3. Directors Flashcards
Director’s Duty to promote success of the company: key considerations
Directors must have regard to (a) the likely consequences of any decision in the longterm, (b) interests of company employees, (c) need to foster company’s business relationships, (d) impact of company operations on community and environment (e) desirability of company maintaining reputation for high standards of business conduct (f) need to act fairly between members of the company
Test for breach of s 172 CA 2006
- Subjective test applied by court when assessing breach (will not be in breach if they considered in good faith that their actions would promote company success) (Re Smith v Fawcett 1942), difficult to establish the director is in breach here
- If director acted dishonestly (clear they have not considered s 172), court can apply objective test (use board meeting minutes as evidence)
Potential defences to s 173: Duty to exercise independent judgement
- If this behaviour is authorised by the company’s constitution
s 174 CA 2006 Duty to exercise reasonable care, skill and diligence: how is the level of RC,S, and D measured?
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (objective test), and
- the general knowledge, skill and experience that the director has (subjective test)
s 175 CA 2006: Duty to avoid conflicts of interest, when does this NOT APPLY
Does not apply in relation to conflicts of interest arising in relation to a transaction or arrangement with the company
Can the same action give rise to breach in s 175 and s 177
No - 175 does not apply to company transactions while 177 does
Can a breach of 175 CA 2006 be AUTHORISED by the other directors?
Yes (s 175(4) and (5))
If a board meeting is held to decide whether to authorise a director’s breach of s 175, can the director in breach vote?
No, and will not count in quorum (EVEN IF MA 14 HAS BEEN EXCLUDED)
Defences to s 175 CA 2006
- Situation cannot reasonably be regarded as likely to give rise to a conflict of interest
- The matter has been authorised by the directors
s 176 CA 2006: Director’s Duty
Directors have a duty not to accept benefits form third parties (because of his status as director or actions or inaction in relation to his role)
s 177 CA 2006: Duty
Duty to declare interest in a proposed transaction or arrangement
Ways to defend / avoid a s 176 claim:
- If the benefit cannot reasonably be expected to give rise to a conflict of interest
Methods of declaring interest under s 177
- At a board meeting
- General notice in writing to the other directors
Exceptions to s 177
a. If the director is not aware of the interest, or of the transaction or arrangement in question (and a director is treated as being aware of matters of which he ought reasonably to be aware)
b. if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest
c. if, or to the extent that, the other directors are already aware of it (or ought reasonably to be)
d. if it concerns the terms of the director’s service contract
Difference between s 177 and s 182 duties
177: Regards transactions which are UPCOMING
182: Regards transactions which are CURRENT
Failure to comply with s 177: consequences
Civil penalties
Consequences of failure to comply with s 182
Criminal offence punishable by fine
Who has the power to appoint a director?
(1) Directors (under MA 17)
or shareholders
Essential inclusions in notice of board meetings
- Reasonable (time)
- Include date, time and place of meting
- state method of communication if not in person
4, sent to all directors
Must notice for a board meeting be communicated in writing?
No, but any other mean must meet the ‘reasonableness’ requirement
Quorum at Board Meetings
Generally, 2 (for meeting to be quorate)
Two ways companies raise capital
- Borrowing
- Issuing Shares
When might a director (who is also a shareholder) breach their 171 duty when borrowing capital
- If the company is already significantly in debt
- the D/S has decided borrowing is better than issuing more shares solely / significantly due to their reluctance to have their shareholding diluted
Minimum # of directors: Private Companies
1
Minimum # of directors: Public Companies
2
Age requirement for directors
16 +
Executive v Non-Executive Directors
Executive: appointed to board and have an employment contract with the company
Non-Executive: Appointed to board, registered at CH but no service contract (no salary)
How can directors appoint a chairperson
Pass a board resolution
Additional role for chairman in public company
Acts as a figurehead in dealings with shareholders / those outside the company
Definition: De Facto Director
Acts as director although they have never been validly appointed, can fall within definition of direction
Shadow Director: Definition
Directors of company are accustomed to acting in accordance with their directions (s 251(1) CA 2006) but has never been formally appointed
- Need not be on all matters
If quorum for board meetings is 2, how can 1-director companies make decisions?
MA7 allows directors to make decisions without board meetings if they unanimously express their consent on a matter
Role of an “Alternate Director”
Individual appointed by a director to attend a board meeting and vote on their behalf
When can directors appoint an ‘alternative director’?
If there is a special article in the articles of association (not covered in model articles)
Effect of bankruptcy on directorship?
MA 18: Person will cease to be a director if a bankruptcy order has been made against them or a doctor gives a written opinion
What happens if a director becomes physically or mentally incapable of continuing in their role?
- They can cease to be director if a doctor gives the company their written opinion outlining the individual’s condition and their belief that this will persist for more than 3 months
Once a director is appointed, what administrative requirements are there?
Company must submit form AP01 (For human director) or AP02 (for corporate director) to companies house within 14 days of the appointment
Definition of a longterm service contract
A service contract with a guaranteed term of more than 2 years (company must not have the power to terminate it before then)
Administrative Requirements: Board Meeting to call General Meeting for Long Term Service Contract
Directors of company are accustomed to acting in accordance with their directions (s 251(1) CA 2006) but has never been formally appointed
Administrative Requirements after Service Contract is approved / passed
Contracts must be available for inspection by shareholders during term and until a year after termination of service contract (s 228 CA 2006), shareholders have right to inspect them without charge (s 229) and within 7 days of their request
Who can remove directors? What notice is required?
Shareholders, by ordinary resolution
- Special Notice is required
DEF: Special Notice
Notice must be given to the company of the resolution at least 28 days before the general meeting at which the resolution is proposed
Significance of Bushell v Faith Clause in Shareholders Agreement
If an individual is a shareholder and director, B v F clause gives shareholder extra voting rights IFF the resolution resolves to remove them as a director
Removal of Director: Administration Requirements
If a director resigns or is removed, Forms TM01 (human) or TM02 (corporate) are used to notify companies house within 14 days of the resignation / removal
To whom do the directors owe duties?
To the company
Potential Civil Remedies for Breaches of Duties
- Account of profits
- Equitable compensation for loss suffered by company
- Rescission of any contract entered into as a direct / indirect result of the breach
- an injunctions
- restoration of property transferred
Remedies for Breach of s 174
174 is akin to negligence
- Remedy is common law damages assessed in the same way as damages for negligence
Can the right for shareholders to remove a director be suspended by specific wording in their employment contract?
No, this right is given to shareholders by statute
Can the written resolution procedure be used by shareholders to remove a director?
No, this would infringe on the director’s right to make representations / defend themselves / speak at the general meeting
Can a general meeting to remove a director be done on short notice?
No, director is entitled to time to prepare their representations
When can written resolutions not be used to pass ordinary resolutions?
- Removing a Director
- Removing an auditor
How are breaches of director’s duties ratified? By whom?
- By ordinary resolution
- Of the shareholders
Can the company be vicariously liable for the wrongful trading of a director?
No, liability is personal to the director
Can shareholders bring an action for breach of a director’s duty?
No, the company must bring the action
Under duty 172: do the directors also have this duty to promote the success of the company to creditors?
Only if the company is insolvent
Who can ratify the breach of a director’s duty?
The shareholders, by ordinary resolution if not specified to be special
- votes of breaching director (if shareholder) and any connected person are disregarded only if they are deciding votes
Constraints on a director’s ability to borrow and give security under the Model Articles
- all powers must be exercised for their proper purpose (ie. borrowing to retain control is likely to be improper)
