Saturday 3 rd March 2012 Lecturer: Rowin Gurusami

Lecturer: Rowin Gurusami

COMPANY LAW:Ownership

& Management

Part 1 - Directors

Saturday 3rd March 2012


DIRECTOR Management of company vested in board of directors

CA 2006 does not define ‘director’ beyond stating in s250 that the term ‘includes any person occupying the position of director, by whatever name called’

A test of function, not title

Director’s function to take part in making decision by attending meetings of board of directors


TYPES OF DIRECTORS EXECUTIVE DIRECTORS:-Full-time officers of the company who perform a specific role under a service contract which requires regular involvement in management of company’s business

-Director may also be an employee (although articles will need to make express provision for it)

-Directors who have additional management duties as employees may be distinguished by special titles (e.g. Finance Director) but this does not affect legal position


TYPES OF DIRECTORS NON-EXECUTIVE DIRECTORS:-Normally appointed to board of directors to act as monitors of executive management

-Do not have function to perform in company’s management but is involved in its governance

-Main tasks:1. Contribute an independent view of board’s

deliberations2. Help board provide company with effective leadership3. Ensure continuing effectiveness of executive directors4. Ensure high standards of financial probity on part of

company


TYPES OF DIRECTORS DE FACTO DIRECTORS:-One who has not been formally appointed but has nevertheless acted as a director (Re Kaytech International plc [1999])

- In Secretary of State for Trade and Industry v Tjolle (1998), the court held out the factors to be considered:1. That the person has been ‘held out’ as a director by the

company2. Whether the person was in a position to commit

company to major obligations on basis of access to management accounts

3. Whether he used title of director and took part in management decisions at board level

The main question asked by the court is whether “that person was part of the corporate governing structure”


TYPES OF DIRECTORS SHADOW DIRECTOR:-Person seeking to avoid legal responsibilities of being a director by avoiding appointment as such, but using power (e.g. as major shareholder) to manipulate board of directors

-S251CA 2006 defines as ‘person in accordance with whose directions or instructions the directors are accustomed to act”

- Professional advisors excluded but a professional may be held as shadow director if his conduct amounts to effectively controlling company’s affairs (Re Tasbian Ltd (No 3) [1993])


TYPES OF DIRECTORS Test developed in Re Hydrodam (Corby) Ltd [1994]:-de jure and de facto directors must be identifiable-The person in question directed directors on how to act in relation to company’s affairs or that we has one of the persons who did-The directors did act in accordance with his instructions-That they were accustomed so to act

-Must be shown that board did not exercise any discretion or judgment of its own but acted with directions of others

-Must have controlled at least governing majority of board


APPOINTMENT OF DIRECTORS Every private company is to have at least one director and every public company to have at least two directors (s154 CA 2006)

16 is minimum age for director to be appointed (s157)

A company can be a director

Appointment of director of public company is voted on individually (s160)

The acts of a person acting as director are valid even if found later that there was a defect in his appointment, that he was not entitled to vote on certain issues or that he ceased to hold office


APPOINTMENT OF DIRECTORS Subject to certain statutory provisions, appointment of directors left to articles of association

The persons named in statement of first directors and secretary delivered for registration are deemed to be its first directors and secretary

At the first AGM, all directors shall retire from office and shareholders will elect successors


VACATION OF OFFICE Director may vacate office due to:-Resignation-Not going for re-election-Death-Dissolution of company-Removal-Disqualification

A form should be filed with Registrar whenever and however a director vacates office


REMOVAL OF DIRECTORS s168 provides that (in addition to provisions in articles for removal of directors) a director may be removed from office by ordinary resolution at a meeting of which special notice to company been given by the person proposing it

On receipt of special notice, company must send copy to director and a memorandum of reasonable length shall be issued to members

Articles and service contracts cannot override statutory power. Still, articles can permit dismissal without statutory formalities being observed (e.g. Dismissal by resolution of board of directors)


REMOVAL OF DIRECTORSTo propose resolution to remove director, shareholders must hold at least 10% of paid up share capital (or 10% voting rights if company does not have shares)

Possible for director to entrench himself by including in articles a clause entitled him to weighted voting in event of resolution to remove him (Bushell v Faith [1970])


POWERS OF DIRECTORS Powers of directors defined by articles

Usually authorised to manage the company’s business and to exercise all powers of the company for any purpose connected with the company’s business

They may take any decision which is within the capacity of company unless either the Act or Articles themselves require decision to be taken by members in general meeting


RESTRICTIONS Can be restricted by statute or by articles

Have duty to exercise powers in what they honestly believe to be the best interests of company and for purposes for which powers are given

Statutory restrictions such as alteration of articles or reduction of capital must, by law, be effected by passing a special resolution in general meeting after directors proposed such change


RESTRICTIONS Restrictions by articles can concern borrowing powers of directors. If directors seek to exceed limit, they must seek authority from general meeting

When directors have power, their decisions can be challenged if they exercise power in wrong way

