Company Law Directors Duties Problem Question Essay

Transcript of Answering Problem Questions in Law

Answering Problem
Questions: Law

This prezi looks at how to go about
answering problem questions.
These are my views. Mine. Your own tutor
or lecturer may have their own views on
how to approach problem questions. What
you should do is use this prezi to guide you
and then check if your tutor/lecturer differs
in what they expect to see by way of problem
question answer
Problem questions ask you to apply your knowledge
of the law to a given factual scenario. As the name
suggests, they get you to question problems...
Problem questions (or PQs to the cool kids) are frequently based on areas where there are uncertainties about the law
What this means, then, is that there are rarely "right"
answers to PQs. Instead, there are arguments which
suggest one view and other arguments which suggest
an alternate view. Your job is to highlight what those
arguments are.
This prezi has some tips for you on
how to structure your thinking and
answers for PQS
The two key things to remember are:
(i) apply the correct law (legislation and cases) to the relevant facts of the PQ
(ii) use the law to ARGUE your case
In any PQ, you start with the facts.
Let's look at an example:
Bill is one of three directors in Fun Law Ltd,
a company set up to promote the fun in law.
Jane is one of four shareholders in Fun Law Ltd.
Dr Steven Vaughan, UCL Faculty of Laws
When you get the facts of a PQ, read them. Then re-read then.
Then pick up a pen.
First thing, identify the relevant parties. Remember that names
may indicate parties with rights or liabilities that may need to be discussed.

Let's go back to our example. Who are the parties here?
Bill is one of three directors in Fun Law Ltd,
a company set up to promote the fun in law.
Jane is one of four shareholders in Fun Law Ltd.
Bill and Jane are obviously parties.
Anyone else?

