Directors – Chapter 9

Directors

Definition of director

The term ‘director’ includes ‘any person occupying the position of director, by whatever name
called’: s250 CA06.

The decision as to whether someone is a director is therefore based on their function, not their title.

A director must normally be aged at least 16. Under the SBEEA 2015 all directors must be natural
persons.

De Jure Director

A person who is formally and legally appointed or elected as director in accordance with the articles
of association of the company and gives written consent to hold the office of a director.

De Facto Director

A person who is not a de jure director but performs the acts or duties of a director.

Any person, who is not technically a director, but according to whose directions and instructions
other directors and employees are accustomed to act, is legally deemed a de facto director.

A de facto director owes the same duties to the company as a de jure director, i.e. they are subject
to both statutory duties and prohibitions, and they also owe fiduciary duties to the company.

Types of director

Managing director  A director appointed to carry out overall day-to-day management

(MD/CEO) functions.
 The model articles allow the board to delegate to the MD/CEO any
powers they see fit.
 The MD/CEO has a dual role – member of board and also executive
officer.
 Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal)
Ltd (1964) – the MD/CEO has the apparent authority to enter into all
contracts of a commercial nature.
Shadow director  A person in accordance with whose directions or instructions the
directors of a company are accustomed to act’: s251 CA06. As
discussed earlier this means that it is the persons function rather
than their title that defines them as a director.
 Used to regulate activity by those who exercise control over a
company but try to evade their responsibilities and potential
liabilities as a director.
 All the rules of company law are equally applicable to shadow
directors.
 Not a shadow director if advice is given only in a professional
capacity e.g. accountants and lawyers.
Executive director  Likely to be a full-time employee involved in management.
 Performs a specific role under a service contract.
 May be distinguished by a special title such as ‘Sales Director’ or
 ‘Finance Director’
Non-executive  Part-time.
director (NED)  Not an employee.
 Brings outside expertise to board.
 Contributes an independent view.
 Exerts control over executive directors.
 Subject to the same duties, controls and potential liabilities as
executive directors.
Chairman of board  Chairs meetings of board.
 Acts as spokesman for the company.
 Has a casting vote.
Alternate director  Appointed by a director to attend and vote for them at board
meetings which they are unable to attend.
 Can be another director within the same company or more usually
an outsider.

Appointment, disqualification and removal

Appointment

First Directors  Public companies need a minimum of two; private companies need
one.
 There is no statutory maximum, but the articles may specify a
maximum number.
Appointment  Usually appointed by the existing directors or by ordinary
procedure resolution.
 Directors of public companies should generally be coted on
individually: s160 CA06
 A director’s actions are valid notwithstanding that their
appointment was defective: s161 CA06.
Model articles for  At the first AGM all the directors retire and offer themselves for re-
public companies election by ordinary resolution.
 At each AGM on-third retire (those most senior). They can be re-
elected.
 Casual vacancies are filled by the board until the next AGM when
the new directors must stand for election.
Publicity  The company must notify Companies House within 14 days of new
appointments and any changes in particulars. It must also enter
details in the register of directors.
Service contracts  Cannot exceed two years unless they have been approved by the
shareholders by ordinary resolution: s188 CA06.
 If s188 CA06 is breached, the service contract is deemed to state
that the company can terminate the contract at any time by giving
reasonable notice.
 The service contract must be kept open for inspection at the
company’s registered office.
 The directors of a quoted company must prepare a directors’
remuneration report for each financial year of the company. The
report will contain for each person who was a director during the
year:
 a) Date of the contract, the unexpired term and the details of any
notice periods
b) Any provision for compensation payable upon early
termination of the contract; and
c) Such details of other provisions in the contract as are
necessary to enable members of the company to estimate the
liability of the company in the event of early termination of the
contract.
Compensation for loss  Gratuitous payments must be disclosed to all members and
of office approved by ordinary resolution. If not approved, director holds
payment on trust for the company.

Disqualification

Model articles – directors must vacate their office if they become bankrupt.

Company Directors (Disqualification) Act 1986 (CDDA 1986)

The CDDA 1986 was introduced to prevent the misuse of the limited liability status of companies by
directors who would set up a new company to carry on essentially the same business as an old
company which has ceased trading with unpaid debts.

A disqualified director cannot be concerned in the management of a company directly or indirectly

or act as a liquidator, receiver or promoter.