They must exercise power:-In what they honestly believe to be best interest of company (Re Smith v Fawcett Ltd 1942)-For a proper purpose (Bamford v Bamford 1969)


MEMBERS' CONTROLWays of control include:

-Members appoint directors and may remove them from office under s168 or by other means

-Members can, by altering articles (special resolution) re-allocate powers between board and general meeting


AGENCY & THE DIRECTOR Directors are agents of company, not members

Where they have actual or usual authority, they can bind the company

If board of directors permits director to behave as if were a managing director duly appointed, company bound by his actions

Managing director has apparent authority to make commercial contracts for company (Freeman & Lockyer v Buckhurts Park Properties (Mangal) Ltd 1964)


Freeman & Lockyer v Buckhurts Park Properties (Mangal) Ltd (1964)

Articles of property developer company contained power to appoint managing director but it was never done One of directors (to knowledge but without express authority of remainder of board) acted as if he were managing director Later company refused to pay contract fees on grounds that director had no actual or apparent authority Court held company was liable since by its acquiescence it had represented the director was managing director with authority to enter into contracts that were normal commercial agreements and which board itself would have been able to enter


MANAGING DIRECTOR Has apparent authority to make business contracts on behalf of company with outsiders

Actual authority is whatever the board provides

Any other individual director do not have apparent authority to make general contracts but have whatever apparent authority that attaches to their management position


DUTIES OF DIRECTORS The director is in a fiduciary position

Duties used to be embedded in common law but is not in statutory form

s170(4) states that courts have to interpret these statutory principles with regard to pre-existing case law

CA 2006, Part 10 sets down the statutory duties


DUTIES OF DIRECTORS Statutory duties owed by directors are to:

1. Act within their powers (s171)2. Promote the success of the company (s172)3. Exercise independent judgement (s173)4. Exercise reasonable skill, care and diligence

(s174)5. Avoid conflicts of interest (s175)6. Not to accept benefits from third parties

(s176)7. Declare an interest in a proposed

transaction or arrangement (s177)


DUTY TO ACT WITHIN POWER Directors owe duty to act in accordance with company’s constitution & only use powers for purposes they are conferred for

Have fiduciary duty to exercise powers bona fide in what they honestly consider to be the interest of company and for a proper purpose (Bamford v Bamford 1969)

Any shareholder can apply to court to declare a transaction in breach of s171 should be set aside. However, the practice of courts is to remit the issue to members in general meetings to see if they wish to confirm it


DUTY TO PROMOTE SUCCESS OF COMPANY The purpose of the legal framework is to help companies do business and create wealth for shareholders

CA 2006 embraces the principle of ‘enlightened shareholder value, i.e. encouraging longtermism and regard for all stakeholders by directors

Duty of directors to act in good faith to promote success of company for benefit of members as a whole


DUTY TO PROMOTE SUCCESS OF COMPANY When exercising duty, directors must consider:-Consequences of decisions in long term-Interest of their employees-Need to develop good relationship with customers and suppliers-Impact of company on local community & environment-Desirability of maintaining high standards of business conduct and a good reputation-Need to act fairly as between all members of company


DUTY TO EXERCISE INDEPENDENT JUDGEMENT Directors must exercise independent judgement

Should not delegate powers of decision-making or be swayed by influence of others

Can delegate functions but decision need be independent

Duty is not infringed by acting in accordance with any agreement by company that restricts the exercise of discretion by directors or by acting in away authorised by company’s constitution


DUTY TO EXERCISE REASONABLE SKILL, CARE AND DILIGENCE

Director owes duty to company to exercise the same standard of care, skill and diligence of that of a reasonably diligent person with:

-General knowledge, skill and experience that may be reasonably be expected of a person carrying out functions of a director (objective test)-General knowledge, skill and experience that director has (subjective test)

The standard of care is an objective competent standard plus a higher personal standard of application


DUTY TO AVOID CONFLICTS OF INTEREST Duty to avoid circumstances where personal interests conflict with company’s interests

Directors must retain their freedom of action and not fetter their discretion by agreeing to vote as some other person may direct

Must not obtain personal advantage from position as director without consent of company for whatever gain or profit they have obtained


DUTY TO AVOID CONFLICTS OF INTEREST Regal (Hastings) Ltd v Gulliver (1942):

-Directors accountable to company for profit made since that opportunity came to them in their capacity as directors-Immaterial that company has lost nothing-Directors might have kept their profit if the company had agreed by resolution passed in general meeting that they should do so-Professional not accountable for profit since he is not a director


DUTY TO AVOID CONFLICTS OF INTEREST Directors not liable for breach of duty if:

1. Members of company authorised their actions

2. Situation cannot reasonably be regarded as likely to give rise to conflict of interest

3. Actions have been authorised by other directors

Only applies if other directors are genuinely independent from transaction and:

- Articles do not restrict such authorisation (private)

- Articles expressly permit it (public)


DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTIES Prohibits acceptance of benefits (bribes) from third parties conferred by reason of them being a director

Usually accepting a bribe, also breaches duty in s175

Unlike s175, directors cannot authorise an act in breach of s176 but members have that right

