Week 8 company law

Lecture 8: Company Law II

Who manages the company?

The directors of a company are responsible for managing the affairs of the company. They are responsible for the day-to-day management of the company and for developing company strategy and policy. The Board of Directors is considered the "mind" of the company and has the responsibility for managing its affairs.

Who are the directors?

To become a director, the minimum requirements are as follows:

Private limited companies must have at least one director, while public limited companies must have at least two directors.

The articles of association may provide for additional directors.

There is no statutory maximum age limit for a natural person, but there is a minimum age of 16 for both public and private companies.

Under the Companies Act 2006, as long as a company has at least one natural person as a director, they can also have corporate directors (i.e. other companies as directors).

The Company Directors Disqualification Act 1986 allows a court to disqualify any person from being a director.

Who are the board of directors?

The board of directors is responsible for managing the affairs of the company and developing its strategy and policy. They are the "mind" of the company and have the authority to delegate some of their powers to individual directors to act on their behalf. The board also oversees the day-to-day management of the company and ensures that it is managed in the best interests of the shareholders, while also taking into account the interests of other stakeholders such as employees and creditors.

The board of directors has the authority to make decisions about the company and is accountable to the shareholders for the company's performance. In larger companies, there is often a separation of ownership and control, and the directors play a crucial role in balancing the interests of the shareholders with the management of the company. They are also responsible for ensuring good corporate governance, which includes producing annual audited accounts for shareholders and adhering to rules related to corporate governance.

What are board meetings?

During board meetings, directors come together to make decisions and oversee the company's operations. The quorum, which is the minimum number of directors required to be present, is usually specified in the company's articles. If the number of directors falls below the quorum during a meeting, the board can only act to fill vacancies or call a general meeting of the shareholders.

The chairman of the board, appointed by the board of directors, plays a crucial role in ensuring the meeting proceeds efficiently. The chairman is responsible for providing an agenda for the meetings and overseeing that the functions of the board are competently carried out. In some cases, the chairman may also have a casting vote as per the articles.

Minutes of the board meetings must be kept and maintained. These minutes serve as an official record of the meeting, documenting the decisions made and the discussions held. Directors and auditors have the right to inspect these minutes, as they are critical for transparency and accountability.

What are the types of directors?

The types of directors include:

Executive Directors: These directors have management responsibilities in the company and may hold positions such as finance director, managing director, and sales director. They usually work full time for the company and have a contract of employment, making them employees of the company.

Non-Executive Directors: These are lay directors who are not employed by the company and do not receive a salary but may be paid a fee. Their primary function is to attend board meetings.

De Facto Director: This is a person who acts as a director, although not validly appointed. They become a director through conduct and have the liabilities, duties, and powers of a properly appointed director.

Shadow Director: A shadow director is a person (natural or corporate) whose directions or instructions the directors of a company are accustomed to follow. They are subject to the same general duties as appointed directors.

Alternate Directors: When a director is unable to attend a board meeting, they may be allowed to appoint a person to act in their place and vote on their behalf as an alternate director, provided the articles allow for such an appointment.

What is appointment and retirement?

The process of appointment and retirement of directors involves several key steps:

Appointment:

When a company is first formed, the initial directors are named in the application for registration sent to the Registrar of Companies. New directors can be appointed to replace existing ones or as additional directors, as outlined in the company's articles. Generally, directors can be appointed by ordinary resolution at a general meeting or by the existing directors. In public companies, new directors are typically appointed by the Board and their appointment lasts until the next annual general meeting, where shareholders vote to re-appoint them. Retirement and Resignation:

Directors can retire from office at the end of a set period or resign at any time. Some articles allow for retirement and re-election of directors after a specific number of years. Non-executive directors in public companies and large private companies often retire by rotation every three years, with the option to stand for re-election. Removal:

A director can be removed before the expiration of their term by an ordinary resolution of the shareholders at a general meeting. Shareholders proposing the dismissal of a director must give the company at least 28 days' notice, and the director in question has the right to attach a written statement to the proposal for dismissal. Overall, the process involves initial appointment, potential retirement, and the possibility of removal through shareholder resolution.

