Percival v Wright

Duties of Directors and Relevant Case Law

The directors’ duties to the company were governed by the common law of
negligence and the equitable principles of fiduciary duties before the CA 2006. The
CA 2006 has brought an important change of codification. [1] This codification of
the general duties of a director was brought forward by the law reforms bill as
introduced to the parliament on November 1, 2005. The explanatory notes to the
bill show the apprehension of the draftsmen that the exercise of the codification will
serve as insulation to the development of the directors’ duties. The general duties
will be interpreted in the same manner as the common law rules or equitable
principles and in interpreting and applying these general duties regard shall be had
to corresponding common law rules and equitable principles. [2] In this work an
endeavour has been made to discuss the directors’ duties as conferred by the CA
2006 in a codified form. The directors have the duties to work within the powers, to
exercise the reasonable skill and care, and to work for the success of the company.
They also have important duties to the shareholders and owe certain duties to the
creditors in case of the insolvency of the company. These duties of the directors
have been discussed along with the relevant case law.

Directors Duties to the Shareholders

In general the directors do not have any contractual or fiduciary duty to the
shareholders of the company. But if there is a bid situation the City panel would be
concerned on takeovers and mergers and the stock exchange is beginning to look
critically at the sort of insider dealing which took place in the Percival v
Wright [3] where a listed company is concerned at least and has set up a dealing
code for the directors. [4]

Lindley L.J. said in the Re Lands Allotment Company [5] regarding the position of
directors towards shareholders,

“Although directors are not properly speaking trustees, yet they have always been
considered and treated as trustees of money which comes to their hands or which is
actually under their control; and ever since joint stock companies were invented
directors have been held liable to make good moneys which they have misapplied
upon the same footing as if they were trustees, and it has always been held that
they are not entitled to the benefit of the old Statute of Limitations because they
have committed breaches of trust, and are in respect of such moneys to be treated
as trustees". [6]

Swinfen-Eady J. held in the case of the Percival v Wright [7] regarding the directors’
duties towards the shareholders
“The directors of a company are not trustees for individual shareholders and may
purchase their shares without disclosing pending negotiations for the sale of the
company's undertaking" [8] .

The decision in the case of the Percival v Wright [9] has been criticised a lot that it
should not be deduce that the directors can never be placed in a fiduciary
relationship to the members. If the shareholders authorise the directors to
negotiate for them, then the directors owe a duty in the case of a takeover bidder.
The establishment of an agency relationship may be sufficient in the case of a family
company, which depends on the whole surrounding circumstances and the
character of the responsibility which the directors have assumed in a real and
practical sense. [10]

The family characteristic of the company is the most important reason to impose
fiduciary duties on the directors towards the shareholder, this happened in the New
Zealand in the case of Coleman v Myers [11] , in which Mahon J did not follow the
decision of the Percival v Wright [12] , he stated the following:

“It seems an untenable argument to suggest that the shareholders on an offer to

buy their shares are not perforce constrained to repose a special confidence in the
directors that they will not be persuaded into a disadvantageous contract by non-
disclosure of material facts. [T]here is inherent in the process of negotiation for sale
a fiduciary duty owing by the director to disclose to the purchaser any fact … which
might reasonably and objectively control or influence the judgment of the
shareholder in forming the decision in relation to the offer." [13]

As it has been discussed that the directors do not have any fiduciary duty to the
shareholders, but some of the judges are of the view that directors have some
discrete duties to the company’s shareholders and these duties are fiduciary in
character. The directors have to fully inform and should avoid misleading the
shareholder when their action or approval is required. The disclosure will relate to
material considerations having an effect on the management of the company. [14]

According to Mr Flannigan the decision in the case of the Coleman v Myers [15] by
the court of appeal of the New Zealand is based on the wrong analysis. The
shareholders complaint was that the director had failed in disclosing about their
financial plans to get all the share of the company, through non disclosure and
misrepresentation. According to the court, failure was the breach of the fiduciary
duty which arose on the basis of the facts. The court distinguished the Percival v
Wright [16] that the directors do not have any fiduciary duty to the shareholders. Mr
Cook said that Percival v Wright [17] ,

“would merely exclude any automatic fiduciary duty, leaving open the possibility of
such a duty falling on a director in particular circumstances".
There is no fiduciary obligation on the directors because the relationship between
the members and the directors is not of a limited access in general but in some
circumstances a limited access can exist. [18]