Business - Directors (8) Flashcards
What are the basic requirements for directors?
Requirements: There are a number of directorship requirements, both for the company and directors themselves.
(1) Natural Director: All companies require at least one natural (human) director (s155). All human directors must be at least sixteen years old (s157).
- It is intended that all directors will be required to be human by a date to be announced (SBEEA 2015).
(2) Restrictions: Directors cannot act where disqualified or excluded.
- Bankrupt: Bankrupts cannot act until discharged (s11 CDDA 2006).
- Incapable: Directors cannot act where a doctor confirms in writing that they lack physical or mental capacity required for the role for a period of more than 3 months (MA 18).
- Disqualified: Directors cannot act if they have been disqualified (CDDA 1986) (below).
What are the different types of director?
Types of Director: Directors are those performing the role of director, irrespective of job title (s250). Their individual rights and remuneration are decided independently of this role by the board (MA 19).
(1) Executive Capacity: Directors can act in executive or non-executive capacity.
- Executive: Director is an employee of the company under a service contract.
- Non-Executive: Director performs directorial roles at meetings and a fee for it, but has no service contract or additional employment roles. They are sometimes required by law.
(2) Chairperson: The Chairperson is a director appointed by the board to chair board meetings (MA 12). They will conduct board meetings, and general meetings if willing (MA 13).
- Casting Vote: The Chairperson has a casting vote in deadlocked board resolutions.
(3) Quasi-Directors: Quasi-directors are non-appointed directors with directorial powers.
- De Facto: A non-appointed individual who acts as director unofficially.
- Shadow: A non-appointed individual to whom the governing majority of the board is accustomed to follow, usually a majority shareholder or strict lender (s250).
(4) Alternative: Directors may appoint proxies to attend board meetings in their absence. This is only permitted in bespoke articles, there is no default right.
(5) Sole Director: Sole directors are directors of single-director companies. They make decisions at will (MA 7).
Are all directors permitted to appoint a proxy in their place?
Directors may appoint proxies to attend board meetings in their absence. This is only permitted in bespoke articles, there is no default right.
What is the administrative requirement of directors?
Administrative Requirements: Companies must comply with a number of director-specific administrative requirements.
(1) Register of Directors: Companies must maintain a Register of Directors, including names, dates of birth, and service address (ss162-163). CH must be informed of any change on CH01 or CH02 (natural/corporate). This is open to inspection to shareholders (free) and the public (fee).
(2) Register of Directors’ Residential Addresses: Companies must maintain a Register of Directors’ Residential Addresses for natural directors. This must be stored, but is not open to inspection.
(3) Notice of Appointment and Resignation: Companies House must be informed of appointments on Form AP01/02 (natural/corporate) and resignations on Form TM01/02 (natural/corporate) within 14 days (s167).
-Resignations are normally filed by the resignee themselves, unless their service contract provides the company power of attorney to do so on their behalf.
How are directors appointed?
Appointment: Directors must be properly appointed.
(1) First Directors: First directors named on the IN01 and appointed on certificate of incorporation.
(2) Other Directors: Other directors are appointed according to the articles. By default, they can be appointed by either board resolution or ordinary resolution (MA 17).
How can directors resign?
Resignation: Directors can resign by reasonable notice (MA 18).
How are directors removed?
Removal: Directors can be removed by ordinary resolution, if the correct procedure is followed (s168). This does not automatically invalidate a service contract, meaning the director may continue to be paid following removal.
(1) Special Notice: The shareholders must provide the company special notice of its intent to remove a director at least 28 days before the general meeting to remove them. This means no short notice (s312).
- Directors can only be removed at GMs, they cannot be removed by WR (s288).
(2) Notice to Director: The company must then inform the director ‘forthwith’. They must also inform all shareholders in the notice of the general meeting (s169).
(3) Director Pleas: The relevant director can require the company to send written representations on its behalf to shareholders, and also speak at the general meeting itself (s169).
(4) Resolution: The members must approve removal by ordinary resolution. The director may have special powers.
- Bushell v Faith: If the director is a shareholder, the articles or shareholders’ agreement may give them enhanced voting rights in any vote to remove them, i.e. 10x their normal shares.
- Shareholders’ Agreement: A shareholders’ agreement may require shareholding directors to vote against removal of fellow directors. This should be checked in any relevant agreement.
How long can directors be disqualified from acting for?
Disqualification: Directors can be disqualified from acting for between 2-15 years (CDDA 1986).
What is the effect of disqualification?
(1) Effect: Disqualified individuals cannot direct, or be concerned in promotion, formation, or management of a business without leave of court. Breach is a criminal offence warranting 2 years imprisonment and personal liability.
-Leave of Court: Leave of court is rarely granted. This requires a lack of dishonesty, and capable oversight.
What are the grounds of disqualification?
Grounds: Directors can be disqualified for various reasons.
