Managing Companies - Directors and the Board Flashcards
What do the directors do
- manage the company on a day to day basis
- certain actions can only be taken by the directors
- owe duties to the company
What do the directors do
- own the company
- are able to control key decisions through shareholder resolutions e.g. shareholders need to vote to give directors authority to change the articles or name of the company, to vary class rights
MA 3 on directors
‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.’
How are shareholders protected from actions of directors?
MA 4 reserve power: ‘The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.’
Shareholders also have powers under CA 2006, e.g. the power to control amendments to the company’s articles, which require approval by the shareholders by way of special resolution.
Ultimate sanction shareholders can exercise is the removal of a director by ordinary resolution under s 168.
What is a director?
- Directors are the agents of the company, not the agents of the shareholders. They may in fact take decisions against the wishes of the majority of the shareholders (Howard Smith v Ampol Petroleum)
- Term ‘director’ not defined in CA 2006: it states that a ‘director’ is any person occupying the position of director, by whatever name they are called.
Categories of director
1) At law: de jure, de facto and shadow directors
2) In practice: executive and non executive directors
The company’s articles also provide for alternate directors.
De jure directors
- A director who has been validly appointed at law.
- s 154 CA 2006: a private limited company must have at least one director and a public limited company must have at least two directors.
- every company must have at least one director who is a natural person (s 155(1))
- the Small Business, Enterprise and Employment Act 2015 requires all company directors to be natural persons and prohibits the appointment of corporate directors subject to certain conditions. However this is not yet in force.
- CA 2006: no maximum number of directions
- s 157 CA 2006: directors must be at least 16 years old
De facto directors
- someone who assumes to act as a director but in fact has not been validly appointed
- no single definitive test
- must be established whether someone is part of the corporate governance of the company and undertook decisions normally to be undertaken by a director (Re Hydrodam Ltd)
- considerations: the acts performed and where they were directorial in nature, the cumulative effects of the individual’s acts, and whether the company considered the person to be a director and held them out as such (Smithton Ltd v Naggar)
Shadow directors
- when a person tries to exert influence over the board without being appointed as a director in order to avoid the duties imposed on directors in CA 2006
- Section 251(1) CA 2006: ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act.’
- Section 251(2) professional advisers are not to be regarded as shadow directors, although if the conduct of an adviser goes beyond the normal scope of professional capacity and is effectively controlling the company’s affairs, they will be held to be a shadow director (Re Tasbian Ltd)
Case law example for de facto director
The Commissioners for Hm Revenue and Customs v Holland:
- Mr Holland was a de jure director of Company A which was a corporate director of Company B
- question was whether he should be considered a de facto director of Company B
- held not to be a de facto director as the acts he undertook were within the scope of his duties and responsibilities as a de jure director of Company A
Case law examples for shadow directors
Re Hydrodam (Corby) Ltd: - whether two directors of the parent company could be deemed shadow directors of its subsidiary - to establish someone is a shadow director, have to prove: (1) The identity of the formally-appointed directors (2) that the person in question directed those formally appointed directors as to how to act in relation to the company's affairs (3) that those directors acted in accordance (4) that the directors were accustomed to act in that manner It is a question of fact in every case.
Secretary of State for Trade and Industry v Deverell: ‘sufficient to show that in the face of ‘directions or instructions from the alleged shadow director the properly appointed directors or some of them cast themselves in a subservient role’
Ultraframe UK Ltd v Fielding: must be shown that the governing majority of the board are accustomed to act in accordance with the directions of the alleged shadow director.
Distinction between de facto and shadow directors
Re Hydrodam (Corby) Ltd:
- ‘a de facto director…is held out as a director by the company, and claims and purports to be a director’
- ‘a shadow director…does not claim to purport or act as a director. On the contrary, he claims not to be a director.’
Executive and non-executive directors
- CA 2006 does not differentiate, but in practice there is a difference.
- Executive directors: a director who has been appointed to executive office. Will be both an officer and an employee of the company. e.g. Finance Director, Managing Director, Marketing Director
- Non-executive directors: an officer of the company, but will not be an employee. Do not take part in the day-to-day running of the company.
Alternate directors
- Some companies in their articles provide for alternate directors to take the place of a director where one or more of the directors are absent.
- The alternate director has the voting powers of the absent director.
- The MAs do not provide for appointment of alternate directors and the use of them is becoming quite rare (as can now use telephone internet or written resolutions)
- it is thought that duties of directors will probably apply equally to alternate directors.
Appointment of directors
- CA 2006 does not stipulate a procedure for the appointment of directors, so this is something governed by the Articles of the company.
- MA Art 17(1); ‘Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director:
(a) by ordinary resolution (of the shareholders), or
(b) by a decision of the directors.’ - The second of these two procedures is easier to implement than the first, so usually the board of directors will appoint a new director.
- All persons appointed as directors must consent. The consent is required on form AP01, which is required to be sent to Companies House whenever a new director is appointed.
- A register of directors must be kept at the company’s registered office.
Service contracts
- An executive director is an employee of the company. As an employee, he/she should be given a written contract of employment.
- There is no automatic duty for directors to be paid - this is something the board can determine, subject to the provisions of the company’s articles.