What about the other directors?
What about the other shareholders?
What about Fun Law Ltd itself?
The point here is simple: not every party will be named in a PQ.
Some may simply be referred to by title (e.g. "another shareholder")
or otherwise mentioned ("Cerys is mother to six children, including
Ewan and Elen...")
Ok, so you've read the PQ (at least twice) and you've identified
the relevant parties. What next?
Now look for relationships between those parties. Some of these
will be legally relevant and relevant for your PQ; others won't. But it's a good thinking exercise to identify all of them.
Let's take another example to look at relationships in PQs
Bill is driving his car in wet weather. Jane, a 10 year old child with learning
difficulties steps out in front of the car. Bill tries to brake, but can't stop
the car in time. Jane is seriously injured.
What parties and relationships can you see here?
Car Manufacturer?
Jane's parents?
Car Manufacturer
Jane's Parents
Once you've identified the parties and the various relationships, you
will need to decide on the relevant applicable laws.
Some PQs require you to look at one discrete body of law. Others
require consideration of multiple bodies of law.
Here, the skill you need to learn is to be able to identify what is
required of you by way of answer to the PQ.
Sometimes it will be obvious, "Advise Sarah in relation to a possible nuisance
claim against Anna." On other occasions, it will be more vague: "Discuss" or
"Advise the parties".
Before you put pen to paper, be clear on what you have to do: on which areas
of law you are being asked to discuss.
Issue Spotting
By this stage, you have identified the relevant parties and worked out the relationships between them. What next?
Issue Spotting: Not every relationship that you have identified will be legally relevant. Some will. Some won't.
To issue spot means to make a decision about the relevance of the relationships you have identified.
A good chunk of what you are asking yourself inside your head is: "Can X bring a claim against Y?" And, if yes,
is that claim the sort of the claim that the PQ is asking you to discuss. And, linked to this, if there is a claim, what defences might be open to the defendant? But your PQ might not be wholly about claims. Your PQ might be getting you to advise a party on how the law would apply to them. In that case, that's the issue.
Some PQs will only have one issue that requires spotting. Can A claim against B? Advise A on B. Others will have multiple issues: Can A claim against B, C and D? Can X claim against Y? Can Y claim against Z? Advise A on B, C and D... etc
By identifying parties and by identifying relationships from the facts, you make the likelihood of spotting all the
relevant issues that much greater.
Failure to spot an issue on which you are required to advise will likely mean losing marks. Given
this, spend a good amount of time being sure of the facts and being sure that you have identified
the relevant parties, the relationships between them and what issues are at play.
On the facts, don't make stuff up.
Don't invent facts you are not told. One of
the key skills for a PQ is being able to identify
missing data: facts which you are not told, but
which would be relevant to the determinaton of
the legal issues/claims.
Similarly, don't question the facts. If you are told, for example,
that "The doctor was negligent during surgery...", then don't say
"We don't know if the doctor was negligent. To be negligent..." You
will be told facts for a reason. Don't waste time questioning them.
Finally, on this issue, don't consider alternatives unless you
have been specifically told to do so. So, if you are told "The doctor
was negligent..." don't inlcude, as part of your answer "Had the doctor
not been negligent..." unless the question asks of you "Consider the
situation in which the doctor had not been negligent"
Let's talk about structure
You may have heard in the past about the IRAC or CLEO methods for answering PQs. Both are essentially the same
and are designed to give you a way of thinking about and structuring your approach.
The IRAC method stands for: Issue - Rule - Application - Conclusion.
With IRAQ, identify the relevant issue, decide on the law which is relevant to that issue,
apply the law to the particular facts and then conclude (which will commonly require the giving of advice to a particular party)
The following structure is what I like to see by way of translating of the IRAC method into a written answer. But, as I said before. this is just my PERSONAL PREFERENCE on structure.
Introductions to PQs are not the same as introductions
to essays. Don't start off by saying "This PQ raises many varied
and complex issues in relation to the law of [X]" (which would be poor even for
an essay question). Instead, simply signal to the reader that you have identified
the relevant issues. For example, "There are three possible claims here. A against
B under the law of X in relation to Y; C against D under the law of [etc etc]..."
The Body of the Answer
As for the body of your answer to the PQ, you can do this in one of two main ways. You can either
state all of the laws relevant to the issues you have identified and then apply those laws to the
relevant facts. Or you can integrate the two: that is, state and apply the law at the same time.
You will need to check which of these your tutor/lecturer prefers.
Whatever you do, be methodical. Don't mix up different issues or different bits of law. And don't
jump between different claimants or different claims. Whichever approach you take, make it such that the reader has a clear understanding of what you are discussing and to what that discussion refers. An easy way of making your answer clear is to use headings: "A's claim against B" "Case Law on Contaminatled Land" etc
Let's talk about authority
All too frequently, students made assertions without back up.
Manufactuers owe a duty of care
to end users
Articles of association can be
amended by special resolution
The Only Way is Essex is the
best thing on tv
Don't do this.
Every time you make an assertion, have back up.
Have authority which supports and/or is the basis
for the assertion you are making.
So, instead of simply asserting that "Articles of
association can be amended by special resolution"
give the authority: hence, either "Section 21 of the Companies Act 2006 details that articles of association..." or "Articles of association can be amended by special resolution (s21, CA'06)"
To sum up, for every assertion that you give, try and have some authority for it.
This will make your answer fuller. And more accurate. And thereby you will get better
Let's talk about depth of knowledge of the law
What is required or expected of you during your module/course is different to (a) what you will be capable of remembering for an exam and
(b) what you are physically capable of writing in
the time allotted for that exam
For an EXAM
With case law, you need to know case name, brief case
facts and the key principles of law decided/discussed.
Please don't repeat case facts at great length. You can rest
assured I have read them and know what they say. Case
facts are, however, relevant where you want to compare or
contrast a case to the fact pattern in the PQ. Just don't
spend 1/2 a page writng out the facts of case X or Y.
Case name, brief facts, legal principles. This is the minimum.
It may also be helpful to try to remember the date of the case, the court in which the case was heard and what individual judges said (if there is more than one judgment)
With statute, what you need to know may depend on whether or
not you are allowed to use a statute book in the exam. Even
where you are permitted to take in a statute book, do you really
want to spend all of your time leafing through its pages? Having key
bits of the key statutory provisions in your head is a probably a good
idea in any event.
Applying the Law
Simply knowing what law is relevant to a given fact pattern is not enough for a PQ.
You have to be able to APPLY that law to the facts
What this means is that you have to take the law and see what the result would be
if a judge were asked to apply that law to the particular problem. What is there in
the particular problem that fits with/looks like previous case law, for example? That is,
what are the similarities? At the same time, what looks different? How might you
distinguish previous case law from the fact pattern in front you? If a real world lawyer
was giving advice to a party idenitifed in the PQ, what would they say about how the
law applied to them?
Your teachers will normally write problem questions
that cover uncertainties in the law. They do this
as they want you to highlight those uncertainties
and to detail the facts and factors which a judge
would consider relevant to the determination of the
matter at hand. This is not easy. And it requires you to
step away from the PQ and really think about the body
of law in your head and the facts in front of you. Take your
time. The students who do well in application of the law are
normally the students who do best in PQs. And the more
sophisticated your application and arguments, the more
successful you will be with your PQs.
If there's one thing that drives me crazy,
it's when students don't answer the question set.
If you are told to "Advise Liz", then advise Liz. Imagine
she's a real life client sat at your desk. If you just told
her the law, and didn't advise her on how the law applied to her, that wouldn't massively help her.
When it comes to applying the law, you may find
that some of your arguments are stronger than
others. Or that certain causes of action or certain
grounds of claim are stronger than others.
There's nothing wrong in putting forward a
weak argument, as long as it is arguable. But
do tell the reader about relative strengths. For
example, “Alpha Ltd might argue X. On the basis
of previous case law (see Y and Z), this may be
a somewhat weak argument, but it remains,
nevertheless, arguable…”
Academics, policy etc
If a client walked into my office and paid me
money to advise them in relation to a particular legal
point, can you image their reaction if I started
talking about academic views on
the matter?
"Well, yes, the law is settled in Area X. And so it would apply to you
thus... But, you know, there was this truly fascintaing piece in the MLR
last month where Professor Veryclever argued for a fundamental reform
of the law...."
My personal view is that if you are asked to
advise a theoretical client, you advise them on
the law and how it applies to them. You don't
engage them in debate about academics. And you
don't raise questions of policy or social context,
fascinating though these may be.
As I say, this is my PERSONAL VIEW.
And I know other tutors/lecturers differ. Some will want you
to reference, for example, Law Commission papers where
the relevant area of law is under reform or being debated.
My advice is thus to specifically ask your teacher whether
they would expect to see academics/policy/social context/reform
discussed in your PQs. Better to be safe than sorry...
One of the saddest things (when marking exams)
is when you come to a student who is clearly capable
and who clearly understands the PQ. And who
identifies the X issues in the PQ. But then
runs out of time and only discusses X-1/X-2
of those issues.
To say "I ran out of time" is a poor excuse.
You know in advance how long you have to answer
the PQ (an hour, 45 minutes etc). And once you have
identified the issues, you can give a rough estimate of how
long to spend on each.
Say you have 45 minutes to answer a PQ. And you identify 3 claims that
need to discussed and each is equally complex. Why, then, would you spend
30 minutes doing Issue 1 and leaving such little time for Issues 2 and 3?
My toppest top tip to you is to have a watch in front of you or a clock
nearby and to be ruthless about your allocation of time to each individual
Writing "Sorry I ran out of time! :0( " on your exam
script is not going to get you very far....
Now, go forth and answer your PQs
Good luck!

