Update: company law

It is scarcely believable that the Companies Act 2006 is not yet three years old. That it seems to have been around a good deal longer is probably accounted for by the piecemeal manner in which it is (still) being implemented, its year-long passage through Parliament and, prior to that, its deep roots in almost a decade's worth of consultation documents, White Papers and Regulatory Impact Assessments.

More incredible still, and less explicable, is the promise once held out for this piece of legislation, that its distillation of directors' duties into a short 'code of conduct' would be so pure as to render legal advice on them next to superfluous. Yes, there were naysayers, but they were met with the results of some apparently quantitative analysis. Savings of up to £105m a year were predicted, with '“ even more incredibly '“ no associated costs. Could it be true? Were the services of company law specialists about to be dispensed with?

The code of conduct

As we know the Bill was much deformed in the legislative process, emerging as the longest Act to date. Nevertheless, the code of conduct remained in situ and, whatever else you can say about it, it is short. More relevantly s.170(3) does appear to do away with all the common law rules and equitable principles on which the new general duties of directors are based (see also s.180(5)). Take that, case law!

But here's the rub. No sooner had the coup de grâce been delivered than those very same rules and principles were resuscitated, at least to this extent: regard must be had to them in interpreting and applying the new general duties (s.170(4), second limb; see also ss.180(1) and 180(4)(a)). Indeed the new duties are, more generally speaking, to be interpreted and applied in the same way as common law rules or equitable principles (s.170(4), first limb). Nor have the consequences of breach of the general duties been codified (see s.178), so it's back to the cases on that score too.

If that were not enough, there appears to be a body of rules and principles on which the general duties are not based and which consequently escape codification (nb. 'certain' in s.170(3)). The 'code' is not comprehensive even to the extent of including all a director's fiduciary duties (nb. 'any other fiduciary duty' in s.178(2)). In fact, the code is not a systematic body of law in any sense at all, which '“ when you consider the dictionary definition of the word 'code' '“ makes it a pretty odd specimen.

All in all, s.170(3) is not the death blow it first appears and the pre-2006 Act case law remains if not intact then of continuing relevance. Add to that the fact that new cases are being reported all the time, and there is no shortage of law for the company law specialist to specialise in. Reports of the demise of the common law in this area have been greatly exaggerated. Indeed one of the more noticeable aspects of the recent cases has been the extent to which the judges have paid homage to the ancient authorities. Perhaps we need a new term to describe cases that have been judicially considered ('approved', 'followed', 'overruled' etc.). Might I suggest 'revered'? Here are four quite recent examples.

'Elementary principles'

Where better to start than the 'fundamentally important decision' of the House of Lords in Aron Salomon (Pauper) v A Salomon and Company Ltd; A Salomon and Company Ltd v Aron Salomon [1897] AC 22? A company is a legal person separate from its members; neither the members nor the directors are, without more, responsible for the company's liabilities (see Paycheck Services 3 Ltd, Re; Revenue and Customs Comrs v Holland [2008] All ER (D) 319). These propositions are as true in a 'one-man company' as in any other (see Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] All ER (D) 40). These 'elementary principles' of company law are 'forever to be associated' not with the 2006 Act, but with Salomon v Salomon (the quoted words are in each case those of Munby J in Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam)).

Directors as fiduciaries

That directors stand in a fiduciary position to their company and not to creditors or shareholders, still less strangers, appears axiomatic. See, for example, Bath v Standard Land Co. Ltd. [1911] 1 Ch 618 and, in the context of the new general duties, s.170(1). Bath was respectfully referred to in Gregson v HAE Trustees Ltd [2008] EWHC 1006 (Ch) as a case that has stood almost 100 years.

This is not to say however that directors may never owe fiduciary duties to third parties. A recent and stark example is J D Wetherspoon plc v Van de Berg & Co Ltd [2009] EWHC 639 (Ch), a case which '“ its name notwithstanding '“ boiled down to a dispute between two individuals: Tim Martin (chairman of JDW) and Chris Braun (founder and director of Van De Berg, JDW's property finder and consultant). Theirs was a truly special relationship of trust and confidence and, in these very special circumstances, Peter Smith J found that Mr Braun owed a direct fiduciary duty not only to his company, Van De Berg, but also to JDW.

Management and custodianship of the company's property

A third example is Lexi Holdings (in administration) v Luqman [2008] EWHC 1639 (Ch), a case referred to in February's company law update (Solicitors Journal, 153/4, 3 February 2009), in which Briggs J compared s.174 (the duty to exercise reasonable care, skill and diligence) to prior case law and found little if anything to distinguish them. This did not stop him from drawing on the still seminal (and very long) Re City Equitable Fire Insurance Company Limited [1925] Ch 407 (see also Paycheck Services 3) to add this gloss: a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property. While Briggs J was reversed by the Court of Appeal in February (Lexi Holdings (in administration) v Luqman [2009] EWCA Civ 117), his labours in illuminating this corner of the law were not undone.

Conflicts of interest

One further example relates to directors' conflicts of interest. Yes, the law in this area is now governed by the 2006 Act, but the resemblance borne by the phrasing of s.175(1) to the formulation of Lord Cranworth LC in Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 is unmistakable. His was 'the classic statement', as Lord Hodge put it in Park's of Hamilton (Holdings) Limited v Colin Campbell [2008] CSOH 177 (cf. Keech v Sandford (1726) Sel.Cas t. King (Macnaghten) 175, also much cited in this context).

The closely related obligation not to make secret (unauthorised) profits also came up for consideration recently in the Court of Appeal in Imageview Management Ltd v Jack [2009] EWCA Civ 63 (see solicitorsjournal.com, 16 February 2009). What if a footballer's agent, in negotiating for his client, makes a secret deal for himself on the side? The principles, according to Jacob LJ, were firmly laid down by the court in Boston Deep Sea Fishing v Ansell (1888) 39 Ch. D. 339. This was a case in which the managing director of a company placing orders for four or five fishing trawlers helped himself to a secret commission. The MD was in breach of duty; the secret profit belonged not to him but to his principal; and in the circumstances he forfeited his right to receive any remuneration at all.

So it was with the footballer's agent in 2009. Mummery LJ, who 'totally agreed' with Jacob LJ, conceded that he could add nothing to the court's judgments in Boston Deep Sea Fishing (and Rhodes v Macalister (1923) 29 Com Cas 19); they were brilliant, inspirational, unimprovable.

Guidance from the past

Imageview Management Ltd serves as a reminder that to decipher the duties of company directors now entails a review of the enduring common law rules and equitable principles in the light of the statute. To put it another way, the starting point in this area is not now Boston Deep Sea Fishing, but the 2006 Act (s.176 and potentially several other general duties). That said, when it comes to interpreting and applying the general duties, considering the possibility of authorisation by shareholders and comprehending the civil consequences of a breach, the old cases come back to guide us.

To have so rich a legacy may be a blessing or a curse, but it is a fact. One is left with two questions: was anyone really taken in by the suggestion that the benefits accruing from 'greater clarity' in the expression of directors' duties could be in the order of £30m-£105m per year (Company Law Reform Bill, Regulatory Impact Assessment, November 2005)? Certainly not Lord Freeman who stood up in the Lords on 11 January 2006, disparaged Regulatory Impact Assessments generally, and said he didn't believe this one in particular.

And the second question? When might we expect from government an update comparing the savings actually achieved '“ if any '“ with those foretold?