What is the removal of directors?

These are the different ways in which directors can be removed:

An ordinary resolution is a decision that is voted on by more than 50% of members, either present at a general meeting or voting by proxy. It is used for routine business matters and does not require a higher level of approval. Giving a special notice of 28 days is significant because it is required for certain actions such as proposing the dismissal of a director or bringing criticism to the shareholders' attention. This notice period allows the company and the affected parties to prepare and respond appropriately to the proposed action.

Bushell v Faith is a case where a company had three shareholders, who were also the directors. Each shareholder held 100 shares, and the company's articles stated that in a resolution to remove any director, the shares owned by that director should carry three votes per share. The Companies Act 1948 (now CA 2006, s 168) allowed companies to have weighted voting rights on shares, and the court found the article to be valid. As a result, the resolution to remove one of the directors was defeated due to the weighted voting rights specified in the company's articles.

The process of vacation of office under the articles involves several scenarios. If a director becomes bankrupt, suffers from a mental disorder, or is absent from board meetings for a consecutive period without permission, the board can resolve to vacate the director's office. Additionally, a directorship ceases on the death of a director or if the company becomes insolvent and goes into liquidation. If the articles require directors to hold a certain number of shares, failure to obtain or hold the requisite number of shares will result in vacation of office.

Furthermore, the removal of a director can also occur through a shareholder resolution, which must be proposed with special notice and the director in question has the right to attach a written statement to the proposal for dismissal and speak at the meeting.

Finally, retirement and resignation are also part of the process, where directors can retire from their office at the end of a set period, resign at any time, and in some cases, retire and seek re-election after a set number of years.

Under the Company Directors Disqualification Act 1986, a court has the discretionary power to disqualify persons as directors in certain circumstances, while in other circumstances the court must disqualify them. A court may make a disqualification order for up to 15 years in the following circumstances:

Where a person has been convicted of a serious offence in connection with the promotion, formation, management, or liquidation of a company. Where, on the winding up of a company, it appears that a person has been guilty of fraudulent trading. Where a director is guilty of certain breaches of competition law or participating in wrongful trading. Where the Secretary of State considers it to be in the public interest that a person is disqualified from acting as a director. Additionally, a court may make a disqualification order for up to five years where a person has persistently failed to comply with company legislation requirements, and must make a disqualification order for between two and 15 years where a person has been a director of an insolvent company and their conduct makes them unfit to be concerned in the management of a company.

What type of authorities do directors have?

Directors have both actual and apparent (or ostensible) authority. Actual authority can be express or implied, and it is the authority given to directors by the company, either explicitly or implicitly. Apparent authority, on the other hand, exists when actual authority does not, but the company holds out a director as having authority, and a third party relies on it. In addition, the extent of the directors' powers is defined by the articles of the company, and the directors must always exercise their powers for the proper purpose for which they were given and in the best interests of the company.

The case of Freeman & Lockyer v Buckhurst Park Properties Ltd is about a situation where a director of a company made contracts as if he were the managing director, even though he had never been appointed to that position. Despite lacking actual authority, the other directors knew about this and allowed it to happen. The company refused to honor one of the contracts made by this unauthorized director. The court held that the company was still liable for the contract because they had held out the director as having the necessary authority, and the third party had reasonably relied on this representation. Therefore, the director had apparent authority to bind the company.

When directors act without any authority, or exceed the authority given to them in the company's articles or delegated by the Board, the situation is governed by section 40 of the Companies Act 2006. Under this section, the powers given to directors (or persons authorized by the directors) to act on behalf of the company are protected if a director acts outside their authority. In such cases, the company may still be bound by the transactions entered into by the director, as long as the third party acted in good faith and reasonably relied on the representation that the director had the necessary authority to bind the company.