Full transcript
The Companies Act 2006 ('CA06': unless stated, statutory references are from the CA06) seeks to do what Romer J said was "impossible"; namely, describe directors' duties in terms which accommodate every director's circumstances, including the nature of their company and directorship (Re City Equitable Fire Insurance). The Act is derived from counter-part common law and equitable principles. As will be shown, these were extremely flexible and could apply to "situations that no one [had] foreseen and categorised"(Clarke, 1986, p141). However, few directors understood their basic duties from this compendious mass of legal sources (BIS, 2010a,p.10).

Both the Law Commissions (1999) and the CLR (2001) recommended that the Act should clarify and make accessible these rules developed at common law and equity. For directors, this would cut litigation costs resulting from misunderstanding. Across companies, this could raise standards of corporate governance. But this was the first time under UK law that directors' duties would be committed to writing in one place. This controversial proposition caused widespread debate, not least because directors are integral to companies.

The company is a separate legal personality. Directors are required to act on its behalf. There are three types: De Jure directors (including nominees) are appointed by the company; De Facto directors, whilst not appointed, perform tasks particular to directorship (Re Hydrodan); Shadow directors, excluding professional advisors, are implied directors if they instruct other directors (Unisoft Group). All directors manage companies and their assets. Since this position lends directors significant powers and responsibilities, it is vital duties are imposed on them to uphold behavioural standards, and protect the company and its beneficiaries. Under the CA06 Shadow Directors are subject to "the corresponding common law rules or equitable principles"(s.170(5)). However, the Act otherwise applies to "any person occupying the position of director, by whatever name called"(s.250). Not only, then, does the CA06 affect the activities of the company's engine and legal face, but it attempts to regulate an incredibly broad range of directorships.

Clarity and accessibility, therefore, are bold ambitions for an Act that must speak to the provincial part-timer and the City executive. This essay takes an overview of the CA06 assessing its broader impact on corporate governance; before looking closely at the Act's legal heritage to see if it really has improved directors' understanding of their duties. Codification clarifies some aspects of the law. However, it introduces fresh ambiguities as the Act's general wording tries to preserve the "impossible".

Ss.171 to 177 contain directors' duties. They are owed by directors to the company (s.170(1)). S.170(3) states codified duties supersede equivalent common law and equitable principles. However, s.170(4) requires courts to have regard to interpretations of those sources when interpreting and applying the statute. S.178 imports remedies for breach of duty, from common law and equity.

Considering each duty, s.171 requires directors to act under the company's constitution (s.171(a)), and only exercise powers for the purposes given (s.171(b)). S.172 specifies directors must act in good faith to further the company's success, for the benefit of its members as a whole. In doing so, the director must have regard to factors (a)-(f)(s.172). Thirdly, directors must exercise their independent judgement (s.173). S.174 establishes directors' duty of care. A dual standard is imposed, the first limb being objective- directors must demonstrate knowledge, skills and experience that might be reasonably expected of a person of their position (s.174(2)(a))- the second, subjective- the director must demonstrate the knowledge, skills and experience that they have (s.174(2)(b)).

