1 Company directors and other officer
In this chapter we will discuss about the company officers like Directors, Auditors and company secretary.
Before going into more detail of director’s responsibilities and powers, we define director generally ‘’any person who is responsible for the overall direction of an activity or department.
When we talk about the companies, they are the persons who are responsible to manage and direct the overall functions of the company according to its objects.
According to the section 250 of company act, director is the person who occupying the position of director.
The decision as someone is a director based on their function not on their title.
1.1.1 Board of directors
Board of directors is the elective representative of shareholders to control and manage company affairs collectively in a group, commonly known as board of directors.
When we categorize anything or person then its nature depends on the role, so according to the roles of directors we can give following names to directors to differentiate them by their roles.
1.1.2 Shadow directors
According to section 251 of Company Act 2006, a director who is not technically a director but other directors and employees have to follow their instructions due to its position (major shareholder). Shadow directors are not involved in day to day matters of organization
1.1.3 De facto directors
A person who is not appointed as a director but acts like a director because of the nature of work assigned to him/her. De facto directors perform all functions of directors even if they do not fulfill the qualification of directors and then they enjoy the benefits of directors also.
1.1.4 Alternative director
The director who is appointed temporarily at the place of another director to attend or vote in the board meetings. If article permits, directors can appoint alternative director to attend and vote for them in board meeting in their absence. Alternative director have vote of absence and their own, mostly alternative directors are from outside the company.
1.1.5 Executive director
A person who performs specific role in company on daily basis and involved in management. Executive director is a full time employee involved in management. Executive director may be employee and director both, but in this situation article prohibits him from voting at board meeting.
Executive director may have two possible positions
- A member of board of director
- An employee involved in management
Like finance director who is on board of directors as well as responsibility of financial management
1.1.6 The Chief Executive Officer (Managing Director)
A person who is appointed to carried out overall day to day functions , CEO is also known as Managing Director. CEO appointed by the board of directors and they can delegate some powers to whom they see fit.
1.1.7 Non -executive director
A director who involved in organization’s governance but have no function in day to day management .They are usually part time officers and worked at more than one place so bring outside expertise to the board and exerts controls over executive directors.
According to the UK Corporate Governance guidelines, listed companies could be more effective if they have strong executive directors and independent NEDs
1.2 Number of directors in private and public companies
Private company needs minimum one director and public company needs at least two. There is no statutory maximum numbers of directors but article specifies the limits.
1.3 How directors are appointed?
Appointment of directors, their rotation and co-option is briefly described in company article. As it is discussed before that at the time of company formation the names of first directors must be proposed later on they appointed legally according to the article.
If director appoints expressly they are called de-jure directors.
If a person acts like a directors without actually appointment but they have obligation and powers of proper directors like of de-facto and shadow directors.
1.4 Appointment of first director
During submitting application for registration of a company to a Registrar, include the particulars of first directors with their powers and obligation. After formation of company those persons become first directors.
1.5 Appointment of subsequent directors
After the formation of company more directors can be appointed either on the place of present directors or as a additional directors
More directors are appointed by the following possible ways
- By ordinary resolution of shareholders
- By a decision of directors
However article may impose different methods on company. Separate resolution should be proposed for election of each director during the general meeting of public company for the proposal of appointing directors.
Giving notice of first director, company must give notice of other directors to the registrar within 14 days, this include any changes to the register of directors like residential addresses.
1.6 Age limit for appointments of director
The minimum age limit to be a director must not less than 16 years.
1.7 Director’s remuneration
The salary of director termed as salary including some other monitory benefits. The directors’ remuneration composed of basic salary, fee, and bonuses ad incentives.
It should be disclosed in the directors’ remuneration report in which all detail must be provided and should not exceed the amount that is disclosed in the article.
Directors may be entitled to fee and other expenses as per article and compensation for office according to their service contract
1.8 Directors’ expense
Directors are entitled to reimbursement of reasonable expense for carrying out their duties as director. Most directors have written service contract for compensation and losses.
An ordinary resolution must passed by members, if service contract guarantee for more than two year employment.
1.9 Compensation for loss of office
Directors can receive non contractual compensation for the loss of office by the approval of members after proper disclosure in the general meeting.
Payment paid to director for compensating the loss of office is distinguished from any payment paid to directors as employee.
1.10 Director remuneration report
Listed companies required to include directors’ remuneration report in the annual report .
Report must include followings
- Detail of each directors’ remuneration package
- Company remuneration policy
- Role of board and remuneration
According to section 421(3), directors have duty to provide any information necessary for producing report.
Listed company should vote by members on remuneration report. A negative vote would signals that member not happy with remuneration level.
As we know that an audited report of director’s remuneration must be provided along with audited financial statements.