I.e. a) Indictable Convictions; b) Failure to File Required Documents; c) Breach of Companies/Competition Law; d) Fraud; e) Wrongful Trading; f) General Unfitness.
How will the length of a disqualification be decided?
(3) Length: Length of disqualification will differ based on any aggravating and mitigating factors.
-Aggravating factors include misappropriation of Crown Monies (i.e. VAT), excessive pay, and recklessness.
- Mitigating factors include employing qualified staff, taking proper advice, and personally investing in company.
Under what authority are directors allowed to act?
Authority to Act: Directors are agents of the company, and derive their authority from agency law.
(1) Actual Authority: Director given express or implied authority.
-Express: I.e. provided in contract or by board resolution.
-Implied: Consistent pattern of unchallenged behaviour (Hely-Hutchinson).
(2) Apparent Authority: Director does not have actual authority, but the company has represented that they have. This binds the company to any resultant third-party transaction (Freeman v Buckhurst).
(3) Unison Authority: If the board acts unanimously, any resultant transaction will bind the company, even if authority is prohibited in the articles. However, they may be personally liable for breach.
What happens if a director acs without authority?
Acting Without Authority: Directors may act without actual or apparent authority, but are generally personally liable.
(1) Good Faith: Third parties are protected from rogue directors if the third party acts in good faith, meaning they cannot be forced to honour the contract (s40).
(2) Attribution: Companies may still be bound to these transactions, even for non-directors, and even where they had no knowledge of the act in question (Meridian v Securities).
What are the 8 directors duties?
(1) Duty To Act Within Powers: Directors must act according to the constitution and use powers only for the purposes granted (s171).
- Allocating shares to thwart a hostile takeover is a breach (Hogg v Cramphorn).
(2) Duty to Promote Success for Benefit of Members: Directors must act in a way they believe in good faith to be most likely to promote the success of the company for the benefit of its members as a whole (s172).
-Good Faith: This is subjective.
Members: Means: a) employees; b) suppliers/clients; c) community; d) environment; e) industry; e) shareholders. Only the company can bring a claim for breach, so not enforceable by most ‘members’.
- Statements: Companies must publicise adherence in a statement released in an annual report (public) or website (limited). Board resolutions should also reflect adherence.
(3) Duty to Exercise Independent Judgment: Directors must exercise independent judgement (s173).
- Discretion can be fettered by agreement or bespoke articles.
- Sharing private information to members to encourage chairman’s removal was not breach (Stober v Tinker).
- Relying on advice is permitted, if not ‘dominated, bamboozled or manipulated’ (Madoff Securities v Raven).
(4) Duty to Exercise Reasonable Care: Directors must exercise reasonable care, skill and diligence (s174).
- Objective: Must perform to the standard reasonably expected of their role.
- Subjective: Must perform to the standard reasonably expected of themselves.
(5) Duty to Avoid Conflicts of Interest: Directors must avoid interests that directly or indirectly conflict with those of the company (s175).
- Non-Party: These are transactions the company is not party to. I.e. Exploiting opportunities incidental to directorship. Irrelevant whether or not company could benefit (Towers v Premier).
- Authorisation: Authorisation can be provided by preemptive board resolution. Interested director cannot be in quorate or vote (this cannot be disapplied).
(6) Duty Not To Accept Third-Party Benefits: Directors must avoid third-party benefits conferred by virtue of their position (s176).
- Reasonable corporate hospitality is not a breach.
- May overlap with the Bribery Act, esp. if conferred to persuade a director to act or not act.
(7) Duty to Declare Interests in Proposed Arrangements: Directors must declare the nature and extent of their interest in any proposed arrangements of the business (s177).
- Declaration: Declared prior to or during board meeting, to all directors.
- Exception: Unless the director is: a) unaware and ought not to be aware of interests; b) interest is their own service contract; or c) other directors already aware.
(8) Duty to Declare Interest in Existing Arrangements: Directors must declare the nature and extent of their interest in any existing arrangements of the business (s182).
- Declaration: Made as soon as practicable to all directors.
- Exception: As above; and excluded if already declared under s177.
How can liability through breach of director’s duty be avoided?
Avoiding Liability: Directors may avoid liability through a number of methods.
(1) Authorisation: Breaches can be authorised preemptively.
Board Resolution: The board can authorise breach of s175 by board resolution.
Special Resolution: The members can alter the articles by special resolution, permitting them to authorise breaches preemptively (s180).
(2) Ratification: Members may ratify breaches after they occur.
Ordinary Resolution: Breaches are ratified by ordinary resolution (s239).
Excluded Votes: Directors (and connected members) cannot vote to ratify their own breaches.
(3) Court Order: Courts can relieve directors who acted ‘honestly and reasonably’ (s1157).
(4) Insurance: Directors may be insured to cover any losses incurred for breach (s233).
