Lecture 13 - Directors of a Limited Company Flashcards
Function of directors
To run and manage business on behalf of members
Executive Directors
Normal director running business or part of it. Usually have particular responsibility eg sales/ finance director
Non-executive director
Director with no responsibility or outside independent director
Shadow directors
NOT TYPE OF DIRECTOR. Anyone who performs duties and functions of director is deemed one, and liable accordingly.
Do directors have to be employees?
No - but very often are
Directors appointed (3)
- On company formation
- Ordinary resolution by members
- By the board itself
Who cannot be director? (3)
- Anyone under 16 years old
- Undischarged bankrupt/ person disqualified by Court Order
- Any legal and non-discriminatory Article restrictions
If members unhappy with directors
Can vote them off board. This is how members exercise ownership rights and control.
Service Agreement
Contract of employment for director (if director is employee)
If directorship terminated..
Employment is not automatically terminated too (and vice versa)
Maximum term for fixed term Service Agreements
2 years without consent of shareholders. Can only be longer if Agreement contains provision for termination on reasonable notice, or is approved by members.
Remuneration per Table A and Model Articles
Directors are to be paid whatever company determines by resolution.
Case for remuneration
Half Garage Ltd 1982 > firm went under. Wife’s salary was deemed excessive and unnecessary so was forced to repay, husband wasn’t
Salaries must be…
Approved by members. But Directors often have controlling interest.
Expenses
Properly incurred by director in connection with business are recoverable
Pension payments
Allowable for directors as part of remuneration package
Compensation for loss of office as director
Allowable, but must be approved by members
If compensation paid as contractual entitlement/ damages/ settlement of a claim
No members’ approval required
Chairman (4)
- Must be director
- No obligation to have one > name means nothing
- Often has casting vote
- Usually runs meetings
Company secretary (3)
- Separate function from director
- Public companies must have one
- Legal background
Directors and contracts
Directors enter into contracts as agent for company, not generally personally liable on company contracts
Directors personally liable for contracts when (2)
- They contract to be liable eg guarantor
- Actual authority is exceeded
Case for director’s personal liability in contract
Weeks v Property 1873 > Directors exceeded amount allowed to borrow, personally liable for breach of warranty of authority
Property transactions
Transactions involving directors (or persons closely related) generally prohibited if exceed certain limits unless approved by members. (Property includes almost anything - not just land and buildings)
Loans to directors by company
Now permitted, provided shareholders’ consent given and details transaction provided
Loans to directors for business purposes (eg loans to cover expenses for moving location)
Do NOT need prior shareholder approval
Duties on directors owed to
Company, not individual members
Consequences of breach of duty (5)
- Director in breach can be made personally liable to account to company for profit/ gain made and indemnify company against losses suffered
- Company may still be liable to third parties on transactions
- Shareholders can ratify (authorise) breach of duty
- Company may indemnify director against liability for breach
- Errors and omissions insurance usual to protect directors against own fault (negligence)
Insurance against criminal penalties
Not available
171 Companies Act 2006
Duty to act within powers >
Director must:
- Act in accordance company’s constitution
- Only exercise powers for purposes conferred
Case for 171 Companies Act
Hogg v Cramphorn Ltd 1967 > directors must not issue shares to persons who would protect them after takeover from being dismissed
172 Companies Act 2006
Duty to promote the success of the company
Director must act in good faith and promote success of company for benefit of members, must have REGARD for:
- long term consequences decisions
- interests employees
- business relationships with suppliers/ customers etc
- impact operations on community and environment
- maintaining reputation for high standards
- need to act fairly
173 Companies Act 2006
Duty to exercise independent judgment
Director must not be influenced by other interests/ people
174 Companies Act 2006
Duty to exercise reasonable skill, care and diligence.
This means the skill, care and diligence that would be exercised by a reasonable person/ reasonably expected on the functions carried out by a director, with the experience they have. If director has particular knowledge, skill or experience, director will be held to higher standard.
Cases for 174 companies act (2)
- City Equitable Fire Insurance Co Ltd 1925 > Chairman lost company large sum of money. Remaining directors sued for negligence, not liable, their actions were reasonable in the circumstances.
- Barings plc 2000 > directors delegate functions, but does not absolve director from duty to supervise discharge of delegated functions
175 Companies Act 2006
Duty to avoid conflicts of interest
Director must avoid situations in which they have direct/ indirect interest that conflicts with interests of company. But other directors can authorise something which would otherwise be breach
Case for 175 companies act
IDC v Cooley 1972 > Architecture firm. Cooley worked for IDC, approached by client who wanted to work solely with Cooley, he accepted. Cooley had to repay profits to IDC.
176 Companies Act 2006
Duty not to accept benefits from third parties
Director should not take bribes or other benefits in cash or kind
177 Companies Act 2006
Duty to declare interest in proposed transaction or arrangement
If director has interest in proposed transaction, he/ she must declare it to the board. But obligation to disclose is removed if other directors already know/ ought to know about it.
Director personally liable if (5)
- Acts when undischarged bankrupt
- ‘Phoenix’ company cases
- Wrongful trading (continuing trade when insolvent liquidation unavoidable)
- Fraudulent trading
- Breaches of competition law eg Safeways and Morrisons > cartel in raising milk prices
Disqualification under
Company Directors (Disqualification) Act 1986. Disqualification order between 2-15 years.
Disqualification prevents
Individual being director/ taking part in management company without permission from court NOT trading on own account
Main reasons for disqualification (5)
- Generally unfit to act as director (conduct)
- Bankruptcy
- Criminal offences in relation company management
- Persistent default in filing Returns/ docs
- Fraudulent/ wrongful trading
BUT if director takes all reasonable steps in circumstances, likely avoid disqualification
Reasonable steps to avoid disqualification (3)
- Act promptly on external professional advice
- Frequent board discussions
- Possible resignation from board
Termination of directorship (3)
- Simple resignation
- Members’ vote
- On liquidation, directors’ powers cease
