4 - Directors' Duties and Responsibilities Flashcards
What is the role of a director of a company?
- As a company is inanimate, it is the directors who on a day-to-day basis are responsible for managing the company through an agency relationship.
- The directors are accountable to the company itself rather than to the shareholders directly.
- Certain actions, however, can only be taken by Directors if the shareholders have given authority.
- Directors owe their duties to the company.
What are the key characteristics of shareholders of a company?
- Own the company.
- Are able to control key decisions through shareholder resolutions, e.g., give directors authority to change the name of the company.
It is common for directors and shareholders to be the same people in a company.
What is the authority of directors to manage a company in comparison to that of a shareholder?
Under CA 2006, certain key decisions require shareholder approval, such as:
- Changing the company’s name (unless provided otherwise by the articles).
- Amending the articles of association.
- Removing directors.
The board of directors, under MA 3, is generally free to manage and make decisions on behalf of the company without shareholder approval for other matters. This includes:
- Employing individuals (excluding directors on long-term service contracts) and setting their pay.
- Entering into contracts with customers and suppliers.
- Buying and selling company property.
- Raising funds by borrowing from banks and using the company’s assets as security.
- Preparing company accounts and providing information to auditors.
MA 5 allows the board to delegate decision-making to a specific director or a committee, such as a HR Director for HR matters.
What is the accountability of directors?
Directors are given wide powers, but without regulation, these powers could be abused (e.g., lending company funds to themselves or giving misleading statements in accounts).
To prevent unethical practices and protect shareholders and creditors, directors’ actions are regulated by statute, particularly Part 10 of CA 2006, which outlines their general duties.
Directors can be held accountable for wrongdoing through:
Civil and criminal actions for breaching the Companies Act.
Criminal liability under other legislation, including:
- Fraud Act 2006 (fraud).
- Theft Act 1968 (theft).
- Criminal Justice Act 1993 (insider dealing).
- Proceeds of Crime Act 2002 (money laundering).
What is a director?
CA 2006 does not explicitly define “director,” but under s 250 CA 2006, it includes “any person occupying the position of director, by whatever name called.”
Categories of directors include:
At law:
- De jure directors.
- De facto directors.
- Shadow directors.
In practice:
- Executive directors.
- Non-executive directors.
A company’s articles may also provide for alternate directors.
What are de jure and de facto directors?
- A de jure director is one who has been validly appointed according to the law.
- De facto directors are individuals who act as directors but have not been validly appointed. E.g., provide advice to the company acting as if they are a director. Fiduciary duties and liabilities apply equally to de facto directors as they do to de jure directors.
What are the rules required for the number of directors in a private or public limited company?
Private limited companies: At least one director is required (s 154 CA 2006).
Public limited companies: At least two directors are required (s 154 CA 2006).
Every company must have at least one director who is a natural person (s 155(1) CA 2006).
CA 2006 does not set a maximum number of directors, but a company may include a maximum limit in its articles.
What are the rules on who can be appointed as a director?
- A person must be at least 16 years old to be appointed as a director (s 157 CA 2006).
- As of 4 March 2024, under the ECCTA amendment to CA 2006, a person who is disqualified under director disqualification legislation cannot be appointed as a director unless they have the permission of the court.
What are shadow directors?
- A shadow director is defined under s 251(1) CA 2006 as a person whose directions or instructions the company’s directors are accustomed to follow.
- s 251(2) excludes professional advisers from being classified as shadow directors.
This provision ensures that individuals acting as directors, even if not formally appointed, are subject to the same duties and restrictions as directors. This applies to shadow directors under various provisions of CA 2006 and the Insolvency Act 1986.
What are executive and non-executive directors?
Executive directors:
Appointed to executive office, often spending most or all of their working time on company business.
They are both officers and employees of the company (e.g., Finance Director, Managing Director).
Non-executive directors:
Officers of the company but not employees.
