Division 3 of Part VIII of the Companies Act 1997 states the core duties of a director. Two of them are in sections 112 and 114.
Section 112(1) — the central duty
Subject to this section, a director of a company, when exercising powers or performing duties, shall act in good faith and in what the director believes to be the best interests of the company.
“In good faith” is an objective requirement of honesty. “In what the director believes to be the best interests of the company” is subjective — the test is the director’s actual belief, not the court’s view of what was best.
But the belief must be genuinely held, and a belief no reasonable director could hold will not be accepted as genuine. And the subjective standard in section 112 does not soften section 115, which requires care and diligence measured against a reasonable person in the same office — a director may sincerely believe something and still be negligent in how they reached that belief.
The duty is owed to the company. That is why a wrong to the company is normally pursued by the company — or, with leave, by a shareholder or director through a derivative action under section 143 — rather than by shareholders personally. Section 147 permits a personal action against a director only for breach of a duty owed to the shareholder.
As a company approaches insolvency, the interests of creditors become central to what is in the company’s interests — which is the practical link between section 112 and section 348 on insolvent trading.
Sections 112(2) to (4) — groups and joint ventures
| Subsection | Company | May act in the interests of | Conditions |
|---|---|---|---|
| (2) | A wholly owned subsidiary | Its holding company | Expressly permitted by the constitution |
| (3) | A subsidiary that is not wholly owned | Its holding company or another company in the same group | Expressly permitted by the constitution and with the prior agreement of the shareholders other than the holding company |
| (4) | A company incorporated to carry out a joint venture between the shareholders | A shareholder or shareholders, in connection with carrying out the joint venture | Expressly permitted by the constitution |
In each case the director may act in that other interest “even though it may not be in the best interests of the company”. These are genuine exceptions, not glosses.
None of the three operates by default. A company with no constitution cannot use them at all, and a constitution that is silent does not help. For a group or joint venture structure, the express permission must be drafted in — and for a partly owned subsidiary under subsection (3), the prior agreement of the minority shareholders is also needed.
Note the limit in subsection (4): the joint venture exception applies only in connection with the carrying out of the joint venture, not to the company’s affairs generally.
Subject to section 113, a director who acts in contravention of this section commits an offence and is liable on conviction to the penalty in section 413(4).
Section 113 — provision for employees
(1) Nothing in section 112 limits the power of a director to make provision for the benefit of employees of the company in connection with the company ceasing to carry on the whole or part of its business.
(2) “Employees” includes former employees and the dependants of employees or former employees, but does not include an employee or former employee who is or was a director. “Company” includes a subsidiary.
Without section 113, a redundancy payment beyond contractual entitlement on a closure could be attacked as not in the company’s best interests — the company is ceasing that business and gets nothing back. Section 113 removes the objection.
It is deliberately confined. It applies only in connection with the company ceasing to carry on the whole or part of its business, and it excludes directors — so a board cannot vote itself a closure payment under it. Payments to directors are governed by section 139, and remain subject to the interested transaction rules.
Employees’ separate statutory rights on termination arise under the Employment Act (Chapter 373), and their claims in a liquidation are preferential under section 360.
Section 114 — compliance with the Act and constitution
(1) A director shall not act, or agree to the company acting, in a manner that contravenes this Act or the constitution.
(2) A director who acts in contravention commits an offence, penalty as in section 413(2).
Because the Act repeatedly saves transactions from invalidity — section 18(1), section 44A(5), section 100, section 63A(1) — the consequence of non-compliance falls on the directors through section 114.
Note the width of “or agree to the company acting”. A director who votes for a resolution authorising a contravention breaches section 114 even if they take no part in carrying it out.
How the duties are enforced
- By the company, suing for breach of duty.
- By a shareholder or director with leave, through a derivative action under sections 143 to 146.
- By a shareholder personally, under section 147, for breach of a duty owed to that shareholder.
- By injunction, under section 142.
- By the prejudiced shareholder remedy, under section 152.
- By a liquidator, under sections 344, 348, 348A and 350.
- By prosecution — sections 112(5) and 114(2) each create an offence.
Shareholders may ratify certain conduct under section 154, and a company may indemnify or insure a director only within the limits of section 140.
Sources
- Companies Act 1997 — ss 18, 44A, 63A, 100, 107, 112–116, 139, 140, 142–147, 152, 154, 344, 348, 348A, 350, 360, 413
- Employment Act (Chapter 373)
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.