Directors' Duties Flashcards
What or who is a company director?
Lord Hoffman stated: ‘Under company law, the management of the business of a company is entrusted to the board of directors. They are a group of people who may or may not own shares in the company and in the case of larger companies their shareholding, if any, is likely to be very small in relation to the total issued share capital. Furthermore, the board does not in practice manage the business of a company at all; the board acts collectively; no director has an individual power to do anything on behalf of the company merely by virtue of being a director. In company law, the board of directors means the board meeting acting in accordance with the articles and usually by a majority vote. Such a group of people meeting from time to time obviously cannot manage the day-to-day business of even the smallest company. The powers of management must therefore be delegated to the company’s executive officers who are by and large even less likely than the members of the board to have a serious stake in the ownership of the company’.
Lord Hoffmann identifies the following characteristics:
(i) directors do not have to be shareholders;
(ii) directors act in a collective way through the board of directors;
(iii) board meetings are conducted pursuant to the articles, and with “majority rule” applying;
(iv) directors meet periodically, and so are not involved in the management of the company on a daily basis; and
(v) directors delegate their powers to the “executive officers” of the company.
How is a director defined in the CA 2006?
One of the problems of the CA 2006 is that the definition of a director is fairly circular (s 250 CA 2006[ A ‘“director”’ includes any person occupying the position of director by whatever name called’]). This includes:
⁃ 1) A shadow director
⁃ 2) A de facto director
What is a shadow director?
⁃ A shadow director is not an ‘official’ director but someone whose directions the board are accustomed to act in accordance with. They are also regarded as directors. (see s 251 CA 2006) (and see too s 251 of IA 86)
Two common examples.
- In a family business there may be a mother/father who was the managing director of a company who retires and hands the running of the company to the children who are directors - the mother or father then continues to give instructions / advice which the children follow. In such a case the mother/father would be regarded as a shadow director.
- Where a director has been disqualified from being a director but they continue to work at the company e.g. as a consultant and continue to tell everyone what to do.]
What is a de factor director?
⁃ A de facto director is someone who claims /purports to act as a director but hasn’t been validly appointed.
[Both shadow/de facto directors can be held liable for wrongful trading.]
How are directors appointed?
⁃ Usually directors are appointed by shareholders at a general meeting of the company.
⁃ However, under the Model Articles, there can be appointment ‘by a decision of the directors’ (ie, a power to co-opt): see: (i) Private Cos - Sch 1, Art 17(1)(b), and (ii) Public Cos- Sch 3, Art 20(b).
⁃ ‘Validity of acts of persons acting as director’ – where defective appointment, disqualification, ceasing ‘to hold office’ and/or no entitlement to vote: s 161 CA 2006.
Is there a minimum number of directors per company?
⁃ A public company must have no less than 2 directors; a private company must have no less than 1 director: s 154 CA 2006 [formerly s 282 CA 85].
⁃ ‘Companies required to have at least one director who is a natural person’ – cannot have all corporate directors: s 155 CA 2006
⁃ Cannot have ‘a single resolution’ appointing ‘two or more persons as directors’, except where prior unanimous resolution: s 160 CA 2006 [formerly s 292 CA 85].
⁃ ‘Appointment of directors of public companies to be voted on individually’: s 160 CA 2006.
Is there a minimum age for director?
⁃ These are new provisions which prevent minors being directors.
⁃ As a general rule, you have to be 16 years old to be a company director: s 157 CA 2006
⁃ The minimum age requirement has retrospective effect for Directors under 16: see ss 157 and 159 CA 2006.
⁃ The Sec of State can, by regulations, make exceptions to this: see s 158 CA 2006
What are the main types of directors?
1) Managing director
⁃ This is the person who is in charge of managing the business. They are the main executive director
- - usually power to appoint in articles: see, eg, see Model Articles: (i) Private Cos – Sch 1, Art 5(1); and
- (ii) Public Cos - Sch 3, Art 5(1). [formerly Articles 72 and 84 of Table A (model articles for companies under CA 85)].
2) Executive directors
⁃ The executive directors are involved in the ‘day-to-day’ management of a business.
- often have a service contract with the company.
3) Non-executive directors
⁃ The NEDs attend board meetings but are not involved in the company’s daily running - they have more of a strategic role. They usually act as a check on the executive directors.
