Company Law: Directors and Officers
1 General Points
A director is anyone who occupies the position of ...
A shadow director is a person in accordance with whose instructions the directors are accustomed to act
De facto director – a person who purports to act as though they were a director
Alternate director – a person appointed by a director who is unable to attend a board meeting
Executive directors – more on these next
Non – executive directors
Integral element of corporate governance
Bring an independent view
Help in providing effective leadership
Help to establish and maintain financial probity
Keep a watchful eye on the effectiveness of the executive directors
2 Number and Eligibility
Private company – at least one
Public company – at least two
Anyone may be a director (but some restrictions)
Must be over 16
A company may appoint a corporate director, but must have at least one natural-person director; proposed further restrictions should not be treated as commenced unless confirmed for the exam period
Must not be disqualified under CDDA (see later)
Must not be bankrupt
Loss of capacity is not a universal statutory disqualification; model articles may contain vacation provisions
Six-month absence is a model-article vacation provision, not a general statutory eligibility rule
3 Company Directors Disqualification Act
On application to the Court, a director may be disqualified by court order on a number of grounds:
for an offence committed in the promotion, formation, management, liquidation or striking off a company
where persistently in default (3 offences in 5 years) of filing returns
when found guilty of fraudulent or wrongful trading
when involved in a company insolvent liquidation
following a Department of Trade investigation
Disqualification periods depend on the statutory ground and seriousness; the maximum may be 15 years
breaking the disqualification order up to 2 years in prison
4 Directors Appointment
First directors – named in documents sent to registrar before incorporation
Subsequent directors may be appointed by :-
Members in general meeting
Other directors – to fill a casual vacancy
The court (rare)
A lender (if part of the loan agreement)
Administrator – under an administration order
1/3 rotation procedure
FTSE top 350 company? All directors retire every year
Appointed by ordinary resolution
Registrar notified
5 Directors Removal
Ordinary resolution
Special notice
28 days notice to company
The company gives members the applicable meeting notice; there is no separate fixed 21-day rule
Opportunity to make written representations of reasonable length and not defamatory in nature
Reasonable length
Member-requisition thresholds are separate from the statutory director-removal procedure
Notice to registrar
Weighted voting rights can make removal impossible
Bushell v Faith
Company may have to pay substantial compensation to a removed director (Southern Foundries v Shirlaw)
6 Directors – Statutory Duties
2006 Act put into statute many of the established common law principles
7 duties
Act within their powers
Perform their duties with reasonable skill, care and diligence
Promote success of company (see next)
Independent judgement
Avoid conflicts of interest
No benefits from third parties
Declare interest in transactions/contracts
Common law cases which the courts will follow in interpreting these statutory duties follow
7 Directors’ Duties – Common Law Cases
Re City Equitable Fire Insurance
Re Brazilian Rubber Plantations and Estates
Dorchester Finance Co v Stebbing
Cook v Deeks
IDC v Cooley
Regal (Hastings) v Gulliver
Peso Silver Mines v Cropper
Howard Smith v Ampol Petroleum
Bamford v Bamford
Hogg v Cramphorn
Clemens v Clemens
8 Directors – Promoting Success
Statute trying to encourage long-term approach by directors
Directors to have regard for all stake-holders
Non-exhaustive list of matters for directors to consider:
Long-term consequences of their decisions
Employees’ interests
Good relationships with customers and suppliers
Local community and environmental impact
High standards of business conduct
Good reputation
Fair treatment for all members
9 Directors – Controls
Service contracts ≥ 2 years require approval by members
Acquisition of non-cash assets need members’ approval if ≥ 10% of company’s assets
….but not less than £5,000
…and always if > £100,000
No company may lend money, provide security nor guarantee a loan to a director of itself, nor of its holding company unless approved by members
Relevant companies may use the statutory minor-transaction exception for a loan or quasi-loan not exceeding £10,000
Relevant companies may use the statutory minor-transaction exception for a credit transaction not exceeding £15,000; otherwise member approval is required
The statutory minor-transaction exception for loans, quasi-loans and related security is £10,000
Loans by money lending companies allowed for purchase or improvement of main or only residence up to £100,000
Relevant company restrictions apply also to connected persons
10 Directors – Remedies
Make them account for personal gain (Regal (Hastings) v Gulliver)
Make them indemnify the company against loss caused by their negligence (see below)
Rescind the contract where director has a conflict of interest
Ask the court to declare a transaction is ultra vires
Directors are not liable for the acts of other directors
May be held liable by the court looking behind the veil of incorporation
May be held liable by the court for fraudulent or wrongful trading
Liable for negligence?
Not if honest (Pavlides v Jensen)
But if negligence results in personal benefit? (Daniels v Daniels)
11 Company Secretary
Every public company must have one
Should be appropriately qualified
Duties, determined by the directors, are administrative in nature (Panorama Developments v Fidelis Furnishing Fabrics)
Maintaining company’s statutory records (see later)
Filing returns with the registrar
Taking minutes of meetings
Ensuring the company complies with statutory requirements
Signing documents as required by law
Review and amend confirmation statement sent annually by Registrar of Companies in place of the former Annual Return
Under principles of corporate governance should also:-
Advise the board on governance matters
Arrange the induction process for new neds
Enable effective communication between board and its various sub-committees
Central register
as a result of the coming into force of the Small Business, Enterprise and Employment Act in 2015, private companies can now elect to have many of their statutory records maintained in a central register at Companies House
these include:
the register of members
the register of overseas branches
the register of directors
the register of directors’ residential addresses
the register of persons with significant control
12 Company Secretary: Statutory books
every company must maintain certain records required by statute – “the statutory books”
these records must be kept at the company’s registered office, unless ...
... the register of members is maintained by an independent organisation – the company’s registrars
in this situation, certain other books may be kept also at the offices of the company’s registrars
registers include:
members
directors
secretary
overseas branches
registrable charges are filed at Companies House rather than kept as a universal statutory register
debenture holders
directors’ conflict declarations and transaction records, where required
directors’ residential addresses
substantial shareholders
persons with significant control (PSC) (see below)
PSCs are those people that satisfy any of the following criteria:
they hold >25% of the company’s shares
they hold > 25% of the company’s voting rights
they have the right to appoint and remove a majority of the company’s board of directors
they are individuals that have the right to exercise significant control over the company
where a trust can exercise significant control, they are a member of that trust with significant control over the trust
13 Auditors
Required unless a statutory audit exemption applies, including relevant small-company and dormant-company exemptions
Appointed by:-
Directors (first and casual vacancies)
Members (subsequent and casual vacancies)
Secretary of state (if no-one else does)
Must be appropriately qualified
Cannot be :-
Director or employee of the company
Partner or employee of the above
Undischarged bankrupt
Professionally prevented from
Owning beneficial interest
Being close relative of company officers or employees
14 Auditors – Rights and Duties
Rights
Access to company records
Information and explanations
Notice of and attendance at company general meetings
Written representations (when proposed for removal)
Receive copies of proposed written resolutions
Duties
Express an opinion on truth and fairness (and proper preparation)
Report if directors’ report is inconsistent or misleading
(For quoted companies) report on certain elements of the directors’ remuneration report
Auditors should sign and date the audit report
Report, by exception, if proper accounting records not kept
Company Law: Directors and Officers
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