In Re Smith and Fawcett Ltd: CA 1942

Directors to act Without Collateral Purpose

The primary duty of a director imposed by the general law is that he should act in what he considers to be the best interests of the company, and not for any collateral purpose. That duty is a subjective one that depends on the directors exercising their discretionary powers bona fide in what they, and not the court, consider to be in the interests of the company. Lord Greene MR said: ‘The principles to be applied in cases where the articles of a company confer a discretion on directors . . are, for present purposes, free from doubt. They must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose . . The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company.’
As to the practice of making findings as to a director’s motives by way of affidavit evidence, Lord Greene MR said: ‘I strongly dislike being asked on affidavit evidence alone to draw inferences as to the bona fides or mala fides of the actors. If it is desired to charge a deponent with having given an account of his motives and his reasons which is not the true account, then the person on whom the burden of proof lies shall take the ordinary and obvious course of requiring the deponent to submit himself to cross-examination. That does not mean that it is illegitimate in a proper case to draw inferences as to bona fides or mala fides in cases where there is on the face of the affidavit sufficient justification for doing so, but where the oath of the deponent is before the court, as it is here, and the only grounds on which the court is asked to disbelieve it are matters of inference, many of them of a doubtful character, I decline to give to those suggestions the weight which is desired.’

Lord Greene MR
[1942] Ch 304, [1942] 1 All ER 542
England and Wales
Cited by:
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CitedCayne and Another v Global Natural Resources Plc ChD 12-Aug-1982
The court gave this example of the legitimate use of the directors’ powers to defeat a take-over: ‘If Company A and Company B are in business competition, and Company A acquires a large holding of shares in Company B with the object of running . .
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The parties came together in a limited partnership to develop property. The appeal was against a refusal to grant summary judgment on a claim that one party had been induced to enter the contract by a fraudulent misrepresentation.
Held: In . .
CitedUltraframe (UK) Ltd v Fielding and others ChD 27-Jul-2005
The parties had engaged in a bitter 95 day trial in which allegations of forgery, theft, false accounting, blackmail and arson. A company owning patents and other rights had become insolvent, and the real concern was the destination and ownership of . .
CitedMactra Properties Ltd v Morshead Mansions Ltd and Others ChD 6-Nov-2008
The block of flats was owned by a company in which each tenant owned one share. The claimant company had bought twenty five flats, and now sought to sell them, but the freeholder refused to register share transfers saying that the claimant was in . .
CitedLloyd v McMahon HL 12-Mar-1987
The district auditor had issued a certificate under the 1982 Act surcharging the appellant councillors in the sum of 106,103, pounds being the amount of a loss incurred or deficiency caused, as the auditor found, by their wilful misconduct.
Company, Litigation Practice

Leading Case

Updated: 09 November 2021; Ref: scu.181877