⁃ In public companies, they are, normally, involved in determining the executive directors’ remuneration.
Who is the chairman?
⁃ The chairman of the company is appointed by the directors to chair the company’s meetings.
- see Model Articles:
(i) Private Cos – Sch 1, Arts 12(1) and 13 (“casting vote”); and
(ii) Public Cos - Sch 3, Arts 12(1) and 14 (“casting vote”).
What are the powers of directors?
- ‘Agent’ (or representative) of the company.
- Articles give directors power to manage the business of the company: see see Model Articles:
(i) Private Cos – Sch 1, Art 3 [formerly article 70 of Table A.]; and (ii) Public Cos - Sch 3, Art 3. [formerly article 70 of Table A.]
(i) shareholders cannot, by ordinary resolution, interfere in the business of the board: Automatic Self-cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34 (CA)
(ii) director treated as if ‘trustee’ of company property: Bishopsgate Investment Management Ltd (in liq.) v Maxwell (No 2) [1994] 1 All ER 261, [1993] BCLC 1282 (CA) (Of course, as a director does not own the property, he/she can not be a trustee in the true sense).
- Articles give directors power to manage the business of the company: see see Model Articles:
NB under see Model Articles: (i) Private Cos – Sch 1, Art 4; and (ii) Public Cos - Sch 3, Art 4 – ‘shareholders’ can, ‘by special resolution, direct the directors to take, or refrain from taking, specified actions’.
¥ Acting without authority:
(i) ratification: company in general meeting can ratify act of director which is outside his powers, but within the company’s: Re Horsley & Weight [1982] Ch 442, [1982] 3 All ER 1045 (CA); or
(ii) Directors powers used in bad faith can be ratified: Bamford v Bamford [1970] Ch 212 (CA)
NB ‘Ratification of acts of directors’: s 239 CA 2006 – this provision allows for the ratification (approval after the event) by the company where directors’ ‘conduct’ amounts ‘to negligence, default, breach of duty or breach of trust’ regarding ‘the company’. However, they may not vote at the meeting, although they may attend and participate in, the meeting. This does not affect a unanimous decision of shareholders or directors powers regarding suing, or not suing, or settling a claim, or any other rule regarding ratification. (Ratification is dealt with more fully later.)
[ Not covered well in the lectures.]
How are directors renumerated?
¥ Previous Position: Under the old 1985 Companies Act Regime (including Table A, Art 82), the company in general meeting could determine rates of pay for directors; see too Guinness plc v Saunders [1990] 2 AC 663; [1990] 2 WLR 324; [1990] 1 All ER 652, (HL(E)).
¥ Nonetheless, the remuneration of managing director and other executive directors was often left to directors to decide: see article 84 of Table A (model articles under CA 1985).
¥ Position Now: However, under the new Model Articles, the directors are permitted to decide their remuneration – see:
(i) Private Cos - Sch 1, Arts 19 (‘remuneration’) and 20 (‘Expenses’); and
(ii) Public Cos - Sch 3 (Public Companies), Arts 23 (‘remuneration’) and 24 (‘Expenses’).
¥ Normally, remuneration, in public companies is decided by a remuneration committee. This is a corporate governance issue: see UK Corporate Governance Code (www.frc.gov.uk ). (The latest version of this Code is September, 2014.)
¥ Remuneration committees, in public companies, comprised predominantly of non-executive directors. This is normally dealt with by the UK Corporate Governance Code (D.2.1). (www.frc.org.uk )
NB ss 426-428 CA 2006 (‘Financial Statements’ – includes ‘directors’ remuneration report’) and 447 (‘filing obligations of quoted companies’ requires, amongst other things, ‘directors’ remuneration report’.)
[ Not covered well in the lectures.]
How are directors removed?
¥ S 168 CA 2006 - simple majority shareholders on ordinary resolution, but’ special notice … of … resolution … required’ [formerly s 303 CA 85].
¥ But director may be protected from removal by ‘special voting rights’ attaching to shares: Bushell v Faith [1970] AC 1099; [1970] 1 All ER 53 (HL(E)) See also Russell v Northern Bank Development [1992] 1 WLR 588; [1992] 3 All ER 161, (HL(E)) (shareholder agreements).
