The Management of the Company Flashcards
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 is a UK company law case, which concerns the enforceability of provisions in a company’s constitution.
The Court of Appeal affirmed that directors were not agents of the shareholders and so were not bound to implement shareholder resolutions, where special rules already provided for a different procedure.
Facts
There were 2700 shares and the plaintiff, Mr McDiarmid, owned 1202 of them. The company was in the business of purifying and storing liquids. He wanted the company to sell its assets to another company. At a meeting he got 1502 of the shares to vote in favour of such a resolution, with his friends. The directors were opposed to it. They declined to comply with the resolution. So Mr McDiarmid brought this action in the name of the company, against the company directors, including Mr Cuninghame.
The constitution stated that only a three quarter majority could remove the directors. It said the general power of management was vested in the directors ‘subject to such regulations as might from time to time be made by extraordinary resolution’ (art 96). They were also explicitly allowed to sell company property (art 91). In this case the words ‘regulations’ referred to the articles of association. So the articles could be changed by a three quarter majority of votes. It did not say anything about issuing directions to the directors.
Judgment
High Court
Warrington J held that on the true construction of the articles that unless directions were given through special resolution, then it was impossible for a mere majority to override the views of the directors. This was simply a matter of construction.
Court of Appeal
Lord Collins MR held that the simple majority of shareholders was not enough to override the requirement in the constitution that the directors may only be given instructions through a three quarter majority. So the directors were entitled to reject the offer. They are not agents to the shareholders nor the company. The shareholders would need to dismiss the directors or change the constitution. He elaborated.[1]
It has been suggested that this is a mere question of principal and agent, and that it would be an absurd thing if a principal in appointing an agent should in effect appoint a dictator who is to manage him instead of his managing the agent. I think that that analogy does not strictly apply to this case. No doubt for some purposes directors are agents. For whom are the agents? You have, no doubt, in theory and law one entity, the company, which might be a principal, but you have to go behind that when you look to the particular position of directors. It is by the consensus of all the individuals in the company that these directors become agents and hold their rights as agents… There are provisions by which the minority may be overborne, but that can only be done by special machinery in the shape of special resolutions.
Cozens Hardy LJ agreed. He said that
going back to the root principle which governs these cases under the Companies Act 1862... [it] seems to me that the shareholders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the shareholders in the manner described by other articles, such directors being liable to be removed only by special resolution.
Secretary of State for Trade and Industry v Tjolle [1998] BCC 282
Delay and the probable short period of disqualification are proper reasons for Secretary of State to consider discontinuing proceedings. As to whether a person ‘assumes to act as a director’: ‘It may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.’
Overview Of De Facto And Shadow Directors
Determination of a de facto Director position can be a bit of a minefield. There is no statutory definition for de facto Director, but some assistance maybe found in Section 250 of the Companies Act 2006 (“CA06”):
In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.
This definition is also given in Section 251 of the Insolvency Act 1986 (“IA 86”)
How To Identify A De Facto Director
Ultraframe v Fielding
Once established, de facto directors owe the same duties as de jure directors (Ultraframe v Fielding [2005] EWHC1638 (Ch) para 1257).
HMRC v Holland
To identify a de facto director, there is no single decisive test to be applied; the circumstances of the case must be taken into account (HMRC v Holland [2010] UKSC 51)
However, useful guidance has been given, by Jacob J in Secretary of State v Tjolle [1998] 1 BCLC 333, at 343-344 cited with approval in Holland:
For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.
Re UKLI Limited
A useful list of matters to consider can also be found in Re UKLI Ltd [2013] EWHC 680 (Ch) at paras 40 and 41:
“40. A matter of debate has been whether it is a necessary ingredient of de facto directorship that the person in question should have been held out by the company as a director, as Millett J considered in Re Hydrodam (that being the essential difference, on that analysis, between a de facto and a shadow director). Authorities subsequent to Re Hydrodam have tended to downplay this ingredient to being a useful indicator, but not an essential requirement: see, for example, the decision of Etherton J (as he then was) in Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch), [2007] BCC 11 at paragraphs 61 to 81.
There is a valuable review and summary of the effect of these authorities in the (unreported) decision of Chief Registrar Baister in the UKPFM Ltd proceedings in which Mr Chohan was disqualified [Case No. 3232 of 2006]. Although I have introduced some small variations I agree with the Chief Registrar that the following characteristics are all relevant, though not every one is required to be established, and there is inevitably some overlap between them:
(1) A de facto director must presume to act as if he were a director.
