Faculty of Arts and Social Sciences The Law School Powers, duties and liabilities of company directors: A comparative study of the law and practice in the UK and Saudi Arabia Abdullah Nasser Aldahmash (November 2020) A thesis submitted for the Degree of Doctor of Philosophy Abstract Abstract Due to the globalisation of business and the concept of borderless business activities, these new phenomena need business management to be open and adopt and practice management’ skills with the international in mind, and give good consideration to the circumstances of the internationalisation of the business through directors having powers as provided under contract and law. The financial crises in previous years have demonstrated the importance of directors’ duties to manage the company's affairs properly; these crises were a result of many cases of fraud and mismanagement. The directors’ duties in the UK and the KSA have been codified to enhance the clarity of the law and make it easier for the responsibilities of directors towards the company and others to be understood. It also aims to prevent fraud and mismanagement that causes corporate collapse. This study investigates and analyses the powers, duties and liabilities of the directors in Saudi Arabia and the UK in order to demonstrate the extent to which these regulation work effectively. This is by a critical evaluation of relevant legislation and case law on the subject matter of the study and demonstrating practical problems, which may result from some legislation. By doing this, the study provides an accurate picture of the directors' powers, duties and liabilities, and provides solutions to practical problems of legislation in the same context. 2 Declaration Declaration I confirm that this thesis submitted is my own work. It has not been submitted in the same form for another degree elsewhere. All quotations have been recognised and the sources of identification have been acknowledged. 3 Acknowledgement Acknowledgement All praise be to Allah (the God) first and foremost. Then I would like to take this opportunity to express my sincere gratitude and thanks to both of my supervisors, Prof. David Milman and Mr. Philip Lawton for their continued guidance and constant help to overcome obstacles during my PhD research. I must express my thanks and gratitude to the Government of the Kingdom of Saudi Arabia for giving me this opportunity to study a PhD degree in the United Kingdom. Finally, I must thank my parents, who prayed for me and supported me as best they could during my PhD journey. Table of Contents Table of Contents Abstract ............................................................................................................. 2 Declaration ........................................................................................................ 3 Acknowledgement ............................................................................................ 4 Table of Contents ............................................................................................. 5 Chapter One: Introduction ................................................................................ 9 1.1 Preamble ......................................................................................................................... 9 1.2 The significance of this study ........................................................................................ 13 1.3 The aims and objectives of this study ........................................................................... 15 1.4 Research questions ....................................................................................................... 16 1.5 Methodology ................................................................................................................. 16 1.6 Legal transplantation ..................................................................................................... 18 Chapter Two: Legal principles with respect to company directors and board of directors .......................................................................................................... 24 2.1 Legal principles with respect to company directors ...................................................... 24 2.1.1 Who is a director? ...................................................................................................... 24 2.1.2 Appointment of directors ........................................................................................... 29 2.1.3 Removal of directors .................................................................................................. 34 2.1.4 Directors’ disqualification ........................................................................................... 38 2.2 Legal principles with respect to the board of directors ................................................. 41 2.2.1 Board structure .......................................................................................................... 41 2.2.2 Directors’ meeting and decision-making .................................................................... 47 Chapter Three: The powers and duties of company directors in UK law ........ 50 3.1 Introduction ................................................................................................................... 50 3.2 The directors’ powers .................................................................................................... 51 3.3 The directors’ duties ...................................................................................................... 53 3.3.1 Duty to act within powers .......................................................................................... 53 3.3.2 Duty to promote the success of the company ........................................................... 60 3.3.3 Duty to exercise independent judgment .................................................................... 79 3.3.4 Duty to exercise reasonable care, skills, and diligence .............................................. 87 3.3.5 Duty to avoid conflicts of interest and to declare the interest in a proposed transaction or arrangement ................................................................................................ 91 3.3.6 Duty not to accept benefits from third parties .......................................................... 94 Chapter Four: The powers and duties of company directors in Saudi Arabian law and Islamic law ......................................................................................... 98 5 Table of Contents 4.1 Introduction ................................................................................................................... 98 4.2 Duty to act within powers to achieve the purposes of the company ................. 101 4.3 Duty to exercise reasonable care .......................................................................... 104 4.4 Duty to maintain confidentiality .............................................................................. 106 4.5 Duty to avoid conflicts of interest and to declare any personal interest ........... 109 4.6 Duty not to participate in any business competitive with that of the company. ........................................................................................................................................... 111 4.7 Duty not to accept benefits from third parties ...................................................... 115 4.8 Duty to act in the interests of the company and consider the interests of the stakeholders. ................................................................................................................... 117 4.9 Duty to be a liquidator upon the dissolution of the company ............................. 118 4.10 The evaluation of the Saudi Arabian law with respect to the directors’ duties. ........................................................................................................................................... 123 4.11 The comparison of directors’ duties in the UK and Saudi legislation. ....................... 125 Chapter Five: The liability of company directors in UK law ........................... 129 5.1 Business Judgment Rule and Judicial Intervention ...................................................... 129 5.2 Directors’ liability ........................................................................................................ 136 5.2.1 Breach of fiduciary duty ........................................................................................... 136 5.2.2 Breach of duty owed to creditors ............................................................................. 140 5.2.2.1 Wrongful Trading ................................................................................................... 140 5.2.2.2 Fraudulent trading ................................................................................................. 148 5.2.3 Liability for negligence to the company and third party .......................................... 152 5.3 The consequences of breach of the duties .................................................................. 155 5.3.1 Return of property and Account of profits ............................................................... 155 5.3.2 Equitable compensation ........................................................................................... 157 5.3.3 Rescission of a transaction ....................................................................................... 158