Directors Notes Flashcards
What’s a director?
A director is an officer of the company and is involved in its management.
Directors receive the power delegated to them by the members of the company under the constitution of the company and the Companies Act 2014.
What people are ineligible to become a director?
- a company
- an undischarged bankrupt
- an auditor of the company or its holding company
- a minor
- a restricted person
- a disqualified director
What iss a shadow director?
A shadow director is a person “in accordance with those directions or instructions the directors of a company are accustomed to act”.
While a shadow director may not want to be known as a director, he or she works behind the directors who are properly appointed and frequently instructs the whole board of directors on how to act, and he/she will be classified as such.
As a shadow director will be classed as a director, he/she will have the same liabilities as a director.
What is a De Facto Director?
De Facto directors are persons, who although not formally appointed as directors, hold themselves out to be directors and are treated as such.
What is a managing director?
The manager director is responsible for the day-to-day running of the company.
What is an executive director?
Executive directors are involved in the operational management of the company.
What are non-executive directors?
Non-executive directors are directors who are not involved in the operational management of the company. The key role for every non-executive director is to bring an independent, objective and external perspective to the board of the company.
What are the 8 director’s duties?
1 - to act in good faith in what the director considers to be the interests of the company.
2 - to act honestly and responsibly in relation to the conduct of the affairs of the company.
3 - to act in accordance with the company’s constitution and exercise his/her powers only for the purposes allowed by law.
4 - not use the company’s property, information or opportunities for his/her/anyone else’s benefit
5 - not to agree to a restriction of his/her exercise of independent judgement (unless in specific allowed circumstances).
6 - To avoid any conflict of interest between the director’s duties to the company and his/her interests (unless in specified allowed circumstances).
7 - To exercise the care, skill and diligence that would be exercised in the same circumstances by a reasonable person.
8 - to have regard to the interests of the members of the company, in addition to the duty to have regards to the interests of the company’s employees in general.
Example of case involving the directors’ duty:
1 - to act in good faith in what the director considers to be the interests of the company.
[Parke v Daily News Ltd].
Held by the court that a gift to employees that wasn’t compelled by legal right was not in the best interests of the employees as a whole.
Example of case involving the directors’ duty:
2 - to act honestly and responsibly in relation the conduct of the affairs of the company.
[La Moselle Clothing v. Soualhi]
The court set out factors to determine whether a director was acting honestly and responsibly:
- the extent of compliance with the Companies Acts
- whether the director’s conduct was so incompetent as to be irresponsible
- the extent to the director’s responsibility for any insolvency
- the extent of the director’s responsibility for the net deficiency in assets
- the extent to which the director displayed a lack of commercial probity
- or want of proper standards
Summarize the case of of [La Moselle Clothing Ltd v Soualhi]
Soualhi was a director and 99% shareholder of La Moselle, and was restricted as a director after the company became insolvent.
Held: In making Soualhi a restricted director, the court was heavily influenced by his failure to wind up the company, even when it was clear that the company was insolvent; and also that he had been very unforthcoming with books of account and the existence of unaccounted for expenses and withdrawals.
Example of case involving the directors’ duty:
3 - To act in accordance with the company’s constitution and exercise power only for the purpose allowed by law
[Looe Fish Ltd]:
A director who allotted shares to himself and who used his position to block the appointment of directors of whom he did not approve was disqualified for 2.5 years.
A director may
4 - Not use the company’s property, information or opportunities for their own/ anyone else’s benefit
Except in what circumstances?
- the company’s constitution expressly permits such a benefit.
- there has been a full disclosure and approval by the company in the general meeting.
Example of case involving the directors’ duty:
5 - Not to agree to a restriction of his/her exercise of independent judgement (unless in specific allowed circumstances)
[Fulham Football Club Ltd and others v. Cabra Estates plc]
It was held on appeal that the directors had not improperly fettered the future exercise of their discretion.
The court drew a distinction between directors fetter their discretion, which is a clear breach of duty, as opposed to directors exercising their discretion in a manner which restricts their future conduct for the benefit of the company, which is not a breach of duty.
6 - To avoid conflicts of interest between themselves and the company
Conflicts of interest make take the form of a director taking a business opportunity for their own benefit. Give an example of this.
[Cook v Deeks]
3 Directors negotiated a contract on behalf of the company and then took it for themselves.
Held: They had to pay the company the profit they made as a result of the deal.
6 - To avoid conflicts of interest between themselves and the company
Conflicts of interest make take the form of a secret interest in another’s business. Give an example of this.
[Aberdeen Railway co V Blaikie Bros]
Aberdeen Railway argued that they were not bound by a contract to buy sockets from Blaikie Bros because the chairman of Aberdeen Railway was the managing director of Blaikie Bros, and that therefore, this was a conflict of business.
Held: The basic rule is that if a director has an interest in a corporate transaction, the transaction is voidable at the company’s will, and it is the duty of the directors to avoid a conflict of interest situation.
7 - To exercise the care, skill and diligence that would be exercised in the same circumstances by a reasonable person.
This is according to their level of knowledge and experience in the discharge of their duties.
[City Equitable Fire Insurance Company Ltd] Case established what 3 principles?
1 - The duty to exercise proper skill, care and diligence is subjective in nature and is based on the knowledge and experience of the particular director.
2 - Directors can delegate or leave the normal running of the business to the management of the company.
3 - A director’s duty of care is owed at board meetings only. A director need only attend board meetings regularly.
Example of case involving the directors’ duty:
7 - To exercise the care, skill and diligence that would be exercised in the same circumstances by a reasonable person.
[Barings plc]
An actions was brought against 3 of the bank’s directors for failure to supervise activities after they failed to supervise the acts of a futures trader who was incurring massive losses instead of profits.
Held: The 3 directors should be disqualified.
What is a Directors’ Compliance Statement?
This is a statement by the directors acknowledging that they are responsible for securing the company’s compliance with its legal obligations.
What happens when a director breaches their duties?
When a director breaches any duty, they may be liable to account to the company for any gain made, directly or indirectly, from the breach of duty, and to indemnify the company for any loss or damage resulting from that breach.
The Companies Act 2014 prohibits loans, quasi-loans, credit transactions and guarantees to a director or to connected persons of the company.
What are they exceptions to this?
- where the value of the arrangement or loan is less than 10% of the value of the net assets of the company.
- where funds are advanced to a director to cover reasonable expenses which are properly incurred and provided within a reasonable timeframe.
- Intra-group transactions
- where the business is in the normal course of the company’s business (e.g. if the company is an authorized lending institution.)
An application for a restriction order of a director can be brought by a director, a liquidator, a receiver or made by the courts.
What 3 considerations are taking into account in court of those likely to be restricted.
1 - whether the director acted honestly and responsibly in relation the the company
2 - whether the director co-operated with the liquidator in relation to the conduct of the winding up of the company.
3 - whether there is any other reason why it would be just and equitable to restrict them.
Describe a case related to restriction of directors.
[Tralee Beef and Lamb Ltd]
The company went insolvent.
It was ruled that a non-executive director, Mr.Coyle, had acted honestly and responsibly, and that the same duties cannot be expected from executive and non-executive directors. Thus the restriction order on him was set aside.
What a disqualification order prohibit?
A disqualification order prohibits a director from any involvement in any company;
from being involved in the formation, promotion, or management of any company for the prescribed period.