(2) He must be or have been in point of fact part of the corporate governing structure and participated in directing the affairs of the company in relation to the acts or conduct complained of.
(3) He must be either the sole person directing the affairs of the company or a substantial or predominant influence and force in so doing as regards the matters of which complaint is made. Influence is not otherwise likely to be sufficient.
(4) I am not myself persuaded that an “equality of footing” test is required: I prefer the looser fact-based approach advocated by Jacob J, and consider the indicia to be whether the person concerned has undertaken acts or functions such as to suggest that his remit to act in relation to the management of the company is the same as if he were a de jure director
(5) The functions he performs and the acts of which complaint is made must be such as could only be undertaken by a director, not ones which could properly be performed by a manager or other employee below board level
(6) It is relevant whether the person was held out as a director or claimed or purported to act as such: but that, and/or use of the title, is not a necessary requirement, and even that may not always be sufficient.
(7) His role may relate to part of the affairs of the company only, so long as that part is the part of which complaint is made.
(8) Lack of accountability to others may be an indicator; so also may the fact of involvement in major decisions.
(9) The power to intervene to prevent some act on behalf of the company may suffice.
(10) The person concerned must be someone who was more than a mere agent, employee or advisor.”
There is no decisive test; there is a ‘question to ask’, per Holland at 94
“If the question is, as I believe, whether Mr Holland was part of the corporate governing structure of the composite companies and whether he assumed a role in those companies which imposed on him the fiduciary duties of a director, then I would answer that he was not”
Disclaimer: De Facto Director – Key Issues
The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same. If you have a specific query then you should seek independent legal advice on the same. You can contact us on the specific facts of your case for assistance.
Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch)
Secretary of State v Hollier [2006] EWHC 1804
Company Law study module
Secretary of State v Hollier [2006] concerns clarification of a de facto director and disqualification orders.
Keywords:
Company law – Directors – Company investigation – De facto directors – Directors’ disqualification proceedings – Disqualification orders – The Secretary of State
Facts:
In the case of Secretary of State v Hollier [2006], the first defendant, Dennis George Hollier, registered as a director of Amba Rescue Limited. The remaining defendants were the first defendant’s family members. They served as directors or de facto directors of Amba Rescue and other companies.
As regards Amba Rescue Limited, it provided a vehicle accident management and breakdown recovery service. In August 1999, Amba Rescue Limited published a brochure, describing its services and its membership cost.
By late 1999, the company started to encounter severe financial difficulties. The company accumulated debt in the amount of at least £245,000. However, it continued to sell membership for which it used the brochure. Subsequently, the company wound up.
The Secretary of State obtained investigative material in respect of the companies. As a result, the secretary established a connection between Amba Rescue Limited and another company, Nextime. Following the investigation, the Secretary of State, acting under the Company Directors Disqualification Act 1986, applied for disqualification orders against the defendants.
Issue:
Whether the defendants were unfit to serve as directors and, thus, shall be subjected to disqualification orders?
Held:
The High Court gave clarification as to the definition of a de facto director:
“The applicable principles to clarify whether a person serves as a de facto director included the following: (a) whether he is a part of the governing structure, which was not satisfied by someone who was at all times and in material decisions subordinate to the de jure directors; (b) a defendant can be a de facto director even though he did not have the day-to-day control of the company’s affairs and even though he is only involved in part of a company’s activities; (c) the issue is to be determined objectively on the basis of all relevant facts, including whether he or the company held him out to be a director and whether he has access to relevant company information.”
In the present case, the court found that the first defendant’s son in a family company did not serve as a de facto director when he acted out of a wish to assist his father in his business. However, another son was a de facto director for he did exercise real control and gave instructions over a wide range of the company’s activities, even though equally motivated to help his father
As to the disqualification orders, the court established that the Third Defendant, Adrian Hollier, and the Fourth Defendant, Barbara Ann Hollier.
Applied: Grayan Building Services Ltd (In Liquidation), Re [1995] Ch. 241, [1994] 11 WLUK 151; Secretary of State for Trade and Industry v Tjolle [1998] B.C.C. 282, [1997] 5 WLUK 67.
Considered: Hydrodan (Corby) Ltd (In Liquidation), Re [1994] B.C.C. 161, [1993] 12 WLUK 265.
