Workshop 3 Flashcards
role of a director
The term ‘director’ is not defined in CA 2006; instead s 250 CA 2006 states that ‘director’ includes any person occupying the position of director, by whatever name called.
- Manage the company on a day to day basis – on an agency basis
- Certain actions can only be taken by directors if the shareholders have given authority
- Owe duties to the company
role of shareholder
- Own the company
- Are able to control key decisions through shareholder resolutions e.g. to give directors authority to change the name of the company
- It is common for directors and shareholders to be the same people in a company.
Directors’ authority to manage the company
- CA 2006 reserves certain important decisions for shareholder approval, such as changing the company’s name (unless the articles provide otherwise), amending the articles of association, removing directors and so on.
- The board of a company with MA is usually free under a company’s articles to make decisions on behalf of the company on all other matters (MA 3).
- The directors can therefore act on behalf of the company to employ individuals and decide what they will be paid, enter into contracts with customers and suppliers, buy and sell company property, raise funds by borrowing from banks and authorise the company’s assets to be used as security.
Directors’ accountability
The key provisions are included in Part 10 of CA 2006, which includes directors’ general duties.
Directors can be made to account for wrongs done through civil and criminal actions taken against them for breaching the Companies Acts. They may also be found guilty of criminal actions and sentenced under other legislation e.g. fraud under the Fraud Act 2006, and/or offences under the Theft Act 1968; insider dealing under the Criminal Justice Act 1993; money laundering under the Proceeds of Crime Act 2002.
De jure directors and de facto directors
A de jure director is a director who has been validly appointed at law.
Under 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.
Although a company can be appointed as a director, every company must have at least one director who is a natural person (s 155(1) CA 2006).
The CA 2006 does not prescribe a maximum number of directors and neither do the MA, but a company can put a maximum number of directors into its own articles.
Under s 157 CA 2006 a person may not be appointed as a director unless they are at least 16 years old. ECCTA has now amended CA 2006 from 4 March 2024 prohibiting a person from being appointed as a company director if that person is disqualified under director disqualification legislation, unless they have permission of the Court.
what is a de facto director
someone who assumes to act as a director but has in fact not been validly appointed. The fiduciary duties and liabilities apply to de facto directors as they do to de jure directors.
Shadow directors
A person (usually a shareholder) who tries to exert influence over the board but without being appointed as a director, in an effort to avoid the duties imposed on directors under CA 2006 and the common law.
Section 251(1) CA 2006 defines a shadow director as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.
Section 251(2) makes it clear that professional advisers are not to be regarded as shadow directors e.g. an accountant providing professional advice on the company’s finances will not usually be a shadow director.
Executive and non-executive directors
The CA 2006 does not differentiate between executive and non-executive directors, but in practice there is a distinction. However, note that the duties, obligations and restrictions placed on directors under CA 2006 apply to all directors, executive and non-executive.
Executive directors
An executive director is a director who has been appointed to executive office. Such a director will generally spend the majority, if not all, of their working time on the business of the company and will be both an officer and an employee of his company. Examples include a Finance Director, Managing Director, Marketing Director.
Non-executive directors
A non-executive director is also an officer of the company but will not be an employee of the company. Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders.
Alternate directors
Some companies in their articles provide for alternate directors to take the place of a director where one or more directors are absent.
An alternate director is usually either a fellow director of the company or someone who has been approved by a resolution of the board of directors. The alternate director has the voting powers of the absent director.
The MA do not provide for the appointment of alternate directors and, since it is now possible to hold board meetings over the telephone and to pass board resolutions by means of written resolutions, the use of alternate directors is becoming quite rare.
It is thought that the duties of directors will apply equally to alternate directors.
Company secretary
A company secretary’s main duties are to keep the company books up-to-date, produce minutes of board and general meetings, and make sure that all necessary filings are made at Companies House. It is not a part of their role to take decisions on behalf of the company, which is the domain of either the directors or the shareholders.
In the past all companies were required to have a company secretary. But under CA 2006:
* a private company is not required to have a company secretary (s 270(1) CA 2006) unless the articles require it to have one. If a private company does not have a company secretary, the directors (or any person the directors authorise) may do anything that the secretary was required or authorised to do (s 270(3)(b) CA 2006).
* a public company must have a company secretary (s 271 CA 2006).
Part 12 of the CA 2006 applies to all companies with a company secretary. A public company secretary must have the requisite knowledge and experience, and one of the qualifications set out in s 273(2) CA 2006 (for example, the secretary may be a solicitor or a chartered accountant). The directors appoint the secretary and are required to check that the secretary qualifies under these provisions.
Appointment of directors
CA 2006 does not stipulate a procedure for the appointment of directors, so this is something that will be governed by the Articles of the company.
The MA deal with the matter simply. Companies with MA may appoint a director:
- By an ordinary resolution of the shareholders - MA 17(1)(a)
- By a decision of the directors - MA 17(1)(b)
Service contracts
An executive director will be an employee of the company. As an employee, they should be given a written contract of employment (otherwise known as a service contract), setting out the terms and conditions of employment including duties, remuneration package, notice provisions etc.
