Business Law and Practice - Directors' Duties Flashcards
Duties
Set out in Companies Act
Owed to the Company and so breach may result in Director having to compensate Company not individual shareholders
Ratifying breach of duty
Shareholders can ratify (approve) a director’s breach of duty
If director is also a shareholder they cannot vote nor can any shareholder connected to them
Statutory duties
Duty to act within powers:
- Conferred by company memorandum and articles
Duty to promote the success of company:
- For benefit of members as a whole, not just maximizing profit today, must consider long term consequences, interests of employees, relationships with suppliers and customers, community/environment, company’s reputation, fairness between members (directors must consider these factors but can choose to ignore them)
- Duty changes if company is insolvent - director must act for the benefit of the creditors
- The test in relation to whether the director has acted for the benefit of the members (i.e. good faith) is subjective
Duty to exercise independent judgement:
- Must make decisions independently
- Exception: not breached if directors enter into agreement that may in the future require them to act in a certain way provided it is done in good faith in interest of company
- Exception: also not breached if following professional advice
Duty to exercise reasonable care, skill and diligence:
- No special skills, knowledge or experience with regard to decision at hand: objective test (reasonable director)
- Special skills, knowledge or experience with regard to decision at hand: objective test (reasonable director with same skill, knowledge or experience)
Duty to avoid conflicts of interest:
- Avoid situations of direct or indirect interest
- Still a breach even if no bad faith
Duty not to accept benefits from third parties
- A particular type of conflict of interest
- No secret profits from being a director
Duty to declare an interest in proposed or existing transaction with company
- Must state nature and extent of interest - this can be done in writing when a director joins the company
- Interest need only be declared once
- Exceptions: if conflict would not likely arise (i.e. if director not aware of interest or transaction in question), if other directors are aware or ought reasonably to be aware of interest, if item under discussion involves director’s service contract
Duty to declare interest in existing transaction or arrangement
Breach of duty not ratified by shareholders
Company is claimant - however, company acts through its directors
Derivative Action: shareholders bring action on behalf of company
Remedies: account of profits, return of company property, payment of equitable compensation, recission of a contract, obtaining an injunction to prevent breach, common law damages for negligence (for breach of duty to excercise reasonable skill and care), removal of director through majority vote, director may also be disqualified
Company Secretary
Public companies must appoint one (private companies need not)
Company secretary of a public company has to be professionally qualified (e.g. solicitor, accountant) or have had significant experience as a company secretary
Officer of company like a director
Formal duties not set out in Companies Act
Responsible for maintaining internal records and filing necessary documents with Companies House
Bushell v Faith clause
Shareholders have a statutory right to remove a director
However, a Bushell v Faith clause gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove a director
Disqualification
Director may be disqualified from office under the Company Directors Disqualification Act 1986 for general misconduct in connection with companies or because of unfitness
Auditors
Large companies are required by the Companies Act 2006 to appoint an auditor
Small companies are not required to appoint an auditor
Small company = less than around £10 million turnover and no more than 50 employees