Directors will not be in breach if acceptance of benefit cannot reasonably be regarded as likely to give rise to conflict of interest


DUTY TO DECLARE INTEREST Directors required to disclose to other directors nature and extent of any interest (direct or indirect) that they have in relation to a proposed transaction or arrangement with company

Even if not party to transaction, duty applies if they are aware or ought reasonably to be aware of interest

Duty still applies even if company will derive no benefit from contract and director does not hold office anymore (IDC v Cooley 1972) Directors also have duty to declare interest in an existing transaction (i.e. which has already occurred) (s182)


CONSEQUENCES OF BREACH Only company (through the other directors) can bring action against directors

Consequences of breach include:-Damages payable to company where loss suffered-Restoration of company property-Repayment of any profit made by director-Rescission of contract (where director did not disclose an interest)


REMEDIES AGAINST DIRECTORS Type of remedy varies with breach of duty:

-Directors may have to account for personal gain-Indemnify company against loss caused by negligence-If they contract with company in a conflict of interest, the contract may be rescinded by company (company cannot both affirm contract and recover director’s profit)-Court may declare that transaction is ultra vires or unlawful


DISQUALIFICATION OF DIRECTORS Directors may be disqualified under the Company Directors Disqualification Act 1986 (CDDA 1986)

The effect of disqualification order is that a person shall not, without leave of court:‘be a director of a company, or a liquidator or administrator of a company, or be a receiver or manager of a company’s property 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’ s1 CDDA 1986


DISQUALIFICATION OF DIRECTORS Articles often embody statutory grounds of disqualification and some extra grounds:

1. Disqualified by the CDDA 86 or any rule of law

2. Become bankrupt or enter arrangement with creditors

3. Become of unsound mind4. Resign by notice in writing5. Absent for a period of 6 consecutive months

from board meetings held during that period (without leave of absence).


DISQUALIFICATION OF DIRECTORS CDDA 1986 provides that court may formally disqualify a person from being a director (s1) under those grounds:1. Where person is convicted of indictable offence in

connection with promotion, formation, management or liquidation of a company or with the receivership or management of company’s property (s2) (max period 15yrs)

2. Where it appears that person has been persistently in default in relation to provisions of company legislation (s3) (e.g. Returns to Registrar- 3 defaults in 5ys are conclusive evidence of persistent default)

3. Where it appears that person has been guilty of fraudulent trading (intent to defraud creditors or any other fraudulent purposes) (s4) (max period 15yrs)


DISQUALIFICATION OF DIRECTORS4. Where Secretary of State (acting on report made

by inspectors or from information/documents obtained under Companies Act) applies to court for order believing it to be expedient in public interest (s8) (max period 15yrs)

5. Where director was involved in certain competition violations (max period 15yrs)

6. Where director of insolvent company has participated in wrongful trading (s10) (max period 15yrs)

Court must be convinced conduct of directors makes them unfit to be concerned with management of company (s6(1)).


DISQUALIFICATION OF DIRECTORS Examples of offences for which directors can be

disqualified:1. Insider dealing2. Failure to keep proper accounting records3. Failure to read company’s accounts4. Loans to another company for purposes of

purchase of its own shares with no grounds to believe money will be repaid

5. Loans to associated companies on uncommercial terms to detriment of creditors


DISQUALIFICATION OF DIRECTORS Mitigation of disqualification:1. Lack of dishonesty2. Loss of director’s own money in company3. Absence of personal gain4. Efforts to mitigate situation5. Likelihood of re-offering6. Proceedings hanging over director for long

time


DISQUALIFICATION PROCEDURES Company administrators, receivers and liquidators have

statutory duty to report directors to Government where they believe conditions for disqualification satisfied

Directors will then be considered as “unfit” to manage companies generally rather than unfit to manage a particular company

In Secretary of State for Trade & Industry v Thornbury (2008), court held certain conduct can lead to disqualification:

- Lack of ‘commercial probity’ - Gross negligence- Total incompetence

FRAUDULENT TRADING


Fraudulent Trading

- Occurs where the business of a company in liquidation has been carried on with intent to defraud creditors or for any fraudulent purpose (instigated by any individual)

- Civil penalty imposed by s213 Insolvency Act 1986: liable for the debts of the company in insolvency

- Criminal aspect (s993 CA 06) is introduced when business was carried out for the purpose of any kind of fraud

- Required to prove ‘actual dishonesty’

- Knowledge alone is not enough to make someone a party. They must have taken some active step in fraudulent trading

WRONGFUL TRADING


Civil liability for ‘wrongful trading’ means director will have to make such contributions to the company’s assets as the court sees fit if they are find guilty (only directors liable)

Directors of insolvent company liable if liquidator proves:- They knew or should have known there was no reasonable

prospect that company would avoid insolvency and still traded

- Did not take such steps as a diligent person would take

Director will be liable if he did not satisfy the duty to exercise reasonable skill, care and diligence

Documents

Saturday 3 rd March 2012 Lecturer: Rowin Gurusami