NAME: HANIA SULTAN

ID: 1910330

QUESTION: “Directors are watchdogs of a company and “must exercise their discretion bona
fide in what they consider (...) is in the interest of the company” Re smith & Fawcett Ltd
( 1942).

Do you agree with this statement? Support your answer with reference to sections under the
companies Act 2001 and case law.

Directors play an important role in handling and managing companies. They act as stewards
entrusted with the responsibility of safeguarding the interest of shareholders and stakeholders.
The metaphor of directors as watchdogs describes their role in monitoring and guarding the
reputation of the company. The directors of companies are contracted by the law to show
loyalty, care and good faith towards the company and stakeholders. They are under an
obligation to act and take decisions in the best interest of the company. The directors should be
just and fair while using their power in the company. Section 180 (2) of the company act
outlines that the director shall be deemed to be, and always to have been, a proper and valid
exercise of that power. In the case of Caudan Leisure Ltd Vs Caddy & Foxy Ltd. & Anor, it is
mentioned that Sections 315(3), (4) and 324 of the 1984 Act imposed upon directors' duty to
act in good faith and in the best interests of the company. Such a duty is now equally imposed
by section 143(1)(c) of the Companies Act 2001 which provides that directors shall “exercise
their powers honestly in good faith in the best interests of the company and for the respective
purposes for which such powers are explicitly or impliedly conferred”.

As a director of a company, the director is legally responsible for the company's business. He
must make sure that the company meets its statutory obligations. A director of a company
should take decisions according to the best interests of a company and its employees. He must
act in a way to promote the success of the company and in a way to keep the company
growing, taking risks and decisions that will be to the benefit of the company in the long term.
A director of a company is appointed by the shareholders to handle day-to-day affairs to keep a
positive balance in the company. A director should be able to handle conflicts and find fair
solutions to problems. A director should also avoid conflict of interest. This forms part of the
responsibilities that a director needs to abide by to prevent the downfall of the company.

Section 143 of the companies act outlines the duties that are expected from directors in a legal
framework. Section 143 grants directors broad authority to manage and direct the affairs of the
company. Directors are empowered to exercise all the powers of the company, encompassing a
wide range of actions necessary for its operation and growth. These powers may include
entering into contracts, borrowing money, investing funds, acquiring or disposing of assets,
appointing officers and employees, and making strategic decisions regarding the company's
business activities. Directors are expected to exercise their powers in good faith and in the best
interests of the company. This implicit duty to act responsibly and ethically underscores the
fiduciary nature of directors' roles. They must prioritize the company's welfare over their
personal interests and avoid conflicts of interest or self-dealing that could compromise their
impartiality. "The directors are the working organ of the company.” This statement is cited in
the case of Stan Medical Supplies Ltd v Axess Ltd. This statement shows how important
directors are in a company and without them there is no company. Hence, they are bound by
the law to exercise their discretion bona fide in what they consider the best interest of the
company. Directors are duty-bound to act in the best interests of the company and to avoid
conflicts of interest. When directors have a personal interest in a transaction, whether directly
or indirectly, they must disclose that interest to the board of directors or shareholders,
depending on the jurisdiction's legal requirements. Failure to disclose such interests can lead to
legal repercussions, including potential liabilities for the directors involved. Disclosure ensures
transparency in corporate decision-making processes. By disclosing their interests, directors
allow other stakeholders, such as shareholders and board members, to assess the transaction's
fairness and determine if any conflicts of interest exist.

Directors are responsible for ensuring the company's compliance with applicable laws,
regulations, and internal policies. They establish robust corporate governance practices,
maintain accurate records, and disclose relevant information to stakeholders. Directors are also
accountable for their actions and decisions, subject to scrutiny by shareholders, regulators, and
other stakeholders. This accountability enhances transparency and reinforces the watchdog
function of directors. Directors oversee the implementation of compliance frameworks and
monitor the company's adherence to legal requirements. They review reports, audit findings,
and compliance metrics to assess the effectiveness of internal controls and identify areas of
non-compliance. Regular monitoring allows directors to proactively address compliance issues
and mitigate risks. Directors conduct risk assessments to identify legal risks that may impact the
company's operations. They assess the likelihood and potential impact of legal risks and
develop strategies to manage and mitigate them effectively. This may involve implementing risk
management processes, insurance coverage, or legal safeguards to protect the company from
legal liabilities. The case of Hickman v Kent or Romney Marsh Sheep-Breeders’ Association
highlights the principle of non-intervention in the management of a company's affairs by the
courts and the wide discretion afforded to directors in decision-making. The court reasoned
that directors are generally afforded a wide discretion in decision-making, provided they act
within their powers and in good faith for the benefit of the company.