S.175 states the duty to avoid actual or potential conflicts with the company's interests. It concerns conflicts of interest and duty, and conflicts of duties (s.174(7)). The duty applies particularly to the exploitation of a company's property, information or opportunity (s.175(2)). However, it only arises over directors' third party dealings (s.175(3)). Furthermore, ss.175(4)(b), 175(5) and 175(6) provide the board a procedure for authorising conflicts by the board. Persons ceasing to be directors remain subject to this duty (s.170(2)). S.176 provides directors cannot accept benefits from third parties. Dissimilarly to s.175, s.176 provides no authorisation procedure. Finally, directors with direct or indirect interests in their company's transactions must declare to other directors the nature and extent of those interests (s.177(1)-(4)), unless unaware of their interest or the transaction concerned(s.176(5)).

But how could these seven simple statements apply to a corporate community? Corporate governance "is the system by which companies are directed and controlled"(ECGI(Cadbury Committee),1992,[2.5]). Essentially, it how directors manage and the values they set for their company (FRC, 2010,p.1). In 1992 the Cadbury Committee felt efficient corporate governance was essential for the economy's growth (1992). By 2006 commentators noted a cultural shift in this understanding (FRC, 2006). A company's conduct affects the community, from its customers and employees, to resources utilised. Therefore, corporate governance should also encompass "what is good for society at large"(Hodge/BIS, 2007,p.1). Since directors are responsible for a system which impacts the company and, more widely, the economy and society, it is vital they have clear guidelines to uphold standards.

The fact of codification should, in theory, improve corporate governance. With accessibility and clarity comes accountability: anyone, including directors, can determine a breach of duty. Codification therefore allows directors to regulate their activities, thereby improving management standards. S.172, particularly, implements two significant changes to corporate governance. Firstly, it asks directors to take a long-term perspective when promoting the company's success. British businesses have been criticised for taking volatile actions (Arora,2011). Now, directors are required to think responsibly thereby enhancing the quality of their company's operations.

Secondly, directors must consider the "company as a whole". This adopts the 'enlightened shareholder approach' recommended by the Law Commissions (1999) and the CLR (2001). Accordingly, not only must directors consider shareholders when managing the company, but also stakeholders (Sealy,2010,p.302). The duty's list of factors to consider includes the interests of the company's employees, its business relationships, the community and environment (s.172(1)(a)-(f)). As a statutory statement, it therefore crystallises the notion that good corporate governance should encompass wider considerations. It was anticipated that s.172 would radically improve the quality of directors' decision-making (Keay,2009,p103).

In practice, however, has s.172 delivered the promised improvements to corporate governance? Directors' adoption of long-term focus has always been doubted. Sceptical, Davies writes: "if directors perceive that their positions [are] under threat, they will manage for the short-term... it is [useless] to them if the company is set to do well in the future."(2010, p.149) Even four years on from the CA06's accession, the BIS called for a review of corporate Britain's long-term focus(2010b). This was partly in response to the furore following Kraft's Cadbury takeover: short-term fund interests acquired Cadbury shares with to sell them to Kraft for a quick profit (Company Law, 2010,p.1). Potentially, s.172 has done little to shake the short-term out of British corporate governance.

Similarly, s.172's enlightened shareholder approach has its critics. Given the impracticalities of balancing diverse factors (a)-(f), many believe directors will simply pay them "lip-service"(Sykes, 2010,p.228). Furthermore, Sales J confirmed that s.172 was not a vehicle for enforcing specific factors from s.172(a)-(f). Provided directors decide in 'good faith' which interests, as opposed to others, best promote the success of the company, they will not be held accountable(Ex p.People & Planet).Perhaps, s.172 raises unrealistic hopes about what can be achieved for wider corporate governance values.

According to the BIS' review, less than half the companies surveyed made changes following codification (2010a,p.6).The banking crisis 2007-9 tested the notion that improvements to corporate governance were made atall (Arora,2010). However, given the CA06 has only operated for four years, it is too early to anticipate its impact. Significantly, the BIS also found that 79% of companies understood the statutory statement of directors' duties, as opposed to the old law (2010a, p.6). Arguably, codification and s.172 especially, provide an accessible framework of considerations, which, if understood, should inform companies' decision-making. And, as the BIS concedes, "how can you measure the value of knowing that a company's books are sounder than they were before?"(2007a,p.4). Maybe codification fails to achieve the broader aims of corporate governance, but perhaps statistics cannot reveal its subtler impact on individual companies' management standards.


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