Re Kaytech International plc [1999] BCC 390
Re Kaytech International plc; Secretary of State for Trade and Industry v Kaczer and others: CA 1999
Robert Walker LJ said that the expression ‘de facto director’ had been in use for a long time, and commented on the failure to distinguish in pleadings between pleas that someone was a shadow or a de facto director. The two different labels were not necessarily mutually exclusive. He said: ‘However the two concepts do have at least this much in common, that an individual who was not a de jure director is alleged to have exercised real influence (otherwise than as a professional adviser) in the corporate governance of a company. Sometimes that influence may be concealed and sometimes it may be open. Sometimes it may be something of a mixture, as the facts of the present case show.’ and ”the crucial issue is whether the individual in question has assumed the status and function of a company director so as to make himself responsible under the [Company Directors Disqualification Act 1986] as if he were a de jure dir’
Rimer J referred to Jabble, ‘In my judgment, the principle reflected in that case is applicable here. If, following the service of these proceedings on [the respondent], he wanted to challenge [the Secretary of State’s] assertion that [the company] went into liquidation in 1993, then his correct course was to apply promptly for a stay or adjournment of these proceedings so that he could in the meantime start separate proceedings challenging Mr Alexander’s status as liquidator, being proceedings in which all parties affected by the challenge would be joined as defendants. That would include Mr Alexander and presumably also [the company] itself. [Counsel for the respondent] submitted that such a course would not have been open to the [respondent], since he would have no locus standi to commence such proceedings. I am not convinced of that, since I consider it probable that his status as a respondent to the disqualification proceedings would have given him a sufficient interest, but whether that is right or not, he has anyway not sought to put it to the test, but simply expects the court to decide the point in proceedings to which neither Mr Alexander nor [the company] are parties.’
Robert Walker LJ spoke of the Tjolle cases, saying: ‘I do not understand Jacob J in the first part of that passage to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director.’
Robert Walker LJ, Rimer J
[1999] 2 BCLC 351
Company Director Disqualifications Act 1986
England and Wales
Citing:
Cited – Secretary of State for Trade and Industry v Jabble and Others CA 22-Jul-1997
The Secretary of State sought company director disqualification orders. The defendants challenged the administrative receivership, saying that the appointment of the administrative receiver was invalid, and hence that the conditions of section 6 . .
Explained – Secretary of State for Trade and Industry v Tjolle and Others ChD 9-May-1997
Delay and the probable short period of disqualification are proper reasons for Secretary of State to consider discontinuing proceedings. As to whether a person ‘assumes to act as a director’: ‘It may be difficult to postulate any one decisive test. . .
Cited by:
Cited – Cabvision Ltd v Feetum and others CA 20-Dec-2005
The company challenged the appointment of administrative receivers, saying there had been no insolvency.
Held: No question arises of a derivative action arose here. The claimant had standing to apply for declaratory relief since they were . .
Cited – Holland v Revenue and Customs and Another CA 2-Jul-2009
The appellant supported IT workers. Through his own company, he set up companies in which his company was a director, and which companies in turn employed the IT workers securing substantial savings in higher rate Corporation Tax.
Held: The . .
Cited – Holland v Revenue and Customs and Another SC 24-Nov-2010
The Revenue sought an order under section 212 of the 1986 Act, for payment of the tax debts of the insolvent company by a de facto director. H had organised a scheme under which IT contractors had worked through companies created by him under a . .
Re Hydrodam (Corby) Ltd [1994] BCC 161
Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 is a UK company law case, concerning the meaning of a shadow director. It is sometimes incorrectly cited in sources as Re: Hydrodam.
Facts
There were two corporate directors of a parent company of Hydrodan (Corby) Ltd, which was a wholly owned subsidiary of Landsaver MCP Ltd, itself a wholly owned subsidiary of Midland City Partnerships Ltd, which was, finally, a wholly owned subsidiary of Eagle Trust plc, a TV conglomerate chaired by David James, Baron James of Blackheath. The liquidator alleged that the two directors of Eagle Trust, Leslie Thomas and Dr Hardwick, were liable for wrongful trading, and contended they were liable as shadow directors under the Companies Act 2006 section 251.