The CDDA 1986 identifies three distinct categories of conduct:

 General misconduct in connection with companies. This includes:

- Conviction of a serious offence in connection with the management of a company either
in the UK or abroad (maximum fifteen years disqualification).
- Persistent breaches of CA06, e.g. failure to file returns (maximum five years
disqualification).
 Disqualification for unfitness. This includes:
- Where an investigation by the Department for Business, Energy and Industrial Strategy
finds the director unfit to be concerned in the management of the company.
- Where the liquidator’s report finds the director unfit to be concerned in the
management of a company (minimum two years, and maximum fifteen years,
disqualification.
 Other cases for disqualification. This includes:
- Participation in fraudulent or wrongful trading (maximum 15 years disqualification).
- Where an undischarged bankrupt has been acting as a director.
- Where a person acts on behalf of a disqualified director.

Breach of a disqualification order:

 This is a criminal offence, which could result in a fine and imprisonment.

 The disqualified director (or any person who acts on their instructions) is personally liable for the
debts of the company while so acting.

Removal
Under s168 CA06, a company may by ordinary resolution remove a director before expiration of
their period of office notwithstanding anything in:

 Its articles, or
 Any agreement between the director and the company.

Thus a director can be removed despite any provision to the contrary in their service contract,
although they can sue for damages if the removal is in breach of their contract. The company must
follow this procedure to remove a director:

1. Special notice (28 days) is required of the resolution by persons wishing to remove a
director. The company must forward a copy of the resolution to the director concerned.
2. Notice of the meeting goes to the director and all members entitled to attend and vote.
3. The director in question can require the company to circulate written representations to
members.
4. At the meeting, the director can read out representations if there was no time for prior
circulation. The director must be allowed to attend the meeting and to speak. An ordinary
resolution is needed to remove the director.

The power of the members to remove a director may be limited: Bushell v Faith (1970).

TYU1 – B ✓

Duties

General duties

Prior to the CA06, common law rules, equitable principles and fiduciary duties made up the law on
directors’ duties. A fiduciary duty is a duty imposed upon certain persons because of the position of
trust and confidence they are in.

These have now been replaced by the specific statutory duties provided in the CA06 s170. However,
the old case law still has relevance in interpreting the new legislation and illustrating its application.

Duty to act within powers: s171

A director must act in accordance with the company’s constitution and only use their powers for the
purpose which they were given. They have a fiduciary duty to the company to exercise their powers
bona fide in what they honestly consider to be the interests of the company.

If this rule is not adhered to, the transaction will be void unless it is approved by the shareholders.

Hogg v Cramphorn (1967)

Duty to promote the success of the company: s172

A director must act in good faith, in a way which promotes the success of the company and for the
benefit of the members as a whole.

The Act introduced the concept of ‘enlightened shareholder value’ and required the directors to
have regard to:

 The like consequences of any decision in the long term

 The interests of the company’s employees
  The need to foster the company’s business relationships with suppliers, customers and
others
 The impact of the company’s operations on the community and the environment
 The desirability of the company maintaining a reputation for high standards of business
conduct and
 The need to act fairly as between members of the company.

Companies may have wider purposes than just the benefit of members such as charitable companies
and community interest companies. S172(2) provides that where that is the case, then the duty of
the director is to act in a way that would be most likely to achieve that purpose.

S172(3) provides that the general duty is subject to any specific enactment or rule of law requiring
directors to consider or act in the interests of creditors of the company. This provision there formally
recognises that the duty to the shareholders is displaced when the company is insolvent or heading
towards insolvency.

Duty to exercise independent judgement: s173

The director of a company must exercise independent judgement.

This duty is not infringed by a director acting:

 In accordance with an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors, or
 In a way authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence: s174

The standard expected of a director is that of a reasonably diligent person with:

 The general knowledge, skill and experience that could reasonably be expected of a director,
and
 The actual knowledge, skill and experience held by the director.

The reasonableness test therefore consists of two elements:

1. An objective test – a director in carrying out their functions, must show such care as could
reasonably be expected from a competent person in that role. It is not a defence for a
director to claim lack of expertise.
2. A subjective test – a director is expected to show the degree of skill which may reasonably
be expected from a person with their knowledge and experience.

Re City Equitable Fire Insurance Co (1925)

Also, Dorchester Finance Co Ltd v Stebbing (1989)

Duty to avoid conflicts of interest: s175

A director must avoid any situation which places them in direct conflict with the interests of the
company or the performance of any other duty.

IDC v Cooley (1972)

The IDC case also illustrates that an individual may still be subject to the duties even after they cease
to be a director.
The accountability arises from the mere fact of having made a profit, it is not a question of loss to
the company.

Regal (Hastings) Ltd v Gulliver (1942)

Duty not to accept benefits from third parties: s176

A director must not accept any benefit from a third party which arises by reason of them being a
director or performing/not performing an act as a director, unless acceptance cannot reasonably be
regarded as likely to give rise to a conflict of interest.