Do not engage in the day-to-day running of the company, instead offering independent guidance and advice to the board and protecting the interests of shareholders.
Both types of directors are subject to the same duties under CA 2006.
What are alternate directors?
- An alternate director is a person who acts as a substitute for an absent director, typically appointed by the board or fellow directors.
- The Model Articles (MA) do not provide for alternate directors, but some companies include provisions for this in their articles.
- The alternate director possesses the same voting powers as the absent director.
- It is generally accepted that CA 2006 applies to alternate directors, including the duties of directors.
The use of these directors is increasingly rare due to the ability to now conduct Board Meetings online.
What is a company secretary and what are their main duties?
A company secretary is responsible for:
- Keeping company records up-to-date.
- Producing minutes of board and general meetings.
- Ensuring that filings are made at Companies House.
Private companies are not required to have a company secretary under s 270(1) CA 2006, unless stated in their articles.
Public companies must appoint a company secretary (s 271 CA 2006).
A public company’s secretary must possess the necessary knowledge, experience, and qualifications (s 273(2) CA 2006), such as being a solicitor or chartered accountant. It is for the directors to ensure that the company secretary has the requisite qualifications.
How is the appointment of directors dealt with by companies and the Model Articles (MA)?
The Companies Act 2006 (CA 2006) does not provide a specific procedure for the appointment of directors; this is governed by the Articles of the company.
The Model Articles (MA) allow for two methods of appointing directors:
- By ordinary resolution of the shareholders (MA 17(1)(a)).
- By a decision of the directors (MA 17(1)(b)).
It is more common for the board of directors to appoint new directors under MA 17(1)(b), as this is simpler to implement.
The Articles of a company may include custom provisions for the appointment of directors, so it is essential to review them before advising on this matter.
What are the service contracts of directors?
An executive director is an employee of the company and must be provided with a written contract of employment (service contract), which outlines:
- Duties
- Remuneration package
- Notice provisions
Directors are not automatically entitled to payment for their services. The board determines remuneration, subject to the company’s Articles.
The company must keep directors’ service contracts (or memoranda of their terms) at its registered office for inspection by the members (s 228 CA 2006).
Under Article 19 MA, the terms of a director’s service contract, including remuneration, are for the board to decide.
Shareholder approval is required for long-term service contracts under s 188 CA 2006.
How is the disclosure of the identity of directors and the secretary dealt with?
The CA 2006 requires certain information about directors and the secretary to be disclosed publicly or to the members.
Every company must:
- Maintain a register of directors (s 162(1) CA 2006) and the secretary (s 275(1) CA 2006).
- Notify the Registrar of Companies (Companies House) of changes to directors (s 167 CA 2006) and the secretary (s 276 CA 2006).
The register must be kept at the company’s registered office and be available for inspection.
Certain details must be filed with Companies House using appropriate forms (e.g., AP01 for the appointment of a director).
The information is available to the public for inspection (s 1085(1) CA 2006).
What are the provisions for privacy for officers of the company?
The CA 2006 allows more confidentiality for directors and the secretary compared to previous legislation.
Section 163(1) CA 2006 specifies that the register of directors must include:
- Name and any former names
- Service address
- Country or state of residence
- Nationality
- Business occupation (if any)
- Date of birth
For secretaries, s 277(1) CA 2006 requires:
- Name and any former names
- Address (which can be a service address, such as the company’s registered office or residential address if there are no issues with privacy for the secretary).
- Directors still need to provide their residential address (s 165 CA 2006), but this is kept on a separate, secure register not available for public inspection.
What disclosure is required in annual accounts regarding directors?
Section 412 CA 2006 governs the disclosure of information about directors’ remuneration in a company’s annual accounts. This includes:
- Salaries, bonus payments, and pension entitlements.
- Compensation for loss of office.
Details of payments made to persons connected with directors or companies controlled by directors must also be disclosed.
