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BUSINESS ORGANISATIONS AND AGENCY 434 COMPANY DIRECTORS Under s. 40 Companies Act 2006, the power of directors to bind their companies are deemed to be unlimited in favour of anybody dealing with it in good faith. This means that as far as innocent third parties are concerned, directors of a company have unlimited power to tie the company to contracts or to authorise others to do so. No restrictions placed on the power of the directors either by the articles or the general meeting or any class of shareholders will affect the validity of such contracts. These provision guarantees that a contract entered into by a company with a third a party cannot be nullified on the ground of lack of capacity on the part of the company’s directors unless the contract involves the director or persons connected with him. Although, members of a company may pass a special resolution to give directives to directors to do or not to do any anything, they cannot overrule any actions taken by directors (see article 4 of the model articles). However, if directors go outside the provisions of the company’s articles or special resolutions passed by the members, they may incur personal liability to the company. It must be noted that, in general directors are not agents of members of the company. Even where a shareholder has nominated a director, the director is not an agent of the shareholder. A member cannot therefore be vicariously liable for the actions of a director. A director may become an agent of a shareholder only where he assumes personal responsibility for that shareholder. This would be the case, for example, where the director agrees to personally sell the shares of a shareholder. 24.10 DIRECTORS AS FIDUCIARIES Directors occupy a fiduciary position in relation to their companies. This means that they must conduct their companies’ business in good faith and in such a manner as will benefit the company as a whole. They must not act in manner that is harmful to the interests of the company. They must not abuse their office or use the company for the benefit of themselves or somebody else. In judging whether directors have acted in good faith, the test is subjective. The question would be whether the directors honestly believed they were acting in the interest of the company to the best of their knowledge and ability. If they did, they would not be in breach of duty even though they turn out to be wrong unless the action was such that no reasonable person could believe it was in the interest of the company. In addition, sections 172 (1)(b) & 247 CA 2006 now require directors to also take account of the interest of employees or former employees of the company as well as those of the shareholders. The interest of shareholders should however outweigh those of employees. If a company is insolvent, the directors must have regard to the interest of creditors and must take reasonable care to minimize losses to them – s. 172(3) CA 2006.
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  • Fall '19
  • Corporation, Managing Partner

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