When directors become aware of compliance breaches or violations within the company, it is
their responsibility to take prompt and appropriate actions to address the situation. These
actions are crucial for mitigating risks, protecting the company's reputation, and ensuring
adherence to legal requirements. Directors may initiate or oversee an investigation into the
compliance breach to gather relevant information and assess the extent of the violation. This
may involve appointing an independent investigator, engaging internal audit teams, or seeking
legal counsel to conduct a thorough review of the circumstances surrounding the breach. They
work to identify the root causes of the compliance breach to understand why it occurred and
prevent similar incidents in the future. This may involve examining internal controls, policies,
procedures, and cultural factors that may have contributed to the violation. Once the root
causes are identified, directors develop a remediation plan to address the compliance breach
and prevent its recurrence. The plan may include corrective actions, process improvements,
policy revisions, and training programs aimed at enhancing compliance awareness and behavior
within the organization. Directors strive for continuous improvement in the company's
compliance practices and culture. They evaluate lessons learned from the compliance breach
and incorporate feedback to strengthen internal controls, policies, and training programs.
Directors also foster a culture of integrity, accountability, and ethical behavior throughout the
organization.

The consequences for directors who do not exercise their discretion bona fide can be severe.
Under the Companies Act 2001, a director who breaches their duty to act in good faith in the
interests of the company may be liable to pay a civil penalty. In addition, if the director's actions
were objectively and subjectively not bona fide, they may face criminal penalties, including
fines and imprisonment. Examples of acting in bad faith include directors approving their own
remuneration in excess of the limits imposed by the Constitution, loaning company money to
associates of directors who cannot repay those loans, investing company funds in insolvent
companies who pay consultancy fees to the directors, using company funds to defend legal
action brought against them personally for improper conduct, and using funds to avoid
voluntary administration simply to frustrate legal action. In determining the interests of the
company, directors must consider the interests of the company as a separate legal entity and
not just the interests of the shareholders. Directors must act in the interests of the
shareholders as a collective group and not just the interests of the majority shareholders. If
shareholders do not have identical interests, directors should act fairly between different
classes of shareholders. Directors must also make an independent assessment of the interests
of the company and not simply rely on the judgment, information, and advice of management
and other officers. Delegation of authority can provide a statutory defense for directors, but the
delegation must be made on a reasonable belief that the power will be exercised in compliance
with the Corporations Act, in good faith, and after making a proper inquiry prior to delegation.
The board of a company may delegate authority to others, but the board will always remain
responsible for the exercise of its powers through the delegates. Ratification by members or the
court's power to excuse a director from liability. Case law has provided guidance on the duty to
act bona fide in the interests of the company. In the case of Re Smith & Fawcett Ltd [1942], the
court held that directors must exercise their discretion bona fide in what they consider to be in
the interests of the company, and not for any collateral purpose. The court also held that the
question of whether the directors are limited by anything except their bona fide view as to the
interests of the company is a matter of construction of the particular article. In the case of ASIC
v Adler [2002], the court held that a director's reliance on the judgment, information, and
advice of management and other officers is reasonable unless the director knows or by the
exercise of ordinary care should have known any facts that would deny reliance on others. In
the case of Eclairs Group Ltd and Glengarry Overseas Ltd v JKX Oil & Gas Plc [2015], the court
held that a company cannot generally claim legal professional privilege save in the case of
advice relating to a dispute between the company and a shareholder.

In conclusion, directors have a legal obligation to act in the best interests of the company and
not for any collateral purpose. Failure to exercise this duty can result in legal consequences for
the directors, including civil penalties and criminal penalties. Directors must consider the
interests of the company as a separate legal entity and not just the interests of the
shareholders. Directors must also make an independent assessment of the interests of the
company and not simply rely on the judgment, information, and advice of management and
other officers. Delegation of authority and ratification by members or the court's power to
excuse a director from liability may also be available in certain circumstances.