sign that he has read the statement when the company submits its annual return; and

(vii) whether they think that such a statement should appear in any other statutory return which the company makes.^[53]

Option 5: Authoritative pamphlets

14.41      This option is available whether or not options 2, 3 or 4 are adopted. Authoritative pamphlets summarising the duties of directors may assume greater importance if the law is not to be codified in whole or part. Nowadays there are many booklets issued which seek to explain areas of technical law in layman's terms. Thus for example the Insolvency Service produces a Guide to Bankruptcy. Documents like this play an invaluable role in making the law accessible to laymen.^[54]
14.42      Such a booklet would have to be an authoritative document to carry weight. It would therefore have to have the support of the Department of Trade and Industry and bodies such as the Institute of Directors, the Chartered Institute of Secretaries, the Federation of Small Businesses, The Law Society and the accountancy bodies etc. The Financial Law Panel^[55] in London has started the preparation of a number of pamphlets to offer general guidance on the law of directors' duties. The pamphlets cover directors in different situations including not-for profit companies, small businesses as well as large private companies and public limited companies. The pamphlets focus on practical situations where the way forward is not easily found in a piece of legislation or a text book, but where a director must understand the practical effect of general statements of legal principle. They are designed to be readily understandable to those directors who are not legally qualified.
14.43      Something similar has already been done in Australia. In June 1994 the Australian Securities Commission, the Australian Society of Certified Practising Accountants, and the Institute of Chartered Accountants in Australia jointly published a booklet designed to assist directors in meeting their duties and legal responsibilities called "The Company Director's Survival Kit. What you need to know about the duties of company directors". It was aimed at people becoming directors for the first time, and directors of smaller private companies. It covered the director's duty to act honestly, to exercise care and diligence, not to use inside information, and not to make improper use of their positions. It also dealt with matters such as insolvent trading and the financial responsibilities of directors.
14.44      A means would have to be found of bringing any such pamphlet to the attention of directors. On the face of it, this ought to happen when the company is formed. Companies House could include a copy of the pamphlet when a company is sent formal papers on incorporation.^[56] Companies House could also send a copy of the pamphlet to any person whose appointment is notified to it in accordance with section 288 of the Companies Act 1985.

Consultees are asked:

(i) whether they consider that a pamphlet setting out directors' duties - including both the duty of care and fiduciary duties - should be prepared as a means of setting out the duties of directors;

(ii) if so, how they think the pamphlet would be best brought to the attention of directors; and

(iii) whether they consider that a pamphlet of this kind would make it unnecessary to have a statutory statement of directors' fiduciary duties.

Note 1   See para 1.55 above.    [Back]

Note 2   Paras 14.8-14.22 below.     [Back]

Note 3   Paras 14.23-14.24 below.     [Back]

Note 4   Paras 14.25-14.31 below.     [Back]

Note 5   Paras 14.32-14.40 below.     [Back]

Note 6   Paras 14.41-14.44 below.     [Back]

Note 7   Namely, the dual objective/subjective test; see paras 15.20-15.25 below.    [Back]

Note 8   One of the objects of the Law Commissions is to consider whether the law can usefully be codified: Law Commission Act 1965, s 3(1).    [Back]

Note 9   There are other meanings of the term "codification". In particular it may mean an authoritative non-binding restatement of the law, such as is found in the American Restatements of Torts, Trusts, Restitution and so on. It can also mean an authoritative model law, developed to give guidance to other law-making bodies to produce uniformity between them. An example of this kind of codification can be found in the Uniform Laws of the United States.    [Back]

Note 10   See Criminal Law: A Code for England and Wales (1989) Law Com No 177, vol 1, paras 2.1-2.8.    [Back]

Note 11   See Industrial Development Consultants v Cooley [1972] 1 WLR 443, 451S, para 11.14 above.     [Back]

Note 12   See Part 15.    [Back]

Note 13   We consider the option of partial codification, that is codification of what can be stated without difficulty, as option 2.    [Back]

Note 14   This is not a new problem, nor is it one confined to common law systems or to systems where the Westminster style of legislative drafting, rather than the style seen in some Continental codes, is adopted: see for example Luke, X, 25-37 for a discussion of the term "neighbour" in the Hebrew law.    [Back]

Note 15   An example of judicial evolution of a rule of law to bring it into line with modern conditions is the history of the development of the standard of care to be exercised by a director: compare Re Brazilian Rubber [1911] 1 Ch 425 and Re D'Jan of London [1993] BCC 646: see paras 12.3-12.10 above.    [Back]

Note 16   An example of this can be seen from the summary of law on art 93 of the German Stock Corporations Code at para 12.26 above. The courts have, for example, imposed on professionally qualified directors a higher duty of care (para 12.28 above) and alleviated the reversal of the burden of proof (para 12.31, n 46 above); and see generally Zweigert and Kotz, An Introduction to Comparative Law (2nd ed, 1992) pp 95-99 for the role of the courts in developing the Code Civil.    [Back]

Note 17   Consultation Paper No 124, para 6.23.    [Back]

Note 18   Fiduciary Duties and Regulatory Rules, Law Com No 236, para 17.2.    [Back]

Note 19   See paras 13.6-13.10 above. See also the views of the Davey Committee at paras 13.2-13.5.    [Back]