1.11 Items not subject to the audit
- Consideration by the director
- Statement of company remuneration policy
- Performance graph
- Directors’ service contract
1.12 Items subject to audit
- Salary of each director
- Bonus paid
- Any benefit received
- Excess retirement benefits
- Compensations to past directors
- Paid compensation for loss of office
- Paid amount to third party in respect of directors’ services
1.13 Service agreements
At the time of appointment an agreement is formed between company directors and company relating to their service.
The contract of employment (service) between company and director must available by members for inspection. That contract includes all the services that directors provide, including the services that are outside the role of director.
Contract must retained at registry office or any place permitted by Sectary of State for 1 year after expiry.
Director s’ pension, particulars of compensation for loss and directors emoluments must be given in accounts.
1.14 Vacation of office
Director may vacate office for the following possible reasons and at this time their employment contract cancelled immediately.
- Not offering him/her for re election after ending of time that was defined.
- Removed from office at some serious issue
- Dissolution of company
1.15 Retirement and re-election of directors
Model article provide following rule for retirement and re-election of directors
- All directors shall retire at first AGM
- At each AGM one third of NEDs retire .They can be re-elected
- Casual vacancies must filled by board. Until new directors stands for election in next AGM
Directors, who are retired by rotation, can offer themselves for re-election. Mandatory retirement provides control over their performance. After every three years members have opportunity to dispose underperforming director by not electing them.
2 Removal of Director
According to section 168 of CA06, company can remove the director through resolution before expiration of his period of office not withstanding anything in its article and any agreement.
Hence director can be removed despite any provision available in service contract but director can sue for damages if removal purely shows a breach contract.
Following possible steps to remove a director
- Special notice within 28 days required of the resolution by person want to remove a director
- Company must forward the resolution to the director concerned
- Notice of meeting goes to all members and all members have to attend the meeting and to give vote
- The Director in question can require the company to circulate written representation to the members
- Director can read out representations at he meeting ,if there was no time for prior circulation
- Director must allowed to attend and speak to the meeting
- An ordinary resolution required to removed the director
The power of members to remove director may be limited.
There are following four possible ways
- Shareholder must have 10% paid up capital shares or 10% voting rights to purpose a removal of director.
- According to section 338 ,100 members having £100 of share capital each may purpose a resolution to remove director
- A director who has some weighted voting rights under company constitution can defeat any motion to remove director. This situation can be seen in case of Bushell v Faith 1970.
- Class right agreement states that members having each class of shares must be present at general meeting, hence member having certain class of shares can prevent removal of director by not attending the general meeting.
The situation for removal of director may be limited can be seen in case of Southern Foundries v Shirlaw 1940
In this case S made a contract with Shirlaw to serve S as a managing director, in 1936 F Co take the control of company, in 1937 F Co changed the article by using vote power. Now F Co has power to remove any director according to the present situation of company article. In 1937 F Co removed Shirlaw as a director by using his power. Shirlaw sued company.
High court made a decision that alteration of article was not a breach of service contract but exercise of power is breach of contract and court ordered the company to pay £ 12,000 for breach of contract
3 Disqualification of Director
A person cannot be a director if he disqualified on the grounds of article or statuary rules, then he has to vacate the office.
There are following possible reasons for disqualification
- Director become bank corrupt
- If ,he absent from meetings for six months
- If , they disqualified by statue or law
- Notice of written resignation
- They show unprofessional behavior
3.1 Disqualification under statue
Disqualification under statue may be explained by Disqualification Act 1986. First we see purpose of disqualification act, an act by court relating to disqualification of company directors and other company affairs.
The terms of disqualification act are very wide and it acts like a consultant for company. This act is just not for the disqualification of directors, it may be for any employee ,if he falls in grounds for dis qualification
Article may also provide grounds for disqualification and director may vacate office, if he was absent from the board meeting and usually absence period is 3 months.
3 months absence period starts from last meeting attended by director. If director voluntarily absent from meeting due to illness and submit application for leave due to illness or other matters from last attended meeting
If they fail to obtain leave, later on directors give reasonable explanation for leave but this cannot resolve the matter and directors will have to vacate the office.
The purpose of this rule is to impose plenty for negligence of directors. Directors have duty to attend board meeting, when they are able to do attend the meeting.
3.2 Reasons for Disqualification
There are following possible reasons for disqualification
- Continuous breach of CA06 like fail to return files to the registrar regarding different company matters as stated in section 3 of CA06.Maximun period for this offence is 5 years disqualification.
- Fraudulent and wrongful trading, this means doing work with intention of defraud creditors or other fraudulent purpose. Maximum disqualification for this period is 15 years as stated in section 4
- Serious offence convicted by director in management of company, like in matters of formation of promotion, liquidation of company or management of company property. Maximum disqualification period is 15 years as stated in section 2.
