Company law revision question and answer

(a) The law governing the directors‟ duty of care and skill takes account of the fact thatthe director may be a part-time counselor rather than a full-time professional manager.

Discuss.

(b) Mwerevu is one of the directors of Kamaliza Ltd. whose articles of association are in the form of Table A. He knows that his fellow directors are interested in obtaining motor vehicles from Modern Vehicles Ltd. to increase the company‟s fleet of trucks. Mwerevu purchases controlling shares in Modern Vehicles Ltd.

Modern Vehicles Ltd. then sells the trucks to Kamaliza Ltd. at Sh. 100,000 over and above the true market price. Mwerevu voted at the board meeting of Kamaliza Ltd. which decided on the purchase price, without revealing that he controlled the vendor company. When true facts are discovered, the company‟s board of directorsdoes not protest against Mwerevu‟s conduct.

Mpole, a minority shareholder is aggrieved.

Advise him.
ANSWER

A director owes his company a duty of care, skill and diligence. The principles governing this duty were enunciated Romer J in re: City Equitable Fire Insurance Co.Ltd (1925) and to a large extent the law takes into account the fact a director may be a part-time counselor rather than a full-time Professioner Manager. This is principally because of the tax nature of the standards expected of a director.
• Primo, a director need not exhibit in the performance of his duties a greater degree ofskill than may reasonably be expected from a person of his knowledge and experience. This principle is exemplified the decision in re: Brazillian Rubber Plantations andEstates Ltd.
• Secudo: a director is not bound to give continuous attention to the affairs of hiscompany. His duties are of an intermittent nature to be performed at periodical board meeting and meeting of committees of the board upon which he happens to be placed. He is not however bound to attend all such meetings thought he ought to attend whenever in the circumstances he is reasonably able to do so. In The Marquis of Butes case where the president of the company had attended only one board meeting in 38 years. It was held that he was not liable for the wrongs committed other directors at board meeting as he was not bound to attend them.
• Thirdly, in the absence of suspicion a director is entitled to assume that officer of the company performed their duties honestly. He is entitled to rely on information provided trusted servants of the company as was the case in Dovey V. Cory.
• These three principles demonstrate vividly that a director is not deemed to be a professional Manager hence his standard of care, skill and diligence is that of a person of his knowledge and experience. He is not bound to bring any qualifications to his office. He is not bound to give his company‟s affairs continuous attention and is entitled to trust that officer of the company performed their duties honestly.

(b)
• As fiduciaries directors are bound to avoid conflict of interest disclosing any personal interest in contracts made the company.
• In this case, it is clear that Mwerevu, a director of Kamaliza Ltd, had a personal interest in the contract made with Modern Vehicle, Ltd, a fact he did not disclose to the board as required law. The vehicles are acquired at an exhorbitant price and Mwerevu voted in its favour. The tragedy is that when the facts come to light, the board acquiesces with Mwerevu‟s conduct.

Firstly, Mwerevu has committed a criminal offence for which he is liable to prosecution and second he has acted fraudulently and therebreached his fiduciary duty to the company. Since the duty is owed to the company Mpole cannot sue to remedy the wrong.

My advise to Mpole is to have an extra ordinary general meeting of the company summoned to consider the matter. The meeting may resolve that the director be sued in damages for breach of duty or ratifies the abuse of power. However, since the

mwerevu‟s conduct amounts to frauded on the minority conduct amounts to fraud onthe minority if members ratify the transaction, Mpole may initiate a derivative action against the directors for the contract to be rescinded. This advise is based on the exceptions to the rule in Foss V. Harbottle (1843).

• I would also advice Mpole to instigate the arrest of Mwerevu the police for prosecution for the offence of non-disclosure of personal interest in contracts made the company for which he is liable to a fine not exceeding Kshs. 2000.

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