Section 413 CA 2006 requires information on advances, credits, and guarantees provided by the company to directors to be disclosed, applying to any person who was a director during the relevant financial year.
How can shareholders remove a director?
Section 168(1) CA 2006 allows shareholders to remove a director by passing an ordinary resolution.
A special notice (28 days) is required for such a resolution under s 168(2) CA 2006.
The board of directors cannot remove a director unless the Articles specifically permit it.
Directors who are also shareholders may vote on their own removal.
What are the ways in which a director may vacate their office?
A director can vacate their office through:
- Resignation: A director may resign by giving notice, as provided for in MA 18(f).
Automatic termination under MA 18 occurs if:
- The director becomes disqualified.
- The director becomes bankrupt or subject to an individual voluntary arrangement.
- A medical practitioner certifies that the director is physically or mentally incapable of performing their duties for more than three months.
What is the Company Directors Disqualification Act (CDDA) and what does it provide for?
The Company Directors Disqualification Act 1986 (CDDA) governs the disqualification of directors.
- Courts can issue disqualification orders preventing individuals from acting as directors, liquidators, or in any other role in company management without court permission.
- Disqualification is imposed to protect the public and can last for up to 15 years.
- Grounds for disqualification include fraudulent or wrongful trading and persistent breaches of company law.
- Acting in violation of a disqualification order is a criminal offence.
What is retirement by rotation and the requirements for reappointment?
The model articles for public companies require directors to retire and be reappointed by the members every three years.
All directors of listed companies are subject to annual re-election.
What are the Companies House filing requirements when a director leaves office?
When a director leaves office, the company must update its register of directors and notify Companies House by filing form TM01 (Termination of appointment of director).
Why are directors subject to extensive duties?
Directors are responsible for the day-to-day management of the company (MA 3).
To protect shareholders and creditors from directors exploiting or abusing their powers for personal gain, directors are subject to extensive duties.
Whenever directors make decisions, they must consider all the duties to which they are subject.
Who are the general duties of directors owed to?
- The general duties of directors are owed to the company, not to shareholders directly.
- A breach of duty by a director is a wrong done to the company, making the company the claimant in any proceedings in the event of a breach by director.
- When a company faces financial difficulty, the directors’ duties shift towards protecting creditors.
Provide an overview of the general duties of directors as set out in ss170-177 CA 2006.
The general duties of directors, codified in CA 2006, are drawn from common law and equity.
Sections 170-177 CA 2006 set out the statutory general duties:
- s 171: Duty to act within powers
- s 172: Duty to promote the success of the company for the benefit of members as a whole
- s173: Duty to exercise independent judgment
- s 174: Duty to exercise reasonable care, skill, and diligence
- s 175: Duty to avoid conflicts of interest
- s 176: Duty not to accept benefits from third parties
- s 177: Duty to declare any interest in a proposed transaction
These duties apply to all types of directors and are interpreted according to the common law rules and equitable principles (s 170(4) CA 2006).
What does the duty to act within powers under s171 CA 2006 entail?
Section 171 outlines two separate duties:
-
Duty to act within the company’s constitution:
The constitution includes the company’s articles of association and decisions taken in accordance with those articles (s 257 CA 2006).
A breach occurs if a director acts without authority (e.g., committing the company to borrow more than allowed without shareholder approval). -
Duty to exercise powers for the purposes for which they are conferred:
Directors must not use their powers for improper purposes, such as personal gain.
What is the duty to promote the success of the company under s172 CA 2006?
Section 172 CA 2006 codifies the duty for directors to act in a way they believe, in good faith, will most likely promote the success of the company for the benefit of its members as a whole.
The government interprets ‘success’ for commercial companies as a ‘long-term increase in value’.
Directors must also consider non-exhaustive factors such as the long-term consequences of decisions, employees’ interests, relationships with suppliers, customers, and others, environmental impacts, and maintaining high business standards when making decisions.
