4) Managing Companies: Directors and the Board Flashcards
Directors Relationship Overview
- Manage company on a day-to-day basis
- Certain actions only taken by directors if shareholders given authority
- Owe duties to the company
Shareholder Relationship Overview
- Own the company
- Able to control key decisions through shareholder resolutions
Where does director’s control of the company originate?
Model Articles
Model Articles 3
Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company
Model Article 4
The shareholders may by special resolution, direct the directors to take, or refrain from taking specified action.
Shareholder Protection from rogue director
- Model Aricle 4 - grants the shareholders a reserve power of special resolution
- Companies Act 2006 - eg power to control amendments to the company’s articles by special resolution (s21 CA)
- Removal of director by ordinary resolution (s168 CA)
s21 Companies Act 2006
Control amendments to a companies articles by special resolution
s168 Companies Act 2006
- Ultimate sanction that can be exercised
- Removal of director by ordinary process
Directors are …
Agents of the company, not of the shareholders.
Howard Smith Ltd v Ampol Petroleum Ltd 1974
Directors may take decisions against the wishes of the majority of the shareholders.
Definition of director in Companies Act 2006
- Doesn’t define “director”
- s250 includes any person occupying the position of director, by whatever name called.
Categories of director which we consider
- At law - de jure, de facto and shadow directors
- In practice - executive and non executive directors
- Company articles may also provide for alternate directors.
De jure directors
- A director validly appointed by law
s154 Companies Act 2006
- A private limited company must have at least one director and a public limited company must have at least two directors
s155(1) Companies Act 2006
Every company must have at least one director who is a natural person
Small Business, Enterprise and Employment Act 2015
Not yet in force but Gov has indicated it will be implemented alongside identify verification checks
* Going to require company directors to be natural persons,
* Prohibits the appointment of corporate directors subject to certain exceptions.
Maximum number of directors?
- CA 2006 does not prescribe a limit
- Neither does MA
- Company can limit in own articles.
s157 CA 2006
A person cannot be appointed as a director until they’re 16 (or does not take effect until aged 16)
De facto director
Someone who assumes to act as a director but has, in fact, not been validly appointed.
Re Hydrodam (Corby) Ltd 1994
- Must be established whether someone is part of the corp governance of the company and undertook decisions which would normally be taken by a director rather than someone below board level.
No definitive test to identify whether someone is a de facto director
Re Hydrodam (Corby) Ltd 1994
Smithon Ltd (formerly Hobart Capital Markets Ltd) v Naggar 2014
- Necessary to assess the acts performed by the person and whether they are directorial in nature
- Look at the context and cumulative effect
- Whether company considered person to be director
- Whether 3rd parties considered the person to be a director
Question of fact in each case
Why is it important to recognise where a person is a de facto director
The same fiduciary duties and liabilities in insolvency apply to all directors
The Commissioners for HM Revenue and Customs v Holland 2010
Basis of liability for a de facto director is an assumption of liabiity, with being part of the company’s corp governance structure
Shadow Director
S251(1) CA 2006
Defines a shadow director as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”
Professional advisers are not regarded as shadow directors
s251(2)
* If conduct goes beyond the normal scope of professional capacity
* If effectively controlling the company’s affairs then = shadow director
Re Tasbian Ltd (No3) 1992
If effectively controlling the company’s affairs, then that person will be held to be a shadow director.
Re Hydrodam (Corby) Ltd 1994
Facts
- Can two directors of the parent company be deemed shadow directors of subsidiary company
- Liable for wrongful trading under s 214?
Re Hydrodam (Corby) Ltd 1994
**Test to establish if a person was a shadow director **
Need to prove
* Identity of the formally-appointed directors of the company
* The person in question directed those formally appointed directors as to how to act in relation to the company’s affairs.
* Those directors acted in accordance with that person’s directions
* The directors were accustomed to act in that manner
The question to determine if a shadow director
A controlling shareholder, holding company or directors of a holding company could be said to be a shadow director if the directors are accustomed to act in accordance with their directions
Secretary of State for Trade and Industry v Deverell 2000
Morritt LJ
Sufficient to show in the face of directions/instructions from alleged shadow director the properly appointed directors or some of them cast themselves in a subservient role
* Consultants were found to be shadow directors- as company’s board was accustomed to following them
Ultraframe (UK) Ltd v Fielding 2005
- Position of influence does not necessarily mean that there is a shadow director.
- Must be shown that governing majority of the board are accustomed to act in accordance with the directions of the alleged shadow director.
Difference between de facto vs shadow director
Re Hydrodam (Corby) Ltd 1994
* De Facto - claims and purports to be a director
* Shadow- shelter behind others who he claims are the only directors.
Executive Directors
A director who has been appointed to executive office.
* Spend majority if not all of time on the business.
Difference between Executive and Non-Executive Directors
- CA 2006 does not differentiate between exec and non exec directors
- Duties, obligations and restrictions apply to both
Article 5 MA
Permits the directors to delegate specific powers to an individual director, or to an exec director
Non executive directors
An officer of the company but not an employee.
* Not involved in the day to day running of the company.
* Generally provide independent guidance
Alternate Directors
- Can take the place of a director where one or more are absent
- Becoming quite rare now resolutions can be passed via phone etc
The office of director is…
The office of director is a personal responsibility
Whether or not the provisions of the Company Act 2006 apply to alternate directors
Is a matter of construction
* Duties of directors are thought to apply to alternate directors
Appointment of directors
Governed by the Articles of a compmay.
MA 17
Modern Article 17
Directors appointed by
* Ordinary Resolution (of the shareholders)
* By a decision of the directors (more common.
Form for appointing a director
AP01 form kept at Companies Houses
Requires consent.