What are the duties of directors?

The specific duties (Seven Codified Duties) of directors include the following:

Act within their powers
Promote the success of the company
Exercise independent judgment
Exercise reasonable skill, care, and diligence
Avoid conflict of interest
Not accept benefits from third parties
Declare an interest in any proposed transaction or arrangement with the company

These duties are set out in the Companies Act 2006 and are to be interpreted and applied in the same way as the common law rules or equitable principles that they replaced. Directors are also required to act in good faith, honestly, and with due care, skill, and diligence.

What is the duty to act within powers (proper purpose) s.171?

The duty to act within powers, or proper purpose, under section 171 of the Companies Act 2006 refers to the requirement for directors to act in accordance with the company's constitution (articles plus later resolutions and agreements made by the company) and to only exercise their powers for the purposes for which they were given. This means that directors must adhere to the established rules and regulations governing the company and ensure that their actions are aligned with the objectives for which their powers were granted.

In Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas Plc (2015), the shareholders E and G were subjected to restrictions on their shares by the directors of JKX, under the belief that E and G were planning a corporate raid. However, it was found that the directors had used their powers for an improper purpose, as the powers had been given for a different reason. The case established that when directors act outside their powers or use their powers for a collateral purpose, the transaction may be ratified by the shareholders in a general meeting, even retrospectively. The Companies Act 2006 allows for ratification in cases where a director's conduct amounts to negligence, default, breach of duty, or breach of trust. However, if the company is insolvent, the transactions must not prejudice the interest of company creditors.

What is the duty to promote the success of company s.172?

The duty to promote the success of the company under section 172 entails that a director must act in a way that they honestly believe would be most likely to promote the success of the company for the benefit of its shareholders as a whole. This means that a director must act in the company’s best interests. Additionally, the director must take into account factors such as the likely long-term consequences of any decision, the interests of the company’s employees, the need to develop good business relationships with suppliers, customers, and others, the impact of the company’s activities on the community and the environment, the desirability of maintaining a reputation for high standards of business conduct, and the need to act fairly between shareholders. It is up to the directors to decide whether a particular factor is relevant to any decision they make, and how much weight to give it. The directors must always act honestly, in good faith, and with due care, skill, and diligence.

The case of Odyssey Entertainment Ltd (in liquidation) v (1) Kamp and others (2012) involved a director, referred to as D, who was working for C Ltd, a company involved in film distribution rights. D secretly started undertaking work for his own benefit without informing C Ltd's Board of Directors. He also misled the Board about C Ltd's financial prospects, after which the Board decided to wind up the company. The court found that D's actions were not in the best interest of C Ltd and therefore breached his duty of good faith under section 172. Additionally, D was found to be in breach of his duty to avoid a conflict of interest under section 175 by undertaking work for his own benefit.

What other duties are there?

The specific duties under sections 173 and 174 of the Companies Act 2006 are as follows:

Section 173:

Duty to exercise independent judgment: Directors must exercise their powers independently and not be influenced by external pressures. Section 174:

Duty to exercise reasonable skill, care, and diligence: Directors are required to exercise the care, skill, and diligence that would be expected from a reasonably diligent person with the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the director's functions.

In the case of Dorchester Finance Co Ltd v Stebbing (1989), a money-lending company had one executive director and two non-executive directors who were both accountants. The non-executive directors occasionally visited the company and signed blank cheques for the executive director to use. The executive director made loans that the company could not reclaim. The company brought an action for negligence against all three directors. The court ruled that all the directors were liable for failing to exercise reasonable skill, care, and diligence, without distinguishing between the standards expected of executive and non-executive directors.