Judgment
Millett J held the directors of the parent were not shadow directors of the subsidiary, just by being members of the parent company’s board. It would need to be shown that they personally instructed and directed the subsidiary’s board. The first step is to identify the de jure and de facto directors, then to say that they had been directed, then that the real directors acted in accordance with the directions, and then that they were accustomed to do so. For instance there must be a pattern ‘in which the board did not exercise any discretion or judgment of its own but acted in accordance with the directions of others’. De facto directors are those who ‘undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.’
Liability for wrongful trading is imposed by s. 214 of the Insolvency Act 1986. The statutory liability is imposed exclusively upon persons who are or were at the material time directors of the company in liquidation. But s. 214(7) provides that in the section ‘director’ includes a shadow director. A shadow director is defined in s. 251 of the Insolvency Act 1986 in these terms:
‘“Shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act …’ I need not recite the proviso to that definition.
Directors may be of three kinds: de jure directors, that is to say, those who have been validly appointed to the office; de facto directors, that is to say, directors who assume to act as directors without having been appointed validly or at all; and shadow directors who are persons falling within the definition which I have read.
The defendants accept, though for the purpose of these appeals only, that the liability imposed by s. 214 extends to de facto directors as well as to de jure and shadow directors. It appears to me that that concession is plainly correct. Liability for wrongful trading is imposed by the Act on those persons who are responsible for it, that is to say, who were in a position to prevent damage to creditors by taking proper steps to protect their interests. Liability cannot sensibly depend upon the validity of the defendant's appointment. Those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities which are attached to the office. Nevertheless, the statutory liability is imposed exclusively upon directors of one or other of the three kinds that I have mentioned. Accordingly, the liquidator must plead and prove against each defendant separately that he or it was a director of the company...
I would interpose at this point by observing that in my judgment an allegation that a defendant acted as de facto or shadow director, without distinguishing between the two, is embarrassing. It suggests – and counsel's submissions to me support the inference – that the liquidator takes the view that de facto or shadow directors are very similar, that their roles overlap, and that it may not be possible to determine in any given case whether a particular person was a de facto or a shadow director. I do not accept that at all. The terms do not overlap. They are alternatives, and in most and perhaps all cases are mutually exclusive.
A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.
A de facto director, I repeat, is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company. To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act. What is needed is, first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.
Bushell v Faith [1970] AC 1099
Bushell v Faith [1970] AC 1099 is a UK company law case, concerning the possibility of weighting votes, and the relationship to section 184 of Companies Act 1948 (the predecessor of s 168 of the Companies Act 2006) which mandates that directors may be removed from a board by ordinary resolution (a simple majority of shareholder votes).
The decision is not relevant to companies listed on the London Stock Exchange as the listing rules refuse listing where the articles of association contain restrictions on removing the board of directors.
Facts
A property company called Bush Court (Southgate) Ltd owned a block of flats. There was £300 capital, 100 shares held by Mr Faith and the other 200 by his two sisters, Mrs Bushell and Dr Bayne. Article 9 of the company constitution said that under a resolution to remove a director, that director’s shares would carry three votes each. When the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two, 200 votes together.
Ungoed-Thomas J said that the article infringed s 184. The Court of Appeal (Harman LJ, Russell LJ and Karminski LJ) reversed this decision. The sisters appealed to the House of Lords.
Judgment
The House of Lords held that the provision was valid, because there was no express indication by Parliament that it intended otherwise.
Lord Reid, giving the first judgment said that
with a some reluctance I agree with the majority of your Lordships that this appeal must be dismissed. Article 9 of the articles of association of this company is obviously designed to evade section 184 (1) of the Companies Act, 1949 [sic], which provides that a company may by ordinary resolution remove a director notwithstanding anything in its articles. The extra voting power given by that article to a director, whose removal from office is proposed, makes it impossible in the circumstances of this case for any resolution for the removal of any director to be passed if that director votes against it.
But he said that given the recognition of giving weighted votes was recognised in Table A, the former Model Articles in the Schedule attached to the Companies Act 1948, “we must take the law as we find it”. He emphasised the possibility of reform in later enactments.
Lord Morris of Borth-y-Gest dissented in a short opinion. He said:
Some shares may, however, carry a greater voting power than others. On a resolution to remove a director shares will therefore carry the voting power that they possess. But this does not, in my view, warrant a device such as article 9 introduces. Its unconcealed effect is to make a director irremovable. If the question is posed whether the shares of the respondent possess any added voting weight the answer must be that they possess none whatsoever beyond, if valid, an ad hoc weight for the special purpose of circumventing section 184. If article 9 were writ large it would set out that a director is not to be removed against his will and that in order to achieve this and to thwart the express provision of section 184 the voting power of any director threatened with removal is to be deemed to be greater than it actually is. The learned judge thought that to sanction this would be to make a mockery of the law. I think so also.