- When Department for Business, Enterprise and Regulatory Reform‘s reports states that director’s conduct is unfit to be in a management of company. Maximum disqualification period is 15 years as stated in section 8.
- If liquidator’s report states that Director is unfit for management of company due to involvement in wrongful trading. Minimum disqualification period is 2 years and maximum disqualification period is 15 years as stated in section 10.
3.3 Disqualification period
Two to 5 years disqualification ,if offence is not too serious, but six to ten years if conduct was serious and over 10 years disqualification period for more serious cases.
- According to Griffith’s 1997 case, disqualification does not mean disqualification from all involvement in management.
- According to Rebarrings plc case Director may continue his services as unpaid director
Mitigation of directors
Directors may have low disqualification period in following possible circumstances
- If director has lack of dishonesty as stated in case of Re Burnham Marketing Services 1993
- If director lost his own money in company as stated in case of Re GSAR Realisations Ltd 1993
- If director gained nothing like extra money as stated in case of Re GSAR Realisations Ltd 1993
- If director ready to pay for his offence as stated in case of Re Grayan Building Services 1995
- If proceedings are taken by director for a long time as stated in case of Re AldermanburyTrust1995.
3.4 Procedure for disqualification
Company administrators or liquidators have statutory duty to report disqualified directors to the government, if they see fit.
3.5 Acting as a director whilst disqualified
Following possible consequences may be occur by action of disqualified director
- Acting as a director after disqualification is a serious criminal offence which may be punished by fine.
- Disqualified director is personally liable for debt of company while acting as a director during disqualification period.
4 Powers of directors
Article authorized the directors to manage company and allow them to exercise authorized power to manage the company affairs.
Directors may take any decision, they see fit for managing company either article or law requires taking these decisions by members.
- Director should use their power in the best interest of company.
- Director may use their power for proper purpose, the purpose for which these powers allowed.
4.1 Restriction on director’s power
Director’s power may be restricted by law or article
If directors use their power in wrong way, then their powers can be challenged
Directors’ power may be restricted in some situations like in reduction of capital and removal of auditors.
Change of company article or reduction of capital requires special resolution, hence special resolution may be proposed by members in general meeting.
Restriction imposed by article
Some restrictions also imposed by the article like in case of borrowing money.
Article set maximum amount for director to borrow, if any director wants to exceed this amount, he has to get permission from the general meeting.
5 Power of Chief Executive officer (Managing Director)
The chief executive officer (CEO) is the most senior person in the organization, has authority and power to run the board of executive officer. In most of the organizations CEO is also termed as managing director but in some companies there may be two persons one is CEO and other is managing director ( senior from CEO) managing all functions and running the whole board of directors so chief executive officer and all other officers are accountable towards managing director (MD).
CEO or MD has three attributes in one time like decision maker, leader or manager.
Article provides CEO apparent authority to take all strategic decisions and make commercial contracts on the behalf of company but actual authority is given by members in general meeting
CEO is the special person who has more authority than any other director whether other directors work full time.
Although CEO or MD has special status but they can be terminated at any time by the members through resolution by members but they transferred to the ordinary position of director.
5.1 Agency and CEO or MD
CEO are the agents of company, they have some actual and usual authority to bind company .Director have also apparent authority provided through holding out.
Holding out is a basis rule of agency law. According to this rule, if principal appoints any person as an authorized agent then principal cannot deny that particular person is not an authorized agent. They are bound by their contract made on company behalf.
If board of directors is permit to act as CEO or MD but he is not CEO or MD, then company may bound by their action.
The apparent authority of CEO or MD may be explained by case of Freeman & Lockyer v Buckhurst Park Property Ltd 1964
A company done business as property developer, article provides a power to appoint a MD but this has never done. One of director acts like a managing director without having express authority. He bought some property and appointed architect to make a plan, later on other directors refused to pay for property and architect‘s fee by pointing that he has no actual or apparent authority. But in fact they are liable to pay because, he was acting like a managing director.
Four conditions must be satisfied claiming under Holding out rule
- It was made clear to them that agent has authority to enter in contract on the behalf of company through presentation.
- Particular representation made by a person who has actual authority.
- They were relied on this presentation.
- Article has nothing to prevent company from giving any authority to agent for binding contract on company behalf.
5.2 Powers of individual directors
There may be following possible power of individual directors.
- Other directors have no apparent authority to bind company in a general contract but they have apparent authority on their management position.
- Removal of director may be a breach of service contract, if they have condition of employment as status of director stated in their service contract.
5.3 Duties of director by companies Act 2006
Company law sets some major duties, which develop day by day through operation of common law or equity which make the clearer.
- Duty to act within power
- Duty to promote the success of the company
- Exercise independent judgment
- Exercise reasