Board Structure and Composition and Directors' Duties ss171-173

Question 1

How many directors must a company have?

Answer 1

Private companies must have one and public companies must have two (s154).

Question 2

Is it possible for a company to be a director of a company?

Answer 2

Yes (Re Bulawayo Market and Offices Co Ltd).

Question 3

How many directors must be a natural person?

Answer 3

At least one (s155).

Question 4

What is the minimum and maximum age to be a director?

Answer 4

16, although it is possible to be appointed at a younger age (s157).
There is no longer a maximum age to be a director (s293 CA 1985).

Question 5

If it is discovered after a director has been appointed that their appointment was invalid for whatever reason are their acts during the time in the role still valid?

Answer 5

Yes (s161).

Question 6

How should one vote for the appointment of a director?

Answer 6

Individually, unless there is unanimous consent to a block resolution (s160). Members should also vote for ‘the benefit of the company as a whole and not to secure some ulterior advantage’ (Re HR Harmer Ltd).

Question 7

What three kinds of directors are there?

Answer 7

1. De jure
2. De facto
3. Shadow

Question 8

What is the statutory definition for ‘director’?

Answer 8

Section 250 defines a ‘director’ as ‘any person occupying the position of director, by whatever name called.’

Question 9

How did Lord Browne-Wilkinson define ‘directors’ in Re Lo-Line Electronic Motors Ltd?

Answer 9

He said it included “governors” or “managers” and those who attended board meetings and took decisions at meetings.

Question 10

Is it possible to hold multiple directorships?

Answer 10

Yes (London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd).

Question 11

Once appointed what must be done?

Answer 11

The new directors’ details must be registered in the ‘Register of Directors’ (s162). Addresses must also be registered but are not public information (s165). These changes must occur within 14 days. The appointee must sign a consent form stating they are willing to act as a director and it will be published in the London Gazette.

Question 12

What test did Millett LJ use to determine whether a person was a de facto director in Re Hydrodam?

Answer 12

Millett LJ said it was necessary to prove that the defendant undertook functions in relation to the company which could properly be discharged only by a director and that the person was ‘held out’ as a director.

Question 13

What did Lloyd J state was an issue in his judgment in Re Richborough with Millett LJ’s test in Re Hydrodam for finding a de facto director? And what did he agree with?

Answer 13

Lloyd J disagreed with the need to ‘hold out’ a person as a director in order to find they were a de facto director. He agreed with the requirement to show that the de facto director undertook functions which could only be properly discharged by a director.

Question 14

How did Jacob J in SSTI v Tjolle summarise the position for finding a de facto director?

Answer 14

There is no single test but factors to take into consideration include:

1. whether or not the company held the individual out as a director;
2. the use of the title ‘director’;
3. whether the individual had access to management accounts;
4. whether the individual committed the company to substantial obligations and made boardroom decisions.

Question 15

Which case confirmed the judgment given by Jacob J in SSTI v Tjolle for finding a de facto director?

Answer 15

Re Kaytech International

Question 16

In which case did Etherton J make the point that a distinction must be made between decision-makers and advisors?

Answer 16

SSTI v Hollier

Question 17

How was the case law on de facto directors summarised by Gemma Ltd v Davies?

Answer 17

1. It is necessary to prove the director undertook functions which can only properly be discharged by a director (Re Hydrodam);
2. It is not necessary to show the person was held out as a director although it may form supportive evidence (Hollier);
3. Holding out is insufficient by itself but at the same time the title of the person is not definitive (Re Mea Corpn);
4. The person must have acted on an equal footing to other directors (Hollier);
5. The person must have exercised a ‘real influence’ (Re Kaytech);
6. A benefit of the doubt is given to the person (Re Richborough).

Question 18

What is the statutory definition for a shadow director under the CA 2006?

Answer 18

‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’ (s251(1) CA 2006).

Question 19

According to Millett LJ in Re Hydrodam what four elements must be apparent to find a shadow director?

Answer 19

1. Who the de jure and de facto directors are;
2. The person in question has directed those in (1) in relation to the company;
3. Those in (1) acted in accordance with the person’s directions;
4. Those in (1) were accustomed to act in this manner.

Question 20

How did Morritt LJ extend Millett LJ’s formulation for finding shadow directors SSTI v Deverell?

Answer 20

Morritt LJ said it is not essential that a shadow director lurks in the shadows and it is not essential that the formal directors act subserviently to the shadow director.

Question 21

When do the general duties apply to shadow directors?

Answer 21

According to s170 the duties apply, however, they will only apply from the time the shadow director is found to be a director, although the fiduciary duties will not apply automatically because they don’t usually deal with the company’s assets (per Lewison J in Ultraframe v Fielding), but if they are dictating policy on income and payments to creditors they will owe fiduciary duties (Re Mea Corpn).

Question 22

Is a director automatically entitled to remuneration?

Answer 22

No, because of the no-profit rule.

Question 23

Who decides the directors’ remuneration?

Answer 23

Discretion is left to the board (Art 19 Model Articles).

Question 24

Does the court have the power to fix levels of remuneration?

Answer 24

No (Currencies Direct Ltd v Ellis).

Question 25

What are the five ways in which a director may leave office?

Answer 25

1. Removal (s168)
2. Retirement
3. Resignation
4. Vacating office as required by statute or articles
5. Disqualification (ss2-8 CDDA 1986)

Question 26

On what five grounds can a director be disqualified under CDDA 1986?

Answer 26

1. Conviction of an offence in connection with the company (s2);
2. Persistent breaches of company legislation (s3);
3. Fraud (s4);
4. Unfit (s6);
5. After investigation (s8).

Question 27

What is meant by ‘unfitness’ in s6 CDDA 1986?

Answer 27

The director is insolvent (s6(1)(a)) or his conduct makes hims unfit (s6(1)(b)) ie a director is unfit to manage a company generally rather than the specific company in question (Re Polly Peck).

Question 28

Is unfitness found on the balance of probabilities or on a higher standard?

Answer 28

On the balance of probabilities (Re Verby Print for Advertising Ltd) but the courts exercise caution and the director should be given the benefit of the doubt (per Hoffmann J in SSTI v Ettinger).

Question 29

What were the reasons behind codification of directors’ duties according to the CLRSG?

Answer 29

1. Clarity and accessibility;
2. Enable defects of common law to be corrected where they no longer respond to modern business practice;
3. To make development in the law more predictable without hindering development through the courts.

Question 30

What was the main argument against codification of directors’ duties?

Answer 30

Loss of flexibility

Question 31

How does the CA 2006 manage the loss of flexibility in codifying the general directors’ duties?

Answer 31

1. The restatement of duties is general by way of principles;
2. The list of principles in Part X is not exhaustive and will take into account previous case law (ss170(3) and (4)).

Question 32

To whom do the directors owe their duties?

Answer 32

Section 170(1) states the directors owe their duties to the company.

Question 33

If directors owe their duties to the company, what is meant by the ‘company’?

Answer 33

The corporators as a general body (per Lord Evershed MR in Greenhalgh v Arderne Cinemas), which includes future shareholders (Report of the Second Savoy Hotel Investigation).

Question 34

Which case does s170(1) restate?

Answer 34

Percival v Wright

Question 35

In what exceptional circumstances may the director not owe his duty to the general body of shareholders?

Answer 35

1. Very close family companies (Coleman v Myers);
2. Where directors hold themselves out as negotiating on behalf of shareholders (Allen v Hyatt);
3. Where directors are giving advice to shareholders (Dawson Intl plc v Coats Patons plc);
4. Where there is a factual relationship between shareholder(s) and director(s) (Peskin v Anderson).

Question 36

What are the two directors’ duties under s171?

Answer 36

(a) act in accordance with the constitution;

(b) exercise powers for the purpose for which they are conferred

Question 37

Whose judgment is restated by s171(b)?

Answer 37

Lord Greene MR in Re Smith & Fawcett Ltd who stated the directors should act ‘bona fide in what they consider - not what the court considers - is in the interests of the company’.

Question 38

Lord Greene’s ‘proper purpose’ doctrine is said to be made up of what two elements? How do the two elements interact.

Answer 38

1. Good faith;
2. Not to act for an improper purpose even if the directors believes it to be bona fides.
   The latter acts to limit the former.

Question 39

What was the defendant’s argument for upholding the share issue in Hogg v Cramphorn? Did he succeed in his argument?

Answer 39

Cramphorn argued the share issue was to prevent a takeover which was not in the best interests of the company. The court disregarded his claim because he had used a power for an improper purpose.

Question 40

What was the four stage test developed by Lord Wilberforce in Howard Smith v Ampol Petroleum to determine whether a power had been used for a proper or improper purpose?

Answer 40

1. Identify the power;
2. Identify the purpose for which the power was conferred;
3. Identify the substantial purpose for which the power was actually used;
4. Determine whether that was the proper purpose for which the power was conferred or otherwise.

Question 41

Which case confirmed the approach used by Lord Wilberforce in Howard Smith v Ampol to identify an improper purpose of constitutional power?

Answer 41

Extrasure Travel Insurances Ltd v Scattergood

Question 42

What is the effect of a power that has been used for an improper purpose?

Answer 42

The action is voidable (Bamford v Bamford).

Question 43

Will the courts take into account the subjective views of the directors in determining whether a director has used a power for a proper or improper purpose?

Answer 43

Yes, for the purposes of the second part of the test (ie for what the power was conferred), but ultimately an objective view will be taken as to why the power was actually used.

Question 44

Is it possible for the shareholders to ratify an improper purpose?

Answer 44

Yes (Hogg v Cramphorn confirmed in Bamford v Bamford).

Question 45

What is the duty under s172?

Answer 45

The duty to promote the success of the company.

Question 46

What is the main criticism of the duty under s172?

Answer 46

The directors are only required to ‘have regard to’ the stakeholders listed in s172. This replaced the stricter requirement that they should ‘take into consideration’, which the CLRSG had recommended. This means directors are still able to take decisions which are disadvantageous to stakeholders because they don’t have to consider their interests but only have regard to them.

Question 47

Is the duty under s172 objective or subjective?

Answer 47

Subjective ie the court will only take into account what the director honestly believed was in the best interests of the company (Regentcrest plc v Cohen). However, there is an objective element ie whether an honest or reasonable man in the position would have reasonably agreed (Charterbridge Corpn Ltd v Lloyd’s Bank Ltd).

Question 48

Is the list of stakeholders in s172 exhaustive? Who does it not include?

Answer 48

No. The list doesn’t include creditors, but under s172(3) their interests are regarded where the law requires it eg insolvency.

Question 49

What is the duty under s173?

Answer 49

Duty to exercise independent judgment.

Question 50

What two exceptions are placed under the duty in s173?

Answer 50

(a) directors may restrict the future exercise of their discretion;
(b) the constitution may restrict their discretion.

Question 51

What case does s173 restate by allowing directors to fetter their discretion if it is in the best interests of the company or the articles say so?

Answer 51

Boulting v Association of Cinematograph applied in Fulham Football Club Ltd v Cabra Estates plc.