Lord Upjohn approved the provision. He emphasised the Court of Appeal’s approval of the provision.
Harman LJ [approved article 9 of the company constitution] on the simple ground that the Act of 1948 did not prevent certain shares or classes of shares having special voting rights attached to them and on certain occasions. He could find nothing in the Act of 1948 which prohibited the giving of special voting rights to the shares of a director who finds his position attacked. Russell L.J. in his judgment gave substantially the same reasons for allowing the appeal and he supported his judgment by reference to a number of recent precedents particularly those to be found in Palmer's Company Precedents, 17th ed. (1956), but, with all respect to the learned Lord Justice, I do not think these precedents which, so far as relevant, are comparatively new can be said to have the settled assent and approbation of the profession, so as to render them any real guide for the purposes of a judgment; especially when I note the much more cautious approach by the learned editors of the Encyclopaedia of Forms and Precedents, 4th ed. (1966), Vol. 5, p. 428, where in reference to a form somewhat similar to special article 9 they say in a footnote:
"The validity of such a provision as this in relation to a resolution to remove a director from office remains to be tested in the courts."
My Lords, when construing an Act of Parliament it is a canon of construction that its provisions must be construed in the light of the mischief which the Act was designed to meet. In this case the mischief was well known; it was a common practice, especially in the case of private companies, to provide in the articles that a director should be irremovable or only removable by an extraordinary resolution; in the former case the articles would have to be altered by special resolution before the director could be removed and of course in either case a three-quarters majority would be required. In many cases this would be impossible, so the Act provided that notwithstanding anything in the articles an ordinary resolution would suffice to remove a director. That was the mischief which the section set out to remedy; to make a director removable by virtue of an ordinary resolution instead of an extraordinary resolution or making it necessary to alter the articles.
An ordinary resolution is not defined nor used in the body of the Act of 1948 though the phrase occurs in some of the articles of Table A in the First Schedule to the Act. But its meaning is, in my opinion, clear. An ordinary resolution is in the first place passed by a bare majority on a show of hands by the members entitled to vote who are present personally or by proxy and on such a vote each member has one vote regardless of his share holding. If a poll is demanded then for an ordinary resolution still only a bare majority of votes is required. But whether a share or class of shares has any vote upon the matter and, if so, what is its voting power upon the resolution in question depends entirely upon the voting rights attached to that share or class of shares by the articles of association...
Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of section 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share. Then, what about shares which had no voting rights under the articles? Should not Parliament give them a vote when considering this completely artificial form of ordinary resolution? Suppose there had here been some preference shares in the name of Mr. Faith's wife, which under the articles had in the circumstances no vote; why in justice should her voice be excluded from consideration in this artificial vote?
I only raise this purely hypothetical case to show the great difficulty of trying to do justice by legislation in a matter which has always been left to the corporators themselves to decide.
Lord Donovan said:
My Lords, the issue here is the true construction of section 184 of the Companies Act, 1948: and I approach it with no conception of what the legislature wanted to achieve by the section other than such as can reasonably be deduced from its language. Clearly it was intended to alter the method by which a director of a company could be removed while still in office. It enacts that this can be done by the company by ordinary resolution. Furthermore, it may be achieved notwithstanding anything in the company's articles, or in any agreement between the company and the director. Accordingly any case (and one knows there were many) where the articles prescribed that a director should be removable during his period of office only by a special resolution or an extraordinary resolution, each of which necessitated inter alia a three to one majority of those present and voting at the meeting, is overridden by section 184. A simple majority of the votes will now suffice; an ordinary resolution being, in my opinion, a resolution capable of being carried by such a majority. Similarly any agreement, whether evidenced by the articles or other vise, that a director shall be a director for life or for some fixed period is now also overreached. The field over which section 184 operates is thus extensive for it includes, admittedly, all companies with a quotation on the Stock Exchange. It is now contended, however, that it does something more; namely, that it provides in effect that when the ordinary resolution proposing the removal of the director is put to the meeting each shareholder present shall have one vote per share and no more: and that any provision in the articles providing that