- There is no automatic entitlement for directors to be paid for their services – this is something that the board can determine, subject to the provisions of the company’s articles.
- The Company has an obligation to keep its directors’ service contracts (or, where the contracts are not in writing, memoranda of their terms) at its registered office for inspection by the members (s 228 CA 2006).
- The effect of Art 19 MA is that the terms of an individual director’s service contract, including remuneration, are for the board to determine.
- As a general rule, a director’s service agreement will only require the approval of a resolution of the board of directors. However, shareholder approval is required to enter into long-term service contracts under s 188 CA 2006.
Disclosure of identity of directors and secretary
The CA 2006 requires certain details about a company’s directors to be disclosed either publicly or to the members.
Every company must maintain a register of its directors and secretary and should keep these registers at its registered office.
Each company must also notify the Registrar of Companies (ie Companies House) of changes relating to its directors or secretary using forms published by Companies House (eg AP01 for Appointment of Director).
The particulars which must be registered in relation to directors are specified in ss 163(1) and 164 CA 2006 (and those for secretaries in ss 277(1) and 278(1) CA 2006).
The information kept at Companies House is available for inspection by the public, the register kept at a company’s registered office must be open for inspection by any member of the company without charge and by any other person on payment of a fee.
Privacy for Officers of the Company
Section 163(1) CA 2006 specifies that a company’s register of directors must contain the following particulars in the case of an individual (a) name and any former name; (b) a service address; (c) the country or state in which he is usually resident; (d) nationality; (e) business occupation (if any); (f) date of birth.
S.277(1) specifies that a company’s register of secretaries must contain the following particulars in the case of an individual (a) name and any former name; (b) address..
This service address can either be the director’s residential address (if they are not concerned with the need for privacy) or could simply be the company’s registered office and will be the only address available to the public generally. Residential addresses that are already on the public register will not be removed automatically.
Individual directors (but not secretaries) will still have to provide their residential address under s 165 CA 2006, but this information will be kept on a separate, secure register. This register is not open to public inspection.
Disclosure required: annual accounts
Section 412 CA 2006 relates to information about directors’ (and past directors’) remuneration and what information will need to be included in the company’s annual accounts. Two SIs currently set out in detail the information which needs to be included in the notes to a company’s annual accounts. This includes information relating to:
* the directors’ salaries, bonus payments and pension entitlements; and
* compensation paid to directors and past directors for loss of office.
Section 412 CA 2006 also requires details to be disclosed of any payments made to, or receivable by, a person connected to such a director, or a body corporate controlled by a director.
Section 413 CA 2006 relates to the disclosure of information on advances and credits given by a company to its directors and guarantees entered into by a company on behalf of its directors. Section 413 CA 2006 applies to a person who was a director at any time during the applicable financial year.
Removal of a director by the shareholders
- Under s 168(1) CA 2006, a company (i.e. the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.
- Under s 168(2) CA 2006 special notice (28 days) is required of a removal resolution.
- It is not possible for the Board to remove a director (unless the Articles specifically provide for this).
- Directors who are also shareholders are allowed to vote in their capacity as a shareholder on the ordinary resolution to remove them.
other ways in which an individual may cease to be a director are:
Resignation by notice
- A director may simply take the decision to resign from the board by tendering a letter of resignation. This procedure is provided for in MA 18(f). It is usual, although not obligatory, in these circumstances for the board to pass a board resolution accepting the letter of resignation.
Automatic termination
Under MA 18 a person ceases to be a director as soon as:
- the director becomes disqualified from being a director;
- the director becomes the subject of an individual voluntary arrangement (or similar);
- the director becomes bankrupt, or
- a registered medical practitioner who is treating the director states in writing to the company that the director has become physically or mentally incapable of acting as a director and will remain so for more than three months.
Disqualification - Company Directors Disqualification Act 1986 (‘CDDA’)
- The CDDA is the key piece of legislation regarding disqualification of directors. Under this Act, the court may make a disqualification order against a person preventing them, unless they obtain leave of the court, to be a director, liquidator, receiver or in any other way directly or indirectly involved in the promotion, formation or management of a company. The purpose of such an order is to protect the public against the activities of such a director. Grounds for disqualification include fraudulent or wrongful trading or persistent breaches of company law.
- The period of disqualification is for a maximum of 15 years. If a director has been disqualified under the CDDA, it is a criminal offence to participate directly or indirectly in corporate management without leave of the court.
Retirement by rotation
- The model articles for public companies require retirement and reappointment of directors by the members every three years. In addition, all directors of listed companies are subject to annual re-election.
Companies House filing requirements
- When a director leaves office, the company must both update the company’s register of directors and also give notice to Companies House by filing form TM01 (Termination of appointment of director).