Note 20   The statement could, of course, state expressly that it does not set out all of a director's duties.    [Back]

Note 21   See para 11.5 above.    [Back]

Note 22   See para 13.8 above .    [Back]

Note 23   The Jenkins statement was to be "in addition to and not in derogation of any other enactment or rule of law with respect to the duties or liabilities of directors"; Jenkins Report, para 99(a)(iv). The Jenkins Report does not explain what the words were intended to achieve, but it appears that the duties contained in the Jenkins statement were to be new statutory duties covering the same ground as duties imposed by the general law.    [Back]

Note 24   See paras 13.7-13.10 above.    [Back]

Note 25   See n 26 below.     [Back]

Note 26   See eg the report by the Joint Committee on Statutory Instruments on the Judicial Pensions (Contributions) Regulations 1998, which stated that the inclusion of mere explanatory matter was not "in accord with proper legislative practice" and that in its view "non-legislative material should not be included in statutory instruments". (June 1998, HL paper 119, HC 33 - xxxvii, p 4). Although the Committee's remarks related to statutory instruments, the same principles apply to statutes.    [Back]

Note 27   See para 9.37 above.    [Back]

Note 28   Statement of duties, para 2.    [Back]

Note 29   See para 11.5 above.    [Back]

Note 30   See para 11.16 above.    [Back]

Note 31   See paras 11.15-11.16 above.    [Back]

Note 32   See para 11.11 above.    [Back]

Note 33   See paras 11.13-11.17 above.     [Back]

Note 34   On the basis of option 2 considered in Part 15 below.    [Back]

Note 35   See para 11.27 above.    [Back]

Note 36   See paras 11.19-11.20 above.    [Back]

Note 37   Inevitably the statement does not cover every aspect of the directors' duties. For instance the statement might have stated that directors should not use the company's assets for purposes not permitted by law and should observe other statutory duties, but the inclusion of this statement might not greatly increase directors' understanding of their duties. The Companies Bills 1973 and 1978 did not include such a statement. See also para 6.13 of the Hong Kong Consultancy Report in Appendix L below.    [Back]

Note 38   See para 11.15 above.    [Back]

Note 39   Including a conflict of duties, as where a director of another company concerned in the transaction: Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488, at p 503.    [Back]

Note 40   The nature of the duty to account will depend on the particluar circumstances of the case: see for example Mahoney v Purnell [1996] 3 All ER 61 (an undue influence case) where the parties could not be restored to their previous position and the court awarded compensation against the party exercising the undue influence; and see generally Aggravated, Exemplary and RestitutionaryDamages (1997) Law Com No 247, paras 3.28-3.32.    [Back]

Note 41   See para 11.30 et seq above.     [Back]

Note 42   Compare para 2.15(iii) above.    [Back]

Note 43   See para 3.91 above, and see paras 15.30-15.41 below. However the statement does refer to the possibility of the company in general meeting permitting a director having a conflict of interest and retaining secret profits, as suggested in Part 3.    [Back]

Note 44   For a discussion of the interaction between section 309 and the duty of loyalty, see paras 11.25-11.28 above.    [Back]

Note 45   See Appendix G.    [Back]

Note 46   Not included in draft s 309B.    [Back]

Note 47   Not included in draft s 309B. Compare section 425(3) of the Companies Act 1985, which requires a company to annex to its memorandum of association an order of the court sanctioning a scheme of arrangement under that section. If this is not done, the company and any officer in default is liable to a fine: s 425(4).    [Back]

Note 48   Section 9 of the Companies Act 1985.    [Back]

Note 49   Section 309B does not provide for the statement of duties to be annexed to a company's articles, or for signature on (say) the annual return other than of the officer submitting the form.    [Back]

Note 50   See para 9, Chapter 22.    [Back]

Note 51   Section 234(5) of the Companies Act 1985. The relevant time would be immediately before the end of the time permitted by the Companies Act 1985 for laying the accounts for the financial year in question before the company in general meeting and filing them with the registrar: see ss 241-242 and 244 of the Companies Act 1985.    [Back]

Note 52   Thus including both the duty of care and fiduciary duties.    [Back]

Note 53   The suggestions made in paragraphs (ii)-(vii) are not achieved by the draft clause and statement in Appendix A.     [Back]

Note 54   See generally the recommendations of the Committee on Standards in Public Life in relation to Public Service Organisations, which may be limited companies: Personal Liability in Public Service Organisations, June 1998.    [Back]

Note 55   The Financial Law Panel is an independent body which was formed in 1993 under the sponsorship of the Bank of England and the Corporation of London. The main aims of the Financial Law Panel are to be the central forum for the consideration and practical resolution of legal uncertainties and anomalies as they affect financial markets and services in the United Kingdom. Its role is to give guidance on particular areas of legal uncertainty as they affect financial markets and services; to review and comment on proposals for legislation and regulation in the UK and EC; and to consider and make proposals on such other matters as it considers appropriate relating to the financial markets of the UK. See the City Handbook (June 1998) published by the Bank of England with the support of the Corporation of London.    [Back]

Note 56   This may not help people who become directors after the company is bought off the shelf from company formation agents.    [Back]