any shareholder shall, in relation to this resolution, have "weighted" votes attached to his shares, is also nullified by section 184. A provision for such "weighting" of votes which applies generally, that is as part of the normal pattern of voting, is accepted by the appellant as unobjectionable: but an article such as the one here under consideration which is special to a resolution seeking the removal of a director falls foul of section 184 and is overridden by it. Why should this be? The section does not say so, as it easily could. and those who drafted it and enacted it certainly would have included among their numbers many who were familiar with the phenomenon of articles of association carrying "weighted votes." It must therefore have been plain at the outset that unless some special provision were made, the mere direction that an ordinary resolution would do in order to remove a director would leave the section at risk of being made inoperative in the way that has been done here. Yet no such provision was made, and in this Parliament followed its practice of leaving to companies and their shareholders liberty to allocate voting rights as they pleased. When, therefore, it is said that a decision in favour of the respondent in this case would defeat the purpose of the section and make a mockery of it, it is being assumed that Parliament intended to cover every possible case and block up every loophole. I see no warrant for any such assumption. A very large part of the relevant field is in fact covered and covered effectively. and there may be good reasons why Parliament should leave some companies with freedom of maneuver in this particular matter. There are many small companies which are conducted in practice as though they were little more than partnerships, particularly family companies running a family business; and it is, unfortunately, sometimes necessary to provide some safeguard against family quarrels having their repercussions in the boardroom. I am not, of course, saying that this is such a case: I merely seek to repel the argument that unless the section is construed in the way the appellant wants, it has become "inept" and "frustrated."
Significance
Companies listed on the London Stock Exchange may not circumvent s 168 by their articles. So this has effect for non-listed companies. The LSE would refuse listing.
Another technique for achieving the same result as in Bushell is to make three classes of shares, each with the right to appoint one director. You then have the protection against altering class rights. Or you could have a shareholder agreement.
A weighted voting provision could potentially found an unfair prejudice petition under Companies Act 2006 s 994. Also, possibility of application by director for winding up order under s 122(1)(g) Insolvency Act 1986 and Companies Act 2006 ss. 994-996).
A quorum provision could state a meeting is inquorate without a particular director. Again, this could give rise to a s 994 petition.
Re Cannonquest, Official Receiver v Hannan [1997] BCC 644
. A disqualified person cannot, therefore, act in any of the alternative capacities listed and so, for example, a disqualified director cannot participate in the promotion of a new company during the disqualification period
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 is a UK company law case concerning the test of being unfit to run a company under the Company Directors Disqualification Act 1986 section 6.
Facts
Mr Cruddas was a chartered accountant and director of five insolvent companies, debt amounting to £600,000. He did not keep proper accounting records, failed to ensure annual returns were filed, and that annual accounts were prepared and audited, caused more debt when he knew of severe financial difficulty, traded while insolvent, did not pay the Crown debts for PAYE, NIC and VAT. Mr Cruddas had, though, remortgaged his house to raise money to pay creditors, losing over £200K. But he only paid creditors who pressed for it.
Judgment
Dillon LJ held that he was unfit to be concerned with management under the CDDA 1986 section 6. He noted that this was the first case of disqualification up to the Court of Appeal. In deciding how much of 15 years to disqualify, only serious cases, which may include someone who was already disqualified should be for ten years and above; for six to ten years are those who do not merit the top bracket and for two to five years, not very serious cases.[1] Here a five-year disqualification was appropriate.
Taking that view of the Crown debts in Rochester and Retail, and adding to it (i) that there were never any audited accounts of any of the five companies, let alone registered accounts, (ii) the inadequacy of the accounting records of Retail, (iii) the loan by Retail to Rochester, (iv) the payment of debts of Hoo Paper by Hoo Waste Paper, (v) the guarantee given by Sevenoaks Stationers for liabilities of Hoo Paper, (vi) the continued trading while insolvent and known to be in difficulties of Rochester and Retail, and (vii) the extent of the deficiency in each company after a relatively short period of trading, I have no doubt at all that it is amply proved that Mr. Cruddas is unfit to be concerned in the management of a company. His trouble is not dishonesty, but incompetence or negligence in a very marked degree and that is enough to render him unfit; I do not think it is necessary for incompetence to be “total”, as suggested by the Vice-Chancellor in Re Lo-Line Electric Motors Ltd,[2] to render a director unfit to take part in the management of a company.