- The company must keep a copy of all directors’ service contracts or memoranda of the terms of those contracts (s 228 CA 2006)
- Shareholders have a right to inspect copies of directors’ service contracts or memoranda (s 229), which must be provided within seven days of a request.
- MA Art 19: the terms of an individual director’s service contract are for the board to decide. As a general rule, a director’s service contract will only require the approval of a resolution of the board of directors.
Long-term service contracts
- Section 188 CA 2006 applies when a service contract provides for a director’s employment to have a ‘guaranteed term’ which is, or may be, longer than 2 years.
- Where s 188 applies, the relevant provision requires shareholder approval by ordinary resolution.
- If shareholder approval is not given, the term incorporated in contravention of s 188 CA 2006 is void under s 189(a) CA 2006.
- under s 189(b), the service contract will be deemed to contain a term entitling the company to terminate the contract at any time, by the giving of reasonable notice.
Termination of appointment
(1) Resignation
(2) Vacation
(3) Removal
Termination of appointment - Resignation
Subject to any provision in the articles to the contrary, a director may resign at any time by giving notice (Glossop v Glossop). The resignation of a director does not need to be specifically accepted by the board.
Termination of appointment - Vacation
MA 18 provides that a director is automatically deemed to vacate office where that person becomes prohibited from being a director, bankrupt, subject to a composition order made with creditors, or physically or mentally incapable for more than three months.
Termination of appointment - Removal
s 168 CA 2006 - a director can be removed by ordinary resolution of the shareholders. Where such a resolution is proposed, the director has the right to be heard at the GM (s 169) and therefore written resolutions cannot be used. Special notice of such a resolution is required to be given (at least 28 clear days before the GM)
Directors who are also shareholders are allowed to vote in their capacity as shareholder on the resolution to remove them.
Bushell v Faith clauses
- Mr Faith held 100 shares, as did each of his sisters. The three siblings were also directors of the company.
- Company’s articles: ‘In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right to three votes per share’
- Faith was therefore able to defeat a resolution proposed by his sisters to remove him. The court held that the article was valid and effective.
Disqualification
- Company Directors Disqualification Act 1986 (CDDA 1986) allows directors to be disqualified in certain circumstances.
- Section 1(1) CDDA 1986: where a person is disqualified, that person shall not, without leave of the court, ‘be a director of a company, or a liquidator or administrator of the company…a receiver or manager…or, in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.’
Types of disqualification order
1) Discretionary - can last for up to 10/15 years depending on the grounds for disqualification
2) Mandatory- can last between 2 and 15 years
Mandatory disqualification orders
Made under s.6(1) CDDA 1986 where the court is satisfied:
(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently); and
(b) that his conduct as a director of that company…makes him unfit to be concerned in the management of a company.’
- Section 6 has been taken by the courts to mean that the director has abused the privilege of limited liability in some way, either by gross negligence or deliberate disregard of creditors’ interests.
Discretionary disqualification orders
Discretionary grounds on which directors can be disqualified:
- Conviction of an indictable offence in connection with the management of the company or company property (s 2);
- Persistent breaches of company legislation requiring returns or notices to be given to the Registrar (s 3);
- Fraud - either fraudulent trading under s 993 CA 2006, wrongful/fraudulent trading under s 213 and 214 Insolvency Act 1986 or fraud in relation to the company or its property (s 4 CDDA);
- Disqualification after investigation of the company - where it seems to the Secretary of State that it would be in the public interest for a disqualification to be made (s 8 CDDA). In Secretary of State for Business, Innovation and Skills v Pawson, the court disqualified a director for 8 years on the basis that he had controlled 9 companies for his own financial benefit by overcharging them for professional services
Criminal penalties
It is a criminal offence to act in contravention of a disqualification order and any person doing so is liable for a fine or imprisonment or both (s 13 CDDA), as well as being personally liable for all the debts of the company incurred during the time they were acting in contravention of the disqualification order (s 15 CDDA)
Compensation orders
The Secretary of State may apply to the court for a compensation order against a director who has been disqualified where creditors have suffered losses due to the director’s misconduct (s 15 A - s 15 C CDDA)
Disqualification undertakings
The Secretary of State may accept a disqualification undertaking by any person that for a specified period, that person will not be a director or be involved in any way with the promotion, formation or management of a company without leave of the court. (s 6(2) CDDA)
Breach of competition law
Directors who breach competition law e.g. by operating a cartel may also be disqualified under s 9A-9E CDDA 1986. Disqualification undertakings may also be offered and there is potential immunity for whistleblowers in cartels.
Directors Duties
- developed by the courts of equity but codified in the CA 2006
- s 170(1) CA - the general duties of directors in ss 171-177 are owed by a director to the company (and not to the shareholders directly)
Breach/remedies of directors duties
- If a director exceeds his powers or breaches his duties, he can be liable to the company for the loss he has caused.
- Any liability for breach can be avoided if the director’s conduct is capable of subsequent approval, or ratification, by the shareholders (s 239)
- The remedies for breach were not codified. Section 178 provides that existing common law and equitable remedies still apply.
To whom do the directors owe duties?
- To the company (s 170(1))
- This principle was originally established in Foss v Harbottle