In the case of Brumder v Motomet Service and Repairs Ltd, B, who was the sole director of a company, neglected health and safety issues, leading to the company breaching its health and safety duty and B losing a finger. B then sued the company, but the court ruled that B was in breach of his duty under s 174 and could not claim against the company. It was also noted that it is the company that decides whether to sue the directors for their negligence, and the company, acting through its shareholders, may ratify a director’s failure to exercise his duty of care, skill, and diligence.

What conflicts of interest are there?

Directors can face various types of conflicts of interest, including:

Exploitation of property, information, or opportunity: A conflict of interest can arise if a director utilizes company property, information, or opportunities for personal gain, even if the company does not suffer a direct loss.

Competition with the company: When a director engages in activities that directly compete with the company, it creates a conflict of interest.

Use of opportunities gained through the director's position: If a director takes advantage of opportunities that they became aware of through their position in the company for personal gain, it creates a conflict of interest.

Undisclosed personal interests in transactions: If a director has a direct or indirect interest in a proposed transaction or arrangement with the company and fails to disclose it, a conflict of interest arises.

Secretly accepting benefits from third parties: Directors must avoid accepting benefits from third parties that could influence their decision-making in a way that conflicts with the interests of the company.

These are some of the key types of conflicts of interest that directors must navigate to fulfill their duties effectively and maintain the trust and confidence of shareholders and other stakeholders.

In the case of IDG v Cooley, Cooley, an architect and managing director of a building consultancy company, breached his duty to the company. He was in charge of negotiations for a contract with Eastern Gas Board. When it became clear that the Gas Board would not award the contract to his consultancy company, Cooley accepted the work privately and resigned from the company under false pretenses. The company sued Cooley for the profits he made on the contract, and the court held him accountable for those profits. This case demonstrates that a director can be held accountable for breaching their duty if they take advantage of an opportunity they became aware of through their position in the company, even if the company itself would not have been able to take up the opportunity.

Killen v Horseworld Ltd and Others (2012)" concerns K, a former director of Horseworld Ltd, who exploited a media broadcasting opportunity that came up while she was on the board of Horseworld Ltd to secure a contract for her own company. The court's decision was that despite no longer being a director of Horseworld Ltd, K was in breach of her duty to avoid conflicts of interest under section 175 of the Companies Act 2006. Consequently, K was ordered to pay any profits her company had made to Horseworld Ltd.

What are the breach of duties by the director?

Directors can potentially breach their duties in several ways, including:

Conflict of interest: A director must avoid situations where they have, or could have, a direct or indirect interest that conflicts with the interests of the company.

Secret profits: Any secret profit gained by a director as a result of breaching their duties can be claimed by the company.

Failure to disclose interest: Entering into a contract without disclosing an interest can lead to a breach of duty, and the contract may be voidable.

Taking property from the company: If a director has taken any property from the company, it can be reclaimed provided it is still in the director's possession or has not passed to a third party who acquired the property for value and in good faith.

Continuing breach or intended breach: If the breach is continuing, or if it is clear that a director intends to commit a breach, the company can seek an injunction from a court to prevent the breach.

Joint and several liability: If more than one director is in breach of their duties, their liability is joint and several, meaning the company can take action against any or all of the directors.

Failure to inform shareholders: If a director becomes aware of serious breaches of duty by ot

What are the directors’ salaries?

The executive directors may receive a salary as employees of the company, while non-executive directors may be paid a fee. The specific amounts of remuneration for directors are determined by the articles of the company or through a contract of service. For non-executive directors, the amounts of fees are generally approved by ordinary resolution of the shareholders. Additionally, listed companies must adhere to statutory regulations and the UK Corporate Governance Code, which sets out standards of good practice for governance and includes recommendations for remuneration packages.

What are loans to directors and substantial transactions?

Loans to Directors:

Loans made by the company to its directors and persons connected to directors (e.g., wives, partners) are allowed, provided the shareholders have approved the loan by resolution. All transactions involving loans to directors must be disclosed in the company’s accounts.

