Lecture 13 - Directors of a Limited Company

Question 1

Function of directors

Answer 1

To run and manage business on behalf of members

Question 2

Executive Directors

Answer 2

Normal director running business or part of it. Usually have particular responsibility eg sales/ finance director

Question 3

Non-executive director

Answer 3

Director with no responsibility or outside independent director

Question 4

Shadow directors

Answer 4

NOT TYPE OF DIRECTOR. Anyone who performs duties and functions of director is deemed one, and liable accordingly.

Question 5

Do directors have to be employees?

Answer 5

No - but very often are

Question 6

Directors appointed (3)

Answer 6

• On company formation
• Ordinary resolution by members
• By the board itself

Question 7

Who cannot be director? (3)

Answer 7

• Anyone under 16 years old
• Undischarged bankrupt/ person disqualified by Court Order
• Any legal and non-discriminatory Article restrictions

Question 8

If members unhappy with directors

Answer 8

Can vote them off board. This is how members exercise ownership rights and control.

Question 9

Service Agreement

Answer 9

Contract of employment for director (if director is employee)

Question 10

If directorship terminated..

Answer 10

Employment is not automatically terminated too (and vice versa)

Question 11

Maximum term for fixed term Service Agreements

Answer 11

2 years without consent of shareholders. Can only be longer if Agreement contains provision for termination on reasonable notice, or is approved by members.

Question 12

Remuneration per Table A and Model Articles

Answer 12

Directors are to be paid whatever company determines by resolution.

Question 13

Case for remuneration

Answer 13

Half Garage Ltd 1982 > firm went under. Wife’s salary was deemed excessive and unnecessary so was forced to repay, husband wasn’t

Question 14

Salaries must be…

Answer 14

Approved by members. But Directors often have controlling interest.

Question 15

Expenses

Answer 15

Properly incurred by director in connection with business are recoverable

Question 16

Pension payments

Answer 16

Allowable for directors as part of remuneration package

Question 17

Compensation for loss of office as director

Answer 17

Allowable, but must be approved by members

Question 18

If compensation paid as contractual entitlement/ damages/ settlement of a claim

Answer 18

No members’ approval required

Question 19

Chairman (4)

Answer 19

• Must be director
• No obligation to have one > name means nothing
• Often has casting vote
• Usually runs meetings

Question 20

Company secretary (3)

Answer 20

• Separate function from director
• Public companies must have one
• Legal background

Question 21

Directors and contracts

Answer 21

Directors enter into contracts as agent for company, not generally personally liable on company contracts

Question 22

Directors personally liable for contracts when (2)

Answer 22

• They contract to be liable eg guarantor

- Actual authority is exceeded

Question 23

Case for director’s personal liability in contract

Answer 23

Weeks v Property 1873 > Directors exceeded amount allowed to borrow, personally liable for breach of warranty of authority

Question 24

Property transactions

Answer 24

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)

Question 25

Loans to directors by company

Answer 25

Now permitted, provided shareholders’ consent given and details transaction provided

Question 26

Loans to directors for business purposes (eg loans to cover expenses for moving location)

Answer 26

Do NOT need prior shareholder approval

Question 27

Duties on directors owed to

Answer 27

Company, not individual members

Question 28

Consequences of breach of duty (5)

Answer 28

• 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)

Question 29

Insurance against criminal penalties

Answer 29

Not available

Question 30

171 Companies Act 2006

Answer 30

Duty to act within powers >
Director must:
- Act in accordance company’s constitution
- Only exercise powers for purposes conferred

Question 31

Case for 171 Companies Act

Answer 31

Hogg v Cramphorn Ltd 1967 > directors must not issue shares to persons who would protect them after takeover from being dismissed

Question 32

172 Companies Act 2006

Answer 32

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

Question 33

173 Companies Act 2006

Answer 33

Duty to exercise independent judgment

Director must not be influenced by other interests/ people

Question 34

174 Companies Act 2006

Answer 34

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.

Question 35

Cases for 174 companies act (2)

Answer 35

• 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

Question 36

175 Companies Act 2006

Answer 36

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

Question 37

Case for 175 companies act

Answer 37

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.

Question 38

176 Companies Act 2006

Answer 38

Duty not to accept benefits from third parties

Director should not take bribes or other benefits in cash or kind

Question 39

177 Companies Act 2006

Answer 39

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.

Question 40

Director personally liable if (5)

Answer 40

• 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

Question 41

Disqualification under

Answer 41

Company Directors (Disqualification) Act 1986. Disqualification order between 2-15 years.

Question 42

Disqualification prevents

Answer 42

Individual being director/ taking part in management company without permission from court NOT trading on own account

Question 43

Main reasons for disqualification (5)

Answer 43

• 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

Question 44

Reasonable steps to avoid disqualification (3)

Answer 44

• Act promptly on external professional advice
• Frequent board discussions
• Possible resignation from board

Question 45

Termination of directorship (3)

Answer 45

• Simple resignation
• Members’ vote
• On liquidation, directors’ powers cease