Re Polly Peck International plc (No.2) [1994] 1 BCLC 574
This has been construed as meaning ‘unfit to manage companies generally’ rather than unfit to manage a particular company or type of company (Re Polly Peck International plc (No 2) [1994] 1 BCLC 574; see also Re Grayan Building Services Ltd [1995] Ch 241).
The meaning of ‘unfitness’
Section 6 CDDA 1986 provides that the court must be satisfied that the director’s conduct ‘makes him unfit to be concerned in the management of a company’.
Re Grayan Building Services Ltd [1995] Ch 241
In re Grayan Building Services Ltd: CA 1995
The degree to which an appellate court will be willing to substitute its own judgment for that of the tribunal will vary with the nature of the question. Hoffmann LJ said: ‘The concept of limited liability and the sophistication of our corporate law offers great privileges and great opportunities for those who wish to trade under that regime. But the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and disciplines in place to protect creditors and shareholders. And, while some significant corporate failures will occur despite the directors exercising best managerial practice, in many, too many, cases there have been serious breaches of those rules and disciplines, in situations where the observance of them would or at least might have prevented or reduced the scale of the failure and consequent loss to creditors and investors.’
Hoffmann LJ said: ‘The court is concerned solely with the conduct specified by the Secretary of State . . under rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987. It must decide whether that conduct, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.’ and ‘Some of the examples given by the judge are of extenuating circumstances which accompanied the conduct in question. These are matters which it seems to me would always be proper for the court to take into account. On the other hand, if the judge meant that the court was concerned with anything other than whether the conduct, taken in its setting, fell below the appropriate standard, I would respectfully disagree.’
References: [1995] Ch 241, [1995] 3 WLR 1
Judges: Henry LJ, Hoffmann LJ, Neill LJ
Statutes: Company Directors Disqualification Act 1986 6, Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987
Jurisdiction: England and Wales
Re Lo-Line Electric Motors Ltd [1988] Ch 477
In re Lo-Line Electric Motors Ltd: 1988
When considering the filing of additional evidence changing allegations made under the 1986 Act, the paramount requirement is that the director facing disqualification must know the charge he has to meet. As to the standard of misbehaviour required to found an order, Sir Nicolas Browne-Wilkinson VC said: ‘Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt in an extreme case of gross negligence or total incompetence disqualification could be appropriate.’ The director ‘has been shown to have behaved in a commercially culpable manner in trading through limited companies when he knew them to be insolvent and in using the unpaid Crown debts to finance such trading.’
Judges:
Sir Nicolas Browne-Wilkinson VC
Statutes:
Company Directors Disqualification Act 1986
Sample examination question
Freedom Publishers Ltd (‘the company’) is a private limited company with model
articles for private companies limited by shares, but with the addition of the
following clause:
‘In the event of there being a resolution before a general meeting to dismiss a
director, that director’s shares shall carry five times the normal number of votes.’
The company has issued 10,000 shares, which are held as to 2,000 each by the three
directors, Karl, Fred and Rosa. The remaining 4,000 are distributed among 10 or so
shareholders. Karl and Fred have become disturbed by the fact that recently Rosa
has taken up with a new boyfriend who is a member of an extremist political party
and they feel that Rosa might not be able to continue to support the progressive
publishing policies of the company. They consult you to consider whether Rosa
could be dismissed as a director, telling you that they are likely to be able to
command the support of all the other shareholders (apart, obviously, from Rosa).
Advise Karl and Fred as to what course or courses of action they should follow.
Advice on answering the question
This is a wide-ranging question requiring you to address a number of issues. It is
important to organise and structure your answer clearly. The following points should
be looked at.
Discuss s.168 CA 2006 and weighted voting. You will need to explain the House of Lords
decision in Bushell v Faith.
A means of defeating Rosa’s voting power on a resolution to remove her is for the
company to alter its articles by special resolution under s.21 CA 2006 (see Chapter 10 of
this guide).
Alternatively, the company might choose to issue additional shares in order to defeat
Rosa’s voting power (ss.549–551 CA 2006). However, she may be able to challenge
such an allotment on the basis that it is for an improper purpose (see Chapter 15 of
this guide, particularly Howard Smith Ltd v Ampol Petroleum [1974] AC 821 and Hogg
v Cramphorn [1967] Ch 254). In any case, if Rosa exercises pre-emption rights (see
ss.561–572 CA 2006) this will frustrate the scheme to defeat her weighted voting rights.
Statutes
Company Directors Disqualification Act 1986 (CDA 1986)