Section 197 of the Companies Act 2006 permits loans made by a company to its directors and individuals connected to directors, such as spouses or partners. However, this is contingent upon the approval of the shareholders by resolution. Additionally, all transactions involving loans to directors must be disclosed in the company’s accounts.

Substantial Transactions:

Substantial property transactions, involving the sale or acquisition of non-cash assets by the company to or from its director or a connected person, require the approval of the shareholders. A substantial asset is one that exceeds 10 per cent of the company’s asset value and is more than £5,000, or its value exceeds £100,000. A connected person includes a director's wife, husband, partner, children, and any company in which the director or connected person holds 20 per cent or more of the share value. If the shareholders have not given their approval, the transaction is voidable by the company, and the director or connected person is liable to the company for profits arising from the contract. Any directors who gave their approval may also be liable.

Who is a company secretary and what do they do?

A company secretary is an officer and agent of a company who plays a key role in ensuring that procedures are observed. Their responsibilities include organizing shareholders' and directors' meetings, issuing agendas, drafting meeting minutes, keeping statutory registers up to date, and completing and filing required documents at Companies House within specified time limits. Additionally, they are responsible for general administration and staff matters in small companies. In public companies, the company secretary must have the knowledge, experience, and qualifications required by law to carry out their duties effectively.

What are duties and authority of a secretary?

The duties and authority of a company secretary include:

Ensuring procedures of the Board of Directors are observed Acting as a source of guidance and information for directors on their responsibilities Organizing shareholders' and directors' meetings, issuing agendas, and drafting meeting minutes Keeping statutory registers up to date Filing required documents at Companies House within specified time limits Updating company information as required by law Serving as the company's agent and carrying out responsibilities assigned by the directors

Who are company auditors and what do they do?

Company auditors are independent contractors appointed to check that the company accounts are accurate and properly prepared, and to report to the shareholders. They have the duty to audit the company accounts, ensuring that the accounts give a true and fair view of the financial position of the company and have been properly prepared in accordance with the Companies Act 2006. Auditors also have the right of access to the company’s books and accounts, and can require explanations and information from officers of the company. It is their responsibility to ensure that the accurate auditing of company accounts is carried out with reasonable care and skill.

An auditor and an accountant have different roles and responsibilities within a company:

Role:

An auditor is responsible for examining and verifying the accuracy of a company's financial records and reports. Their primary duty is to provide an independent assessment of the company's financial position. An accountant, on the other hand, is involved in the day-to-day financial management of a company. They are responsible for recording financial transactions, preparing financial statements, and providing financial analysis and advice. Independence:

An auditor must maintain independence from the company they are auditing to ensure impartial and unbiased assessments. An accountant may be an employee of the company or work for an accounting firm hired by the company, so their independence is not as critical as that of an auditor. Legal Requirements:

Companies are legally required to appoint an auditor each financial year to carry out an audit of the accounts for the purpose of providing an independent opinion on the company's financial statements. While companies may choose to have an internal accountant or hire external accounting services, there is no legal requirement for an accountant's role in the same way as there is for an auditor. Focus:

The primary focus of an auditor is to ensure the accuracy and reliability of financial information and to identify any irregularities or discrepancies. Accountants focus on maintaining financial records, preparing financial statements, managing taxes, and providing financial analysis to support decision-making within the company. In summary, while both auditors and accountants are involved in financial matters, auditors have a specific responsibility to provide an independent assessment of a company's financial position, while accountants are primarily involved in the day-to-day financial management and reporting of the company.

What are the rights and duties of auditors?

The rights and duties of auditors include the following:

Rights:

Access to the company’s books and accounts Ability to require explanations and information from officers of the company Access to a range of information necessary for auditing the company accounts Duties:

Audit the company accounts and report to the shareholders on whether the accounts give a true and fair view of the financial position of the company Ensure that the company accounts have been properly prepared in accordance with the Companies Act 2006 Comply with the implied contractual duty of care in the performance of their work