The general duties of directors ss 170 – 177 CA 2006
The general duties are set out in sections 171-177 CA 2006 and are as follows:
* Duty to act within powers (s 171 CA 2006);
* Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
* Duty to exercise independent judgment (s 173 CA 2006);
* Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
* Duty to avoid conflicts of interest (s 175 CA 2006);
* Duty not to accept benefits from third parties (s 176 CA 2006); and
* Duty to declare any interest in a proposed transaction (s 177 CA 2006).
Note that directors are also subject to duties under legislation other than CA 2006, eg those obligations contained within the Insolvency Act 1986.
Section 171 CA 2006: Duty to act within powers
- Duty to act within the company’s constitution
The company’s constitution is defined in s 257 CA 2006 and includes everything set out in the company’s articles of association and decisions taken in accordance with the articles (i.e. shareholder resolutions). A director is in breach of this duty if they act without authority, e.g. commit the company to borrow more than the articles allow without prior shareholder approval. - Duty to exercise powers for the purposes for which they are conferred
Directors must not use their powers for improper purposes (e.g. for personal gain).
Section 172 CA 2006: Duty to promote the success of the company
- Section 172 CA 2006 stipulates that a director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
- The Government has stated that ‘success’ should normally mean, for commercial companies, a ‘long-term increase in value’.
- The list of matters to be considered is not exhaustive. It is clear that the list is secondary to the duty to shareholders under s 172 CA 2006, and that the duty is owed to the company and not to the third party.
- In exercising this duty, a director is required to have regard to a range of non-exhaustive matters which are set out in s 172(1) CA 2006, including:
o the likely long-term consequences of any decision
o employees’ interests
o the need to foster relationships with suppliers, customers and others
o the impact of the company’s operations on the community and the environment
o the desirability of the company’s maintaining a reputation for high standards of business conduct
o the need to act fairly as between the members of a company
Although many of these matters were not specifically provided for under the common law, many companies would routinely consider such matters, as a necessary part of good business practice following the concept of ‘enlightened shareholder value’. This is a term used to describe the ‘middle way’ between, on the one hand, running the company purely to maximise shareholders’ interests/profits and, on the other hand, a pluralist approach which involves acting in the interests of a wider group of stakeholders.
Compliance with s 172 CA 2006
- Since the introduction of the statutory duties there has been some uncertainty as to how to balance the various matters in the list, which will inevitably conflict from time to time.
- One fear was that companies may feel the need to respond by having more detailed board minutes to document how they have considered each area for every decision made. Another was that the new duty under s 172 CA 2006 may lead to increased litigation. Neither fear has yet come to pass.
- Many companies are taking the common-sense approach of ensuring board minutes clearly note that consideration has been given to the s 172 CA 2006 duty when taking board decisions particularly, with regard to significant commercial decisions, there will have been the requisite amount of research, discussion and briefing of the board to amply demonstrate consideration of the matters in s 172(1) CA 2006 should the company be challenged.
- The courts appear to be backing this approach given the lack of significant case law on the point since these provisions came into force.
- From January 2019 there is a requirement for certain companies (including all public listed companies) to make a s 172 statement in their accounts about how they have considered and met the duty over the year.
Section 173 CA 2006: Duty to exercise independent judgment
This duty codifies the principle that directors must exercise their powers independently, and not fetter their discretion other than in accordance with s 173(2) which states the duty is not infringed by a director acting:
a) in accordance with an agreement entered into by the company that restricts the future exercise of discreation by its directors; or
b) in a way authorised by its constitution.
They can rely on advice from others but must make their own judgments. Directors must be mindful of the individual nature of this duty when acting.
They cannot blindly follow others’ views without considering the interests of the company.
Section 174 CA 2006: Duty to exercise reasonable care, skill and diligence
The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.
The required level is the level of skill, care and diligence which would be exercised by a reasonably diligent person with:
* the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
* the general knowledge, skill and experience of that director.
The minimum standard expected of a director is that objectively expected of a director in that position. This standard may then be subjectively raised if the particular director has any special knowledge, skill and experience.
Section 175 CA 2006: Directors Duty to avoid conflicts of interest
- This duty is the first of three duties aimed at dealing with conflicts of interest which directors might experience.
- This duty requires a director to ‘avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.’
- This is quite widely drafted and is said to apply ‘in particular to the exploitation of any property, information or opportunity’. It is no excuse for the director to say that the opportunity is not one which the company could have exploited itself.
- The duty is not infringed ‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest_’_ or if the conflict arises:
- in relation to a transaction with the company (eg a transaction between the director and the company) (s 175(3) CA 2006); or
- in relation to a matter which has been authorised by the directors (s 175(4)(b) CA 2006).
Note that s 175(3) CA 2006 expressly excludes conflicts of interest arising in relation to transactions or arrangements with the company. These conflicts are subject to the duty of disclosure in s 177 CA 2006 for transparency purposes but are not prohibited. This seems to be a statutory acknowledgement that many directors will have interests in other companies, and most companies’ articles permit this, provided such interests are declared.
