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Boardroom © Photographerlondon | Dreamstime.comThis is the first in a series of four articles on the duty of company directors to act in accordance with the company’s constitution and to only use their powers for the purposes for which they have been conferred. This duty is now enshrined in statute under s171 of the Companies Act 2006, but the duty of company directors to use their powers for a proper purpose had been recognised many years earlier.

In Hogg v Cramphorn Ltd, the directors of Cramphorn Ltd had the power under the company’s articles of association to issue new shares in the company “upon such terms as the directors determine”. A Mr Baxter made an offer to purchase all of the company’s shares with a view to expanding the business. 

The directors exercised this power to issue new shares to the company’s members, and encouraged them to use their vote at a meeting of the shareholders in order to vote against accepting Baxter’s offer. All the evidence suggested that the directors had the best interests of the company’s employees at heart in acting as they did, motivated by their view that accepting Baxter’s offer would disrupt the business and unsettle the staff.

The claimant, who was a member of the company aggrieved by these events, commenced proceedings against the company. In the High Court, Buckley J held that the directors were in breach of their duty to use the powers given to them under the articles of association for “a proper purpose”. Their lack of bad faith was held to be irrelevant, as it was found that “the essential element of the scheme was to ensure control of the company by the directors, and was not therefore a legitimate exercise of their powers.”

The AIA Achieve team is producing a series of ‘A Quick Look at…’ articles, a five-minute look at key topics to help you with your studies.