Company Directors’ Duty to Act Within Their Powers

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The Companies Act 2006 (the Act) places burdens and obligations on directors, with consequences for the director concerned if they fall short of the requirements.

The most important directors’ duties are set out in the Act. The first of these is the duty to act within powers. A director of a company must:

  • Act in accordance with the company’s constitution; and
  • Only exercise powers for the purposes for which they are conferred.

A company’s constitution is its articles of association, any resolutions of its board, other  agreements affecting its constitution, and decisions taken in accordance with the articles.

The problem for any director is that these documents can be difficult to find.  And they are not very easy to read and understand either. Even then, it may not be clear how one is always to know what the powers were conferred for. Some things will be obvious: a director of a manufacturing company is unlikely to have powers to invest company money in crypto currency. In other cases, it will be much less clear.

The courts have said this about it (my emphasis added):

  • “The proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason.” (Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil and Gas plc [2015]).
  • “The state of mind of those who acted, and the motive on which they acted, are all importan” (Hindle v John Cotton Ltd [1919])
  • “It is necessary for the court, if a particular exercise of [power] is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors… and will respect their judgment as to matters of management….” (Howard Smith Ltd v Ampol Petroleum Ltd [1974])

The courts seem to be saying that if the director acts with the right motive, errors may be forgiven. And the court will not second-guess management decisions.

It will be more difficult to reach a conclusion where directors have acted multiple purposes, some of which may be proper and others not. Here we would expect a court to pay most attention to the director’s primary purpose. If the (bad) decision would never have been made in the absence of the improper purpose then the director will have acted outside their powers.

To sum up then, a company director should always consider whether the company has given them the power to do any act.  But if the act is done honestly with the intention of promoting the success of the company then one may expect the courts to be slow to sanction a director who has unintentionally exceeded their authority.

Here to help

Longmores’ Dispute Resolution team are highly experienced. To discuss how we can help, please get in touch with John Wiblin, Partner and Head of Dispute Resolution.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.

This article was originally written for Inspire Magazine.

NLA article not to be reproduced.