Company Law - Directors

Question 1

What are the company’s directors?

Answer 1

The people who represent the company and act on its behalf. They are the agents of the company.

Question 2

What are the requirements to be a director?

Answer 2

1. over 16 years old
2. a natural person (not a body)

Question 3

What is the minimum amount of directors allowed in a public and private company?

Answer 3

Public - 2
Private - 1

Question 4

What does the model articles say about when directors must vacate their office?

Answer 4

1. if they become bankrupt
2. if a medical certificate states that they will be physically/mentally incapable for more the 3 months

Question 5

What is the Company Directors Disqualification Act 1986 (CDDA)

Answer 5

Introduced to prevent misuse of limited liability for when a director creates a new company to continue the trading of an old company which had ceased trading due to unpaid debts.

Disqualified directors cannot be involved in management of a company.

Question 6

What are the 3 categories of conducts in CDDA 1986?

Answer 6

1. General misconduct - e.g. conviction of a serious offence in connection to management, persistent breach of CDDA 1986, ie failure to file returns
2. Unfitness - e.g. found unfit to be in management by liquidator or the Department of Business, Innovation and Skills
3. Other - e.g. participation in fraudulent or wrongful trading, undischarged bankrupt

Question 7

What is the directors duty to act within powers? CA 2006 s171

Answer 7

A director of a company must:

(a) act in accordance with the company’s constitution, and

(b) only exercise powers for the purposes for which they are conferred. They have a fiduciary duty to the company to exercise their powers bona fide in what they honestly consider to be the interests of the company.
If this rule is not adhered to the transaction will be void unless it is approved by the shareholders.

Question 8

Hogg v Cramphorn (1967)
Duty to act within powers

Answer 8

Facts: The directors issued further shares and gave financial assistance for their purchases in an attempt to fight off a takeover bid, believing it to be in the best interests of the company.

Held: despite having acted in good faith the directors had exceeded their powers so the members had to ratify their actions, which they did.

Question 9

What is the directors duty to promote success of the company? CA 2006 s172

Answer 9

A director must act in a way he considers, in good faith , would be most likely to promote the success of the company for the benefit of the members as a whole.

the likely consequences of the decision in the long term

the interests of company’s employees

the need to foster the company’s business relationships with suppliers, customers
and others

the impact of the company’s operation on the community and the environment

Question 10

What is the directors duty to exercise independent judgement? CA 2006 s173

Answer 10

A director must exercise independent judgement and this duty is not infringed by a director acting:
in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion of the directors

in a way authorised by the company’s constitution.

Question 11

What is a directors duty to exercise care, skill and diligence? CA 2006 s174

Answer 11

To act with general knowledge, skill and experience that could be expected of a director

and to act with actual knowledge, skill and experience held by a director.

Question 12

What is the reasonableness tests for the directors duty to exercise reasonable care, skill and diligence? CA 2006 s173

Answer 12

OBJECTIVE: A director must show such care as could reasonably be expected from a competent person in that role. It is not a defence for a director to claim lack of expertise.

SUBJECTIVE: A director is expected to show the degree of skill which may reasonably be expected from a person of his knowledge and experience.

Question 13

City Equitable Fire Insurance Co (1925)
Directors duty to exercise reasonable care, skill and diligence - CA 2006 s173

Answer 13

Facts: The company was in liquidation due to shortage of funds. It was discovered that this was due to the deliberate fraud of the chairman, for which he had been convicted. Liquidator brought an action against the other directors on the basis of negligence for leaving the affairs of the company entirely in the hands of the chairman.

Held: the liquidator failed and the judge rules that the duties expected from the directors were:

A director does not need to demonstrate skill greater than that which would reasonably be expected from someone with his skill and knowledge.

A director is not bound to give continuous attention to affairs of the company.

Where duties can be delegated to an official and in the absence of any grounds for suspicion, the director may trust that official to perform his duties honestly.

Question 14

Dorchester Finance Co v Stebbing (1989)
Directors duty to exercise reasonable care, skill and diligence - CA 2006 s173

Answer 14

Facts: The company was a money lending company and had three directors P, H and S, all with considerable accountancy and business experience. No board meetings were ever held and P and H left all the affairs of the company to S. P and H did, however, sign blank cheques from time to time on the company’s account. S loaned the company’s money without complying with statutory regulations applying to money lending such that the loans were unenforceable.

Held: all three were liable in negligence. If a director has a special skill (eg as an accountant), he is expected to use it for the benefit of the company.

Question 15

What is the directors duty to avoid conflict of interest? CA 2006 s175

Answer 15

A director of a company must avoid a situation in which he has , or can have, a direct, or indirect interest that conflicts or possibly may conflict, with the interests of a company.

Question 16

IDC v Cooley (1972)
Directors duty to avoid conflict of interest - CA 2006 s175

Answer 16

Facts: Cooley was the managing director of IDC and had been negotiating a contract on behalf of the company. The third party wanted to award the contract to him personally and not to the company. Without disclosing the reason to the company (or its board) he resigned in order to accept the contract personally.

Held : he was in breach of his fiduciary duty as he had profited personally by use of an opportunity which came to him through his directorship. It made no difference that the company would not have won the contract. He was therefore accountable to the company for the benefits gained from the contract.

Question 17

What is the directors duty not to accept benefits from third parties? CA 2006 s176

Answer 17

A director must not accept any benefit from a third party which arises by reason of him being a director or performing/not performing an act as a director, unless acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.

Question 18

What is a directors duty to declare interest in proposed transaction? CA 2006 s177

Answer 18

The director must declare the nature and extent of any interest in a transaction or proposed transaction to the other directors.

The declaration must be made in writing, at a board meeting or by a general notice that he has an interest in a third party.

Question 19

Aberdeen Railway v Blaikie (1854)
Directors duty to declare interest in proposed transaction - CA 2006 s177

Answer 19

Facts: A company bought some chairs from a firm. At the time of the contract one of the company’s directors, unknown to the company, was a partner in the firm selling the chairs.

Held: The company could avoid the contract because of this undisclosed interest in the transaction.