Register of directors kept at CH.
Service Contracts
- Executive director = employee
- Given a written contract of employment (otherwise known as a service contract)
- No automatic provision for directors to be paid for their services - decision for the board.
s228 CA 2006
The company must keep a copy of all directors’ service contracts or memoranda of the terms of these contracts.
s229 CA 2006
Shareholders have a right to inspect copies of directors’ service contracts or memoranda, must be provided with 7 days request.
Effect of Article 19 MA
Terms of a service contract are for the board to determine.
Shareholder approval required for long-term service.
Long term service contracts
Section 188 CA 2006
* Where a service contract provides for a director’s employment to have a guaranteed term (two years or longer)
* Requires shareholder resolution by Ordinary Resolution
s189(a) CA 2006
If shareholder resolution for the term of the service contract is not given shareholder resolution under s188 then it is void
s189(b) CA 2006
Additionally the service contract will be deemed to contain a term entitling the company to terminate the contract at any time by the giving of reasonable notice.
Termination of an appointment: 3
- Resignation
- Vacation
- Removal
Termination of an appointment - Resignation
- Subject to any provision on the contrary, director may give notice at any time subject to the terms
Glossop v Glossop 1907
Termination of an appointment - Vacation
MA 18 - director deemed to automatically vacate office if
* Prohibited from being director
* Composition Order by creditor
* Bankrupt
* Deemed mentally medically unfit for over 3 months.
Termination of an appointment - Removal
Under s168 CA 2006 directors can be removed by Ordinary Resolution
Removal of a Director - s168 CA 2006
- Has the right to speak at the GM of their removal OR (s169)
- Special notice of resolution to be given at least 28 days in advance
- Directors who are shareholders are allowed to vote
Bushell v Faith Clause
Bushell v Faith Clause
- Give weighted voting rights to directors/shareholders to block resolutions of director removal
Why are Bushell v Faith Clauses not contrary to s168 CA 2006
- Doesn’t remove the need for OR to remove director.
- Just changes way votes are amassed.
Bushell v Faith 1970
- Company had a share capital of 300 £1 shares, split equally between thre siblings.
- Clause that during a vote on removal of a director, that director shares shall carry the right to three votes per share.
Courts held that this article was valid and effective
Disqualification of directors ACT
Company Directors Disqualification Act 1986
There are two types of disqualification order
Discretionary
Mandatory
Mandatory disqualification order - term
Can last between two and fifteen years
Discretionary disqualification order - term
Can last for up to 10/15 years depending on the grounds for disqualification
s6(1) CDDA 1986
Mandatory disqualification orders
* Has been a director of a company that became insolvent (while director or subsequently)
* Conduct makes him unfit to be concerned
Interpretation of section 6 by the courts
The director has abused the privilege of limited liability
* Either by gross negligence
* Deliberate disregard of creditors’ interests
Secretary of Trade and Industry v Blunt 2005
Secretary of Trade and Industry v Blunt 2005
Director of company in insolvent liquidation who had removed and attempted to conceal from the liquidator a substantial amount of stock
Discretionary grounds on which directors can be disqualified
- Conviction of an indictable offence in connection with the management of the company or property s2
- Persistent breaches of company leg requiring returns/notices s3
- Fraud - either under s993 CA 2006; wrongful or fraudulent trading under s213 and 214 Insolvency Act 1986, in relation to company or property s4
- Disqualification after investigation of the company.
s2 CDDA 1986
Conviction of an indictable offence in connection with the management of the company or company property.
s3 CDDA 1986
Persistent breaches of company legislation requiring returns or notices to be given to the Registrat
s4 CDDA 1986
Fraud in relation to the company or its property.
Disqualification after investigation of the company
Used where it seems to the Secretary of State it would be in the public interest for a disqualification order to be made
s8 CDDA 1986
SoS for Business, Innovation and Skills v Pawson 2015
Court disqualified a director for eight years under the ground on the basis that he had controlled nine companies for his own financial benefit overcharging them for professional services, using almost all of funds and not achieving any value for shareholders.
Criminal Penalties
- Criminal offence to act in contravention of a disqual order - liable for a fine or imprisonment or both s13
- Personally liable for all the debts of the company incurred during the time that the person was acting in contravention of the disqual order s15
s13 CDDA
- Criminal offence to act in contravention of a disqualification order and any person doing so is liable for a fine/imprisonment or both.
s15 CDDA
Personally liable for all the debts f the company incurred during the time that the person was acting in contravention of a disqualification order
Compensation Orders
SoS may apply to the court for a compensation order against a director who has been disqualified where creditors have suffered losses due to directors misconduct.
ss15A 15C
ss15A 15C
SoS may apply to the court for a compensation order against a director who has been disqualified where creditors have suffered losses due to directors misconduct.
Disqualification undertakings
SoS may accept a disqual undertaking by any person that for a specified period, that person will not be a director or involved in management of a company without the leave of the court s6(2)
Directors who breach competition law
may also be disqualified under ss9A-9E CDDA 1986 for a maximum of 15 years.
Potential immunity for wistleblowers in cartels.
MA 3
Directors who have day-to-day basis are responsible for managing the company.
Duties of directors were developed by ….
Duties of directors were developed by the courts of equity
Any breach of duty by a director is….
- Any breach of duty by a director is therefore a wrong done to the company
- Company would be the claimant
- Directors who breach duty are liable to the company for any loss caused.
Liability for breach can be avoided if director’s conduct is…..
Liability for breach can be avoided if director’s conduct is capable of subsequent approval or ratification by the shareholders
S239 CA 2006
S239 CA 2006
Liability for breach can be avoided if director’s conduct is capable of subsequent approval or ratification by the shareholders