Boston Deep Sea Fishing & Ice Co v Ansell (1888)

Duty to declare interest in proposed transaction or arrangement: s177

A director is required to declare the nature and extent of any interest, either direct or indirect
through a connected person that they have in relation to a proposed transaction or arrangement
with the company. Even if the director is not a party to a transaction, the duty may apply if they are
aware or ought reasonably to have been aware, of the interest.

Aberdeen Railway v Blakie (1854)

Breach of directors’ duties

Directors owe their duties to the company as a whole, not to individual members. Percival v Wright
(1902).

 The director may be required to make good any loss suffered by the company.
 Contracts entered into between the company and the director may be rendered voidable.
 Any property taken by the director from the company can be recovered from them if still in
their possession.
 Property may be recovered directly from a third party, unless that third party acquired it for
value and in good faith.
 An injunction may be appropriate remedy where the breach has not yet occurred.

S232 CA06 provides that any provision to exempt a director from or indemnify them against any
liability for breach of duty or negligence is void.

S239 CA06 states that the company can ratify a breach of duty by passing an ordinary resolution.

TYU 2 – B ✓

Powers

The division of power within a company

The division of power within a company is between the board of directors who manage the
business on a day-to-day basis and the members who make major decision about the
running of the company’s business in a general meeting.

Directors are required to exercise their powers in accordance with the company’s
constitution i.e. the articles, which usually authorise the directors ‘to manage the company’s
business’ and to ‘exercise all the powers of the company for any purpose connected with the
company’s business’.
Nb that the power to manage the business of the company is given to the board as a whole,
not to the individual directors. Where a company’s articles delegate the management of the
company’s business to the board, the members have no right to interfere in decisions made
by the board. Directors are not agents of the members and are not subject to their
instruction as to how to act.

Shaw v John Shaw (1935)

There are some restrictions which mean that power is placed in the hands of the members
rather than the directors:

 Some actions require a resolution

 A director can be removed at any time by an ordinary resolution of the members and they
may see fit to exercise this right should their views be ignored
 The members can alter the articles by passing a special resolution. This power could
therefore be used to restrict the director’s powers.

The control of directors

Although the directors manage the company on a day-to-day basis, a company is ultimately
controlled by its members. Most decisions require a majority of over 50% (although some require
75%) therefore shareholders who are in the minority may find that their wishes are ignored.

Members can exercise their votes in their own interests. They are not required to act for the benefit
of the company.

Until Model Article 4, the shareholders may, by special resolution, direct the directors to take, or
refrain from taking, specified action.

Statutory control over directors

Certain matters require the approval of the members in a general meeting in order to be valid.

Directors’ service contracts: s188 CA06

Directors’ service contracts lasting more than two years must be approved by the members.

Substantial property transactions: s190 CA06

A substantial property transaction occurs where a director acquires from the company (or vice versa)
a substantial non-cash asset. An asset is ‘substantial’ if its value either exceed £100k or exceeds 10%
of the company’s asset value and is more than £50k.

Failure to obtain the members’ approval results in the following consequences:

 The transaction is voidable by the company, unless the members give approval within a
reasonable period.
 The director is liable to account to the company for any gain or indemnify it against any loss.

Loans to directors: s197 CA06

Any loans given to directors, or guarantees provided as security for loans provided to directors, must
be approved by members.
Non-contractual payments to directors: s217 CA06

Any non-contractual payments to directors for loss of office must be approved by the members.

Authority of directors

At common law

Individual directors cannot bind the company without being given authority to do so. There are
three ways in which this authority may be given:

Express  Where authority is expressly given, all decisions taken are

binding.
Implied  Authority flows from a person’s position.
 The person appointed as the managing director has the implied
authority to bind the company in the same way as the board.
 The MD/CEO is assumed to have all the powers usually exercised
by an MD/CEO.
Apparent/Ostensible  Such authority arises where a director is held out by the other
board members as having the authority to bind the company.
 If a third party acts on such a representation, the company is
estopped from denying its truth: Freeman & Lockyer v Buckhurst
Park Properties (1964).

Transactions beyond the board’s powers

S40 CA06 states that the power of the directors to bind the company, or to authorise another to
bind the company, will not be limited by anything in the company’s constitution, provided the other
party is acting in good faith.

S40 goes on to state that even where there is actual knowledge of the lack of authority this is not
enough to count as lack of good faith so, on the face of it, any contract entered into by the board of
a company will be binding.

Where, however, the third party to the transaction is also a director of the company or a person
associated with a director, the transaction becomes voidable at the company’s instance: s41 CA06.
Moreover, the third party director or associate, and any director who authorised the transaction is
then liable to compensate the company for any profit made or to indemnify the company for any
loss or damage arising, whether the company chooses to avoid the contract or not.