¥ Removed director has a right of ‘protest against removal’: s 168 CA 2006
[ Not covered well in the lectures.]
How are directors terminated?
In addition to s 168 CA 2006, the Articles of Association may provide for termination, due to bankruptcy, or physical or mental health reasons, or resignation: see see Model Articles:
(i) Private Cos – Sch 1, Art 18; and
(ii) Public Cos - Sch 3 Art 22.[ Not covered well in the lectures.]
Where are the duties of directors codified?
The duties of directors have been codified in Ch 2 of Part 10 of the CA 2006, beginning at s 170, although the main duties are in ss 171-177 CA 2006.
What are the general duties of directors?
⁃ It is stated that ‘the general duties [for directors under Ch 2 of Part 10 of the 2006 Act] are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director’: see s 170(3) CA 2006.
⁃ It is also said that ‘[t]he general duties shall be interpreted and applied in the same way as common law rules or equitable principles and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties’: see s 170(4) CA 2006. Hence, the old law is relevant to the new law, ie, the new law is, in effect, a codification of the old law.[ **Here are some quotes from the handouts describing the codification of directors duties in the CA 2006.
See also Lord Glennie in West Coast Capital (Lios) Ltd v Dobbie Garden Centres PLC [2008] CSOH 72, para [21], who said, in relation to “ss.171 and 172 of the 2006 Act” that whilst “[t]here was no equivalent in the earlier Companies Acts, … these sections appear to little more than set out the pre-existing law on the subject.”
Towers v Premier Waste Management Ltd [2011] EWCA Civ 923; [2012] BCC 72
Mummery LJ (giving the leading judgement) said: ‘1 A director of a company is appointed to direct its affairs. In doing so it is his duty to use his position in the company to promote its success and to protect its interests. In accordance with equitable principles the special relationship with the company generated fiduciary duties on the part of a director. His fiduciary commitments to the company took the form of a duty of loyalty and a duty to avoid a conflict between his personal interests and his duty to the company. 2 Those duties, which were simple, strict and salutary, were the basis of the respondent company’s claim against the appellant director that he had breached his duties by accepting personal benefits from one of the company’s customers. He did not disclose the benefits to his fellow directors or seek or obtain their approval on behalf of the company. 3 I have described the equitable principles and duties in the past tense because, under codification measures in Ch.2 of Pt 10 of the Companies Act 2006, a director’s general duties to the company are now statutory. The codified duties are expressly derived from common law rules and equitable principles as they apply to directors. The relevant events in this litigation occurred in 2003, well before those provisions of the 2006 Act were brought into force. Although the pre-2006 Act common law rules and equitable principles continue to apply to a pre-2006 Act case, it is unrealistic to ignore the terms in which the general statutory duties have been framed for post-2006 Act cases. They extract and express the essence of the rules and principles which they have replaced.’]
paras 1-3, per Mummery LJ (giving the leading judgement), who said:
(i) the director has a protective role in relation to the company, as well as promoting the company’s “success”. This gave rise to fiduciary obligations of “loyalty” and self-sacrifice (ie, no conflicts of interest or no secret profits).
(ii) liability arose because the obligations were breached without prior approval from other directors or the company.
(iii) the new statutory “general duties” for directors set out the old general law “rules’ and … principles’” “essence”.
What are the duties by directors owed to the company - not to the company’s members?
⁃ General law[ I.e the common law position prior to CA 2006]:
⁃ Generally, at common law, duties by directors were owed to the company, not to company’s members individually
*Percival v Wright [1902]
It was held in this case that directors owed no fiduciary duties to shareholders.
*Dawson International v Coats Paton [1988]
This Scottish case reiterates that directors owe duties to the company - not to shareholders.
Court of Appeal in *Peskin v Anderson [2001] 1 BCLC 372; noted by I Moore, [2001] LMCLQ 456-460.
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Where are the common law duties of directors codified?
The common law principle (immediately above) is enshrined in s 170 CA 2006 which states that: “the general duties in ss 171-177 CA 2006 are owed by a director of a company to the company.”
What are the two main types of duty owed by a director to a company?
Directors owe two main types of duty[ The difference between them is that the fiduciary duty is not concerned with how you perform your duties whereas the duty of reasonable skill, care and diligence is.
And there are different remedial consequences.] to the company under CA 2006:
⁃ 1) Fiduciary duties
⁃ 2) Duties of “reasonable skill, care and diligence”
⁃ All but one of the general duties, in ss 171-177 CA 2006 is fiduciary in nature. The exception is s 174 CA 2006 which concerns the duty to exercise reasonable skill, care and diligence)
How are the two main duties distinguished?
see Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, p 17 (ignore the references to Equity).
What is concurrent liability?
Under s 179 - there can be cases where directors breach more than one of these general duties and if this happens there is ‘concurrent liability’.
– “Cases within more than one of the general duties” – there is concurrent liability.
What are the general duties owed by the director?
- Duties to employees – s 172(1) CA 2006 [formerly s 309 CA 85].
S 247 CA 2006 – “Power to make provision for employees on cessation or transfer of business” [formerly s 719 CA 85] - Duties to creditors? –
General Law: West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (where company not solvent). - Acting in the best interest of the company
- Re Smith & Fawcett Ltd [1942] Ch 304 (CA); Heron International Ltd v Lord Grade [1983] BCLC 244 (CA)
General law
⁃ At common law the directors had a duty to act in the best interests of the company
- ss 172(1)(c) and 172(3) CA 2006; ss 213 (fraudulent trading) and 214 (wrongful trading) IA 86 (later);
Statute S 172 CA 2006 – “Duty to promote the success of the company” –
⁃ One of the most controversial provisions in the CA 2006 is s 172. It has a non-exclusive list of matters which a company director must ‘have regard … to’ in deciding what, s/he ‘considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’.
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250
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Re Smith & Fawcett Ltd [1942] Ch 304 (CA)
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Heron International Ltd v Lord Grade [1983]
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What are the non-exclusive factors the director must take into account?
(s 172(1)):
⁃ (a) a decision’s ‘likely’ ‘long term’ ‘consequences’;
⁃ (b) company’s employees’ ‘interests’;
⁃ (c) fostering ‘business relationships with [the company’s] suppliers, customers and others’;
⁃ (d) ‘the community and’ environmental ‘impact of the company’s operations’;
⁃ (e) ‘the desirability of the company maintaining a reputation for high standards of business’;
⁃ (f) ‘the need to act fairly as between members of the company’ (cf s 994 CA 2006 – ‘unfair prejudice’)
West Coast Capital (Lios) Ltd v Dobbie Garden Centres PLC [2008] CSOH 72, para [21].
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What are the problems with s 172(1))?
⁃ There are a number of problems with this provision:
⁃ 1) There are no powers for persons who are not members of the company to sue if these factors are not taken into account.
⁃ 2) The test is subjective: what the director considers regarding the company’s success (it is hard to prove that the director didn’t act in good faith).
⁃ 3) Sometimes the company’s success may conflict with the list (e.g. the environment) - the company’s success is of greater importance
⁃ R (on the application of People & Planet) v HM Treasury [2009]
⁃ 4) It talks about taking into account the interests of creditors but doesn’t say much more than this - the common law rule (which PH thinks the statutory provision is referring) is that on the point of insolvency the interests of creditors must be taken into account. But this is unclear since there has been no definitive case on the point.
R (on the application of People & Planet) v HM Treasury [2009]
This was a case of JR relating to the lending policies of RBS (state owned so JR possible). It was argued that there had been a breach of s 172 because RBS was a company that lent to environmentally unfriendly companies. However the court held that ultimately the directors must make decisions that they think are in the best interests of the company - which will guarantee the long term success of the company. As a result the application for JR was rejected.
*Richmond Pharmacology Ltd v Chester Overseas Ltd [2014] EWHC 2692 (Ch), paras 66-68 (“subjective test”).
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*Re HLC Environmental Projects Ltd (in liq) [2013] EWHC 2876 (Ch); [2014] BCC 337, paras 91-93 (“subjective test”, but …).
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s 172(3) CA 2006
says the above section applies, “subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”
This will be where the company is near insolvency. See *Re HLC Environmental Projects Ltd (in liq) [2013] EWHC 2876 (Ch); [2014] BCC 337, paras 87-90.
Kuwait Asia Bank EC v National Mutual Life Nominees [1991] 1 AC 187, [1990] 3 All ER 404 (PC
Nominee directors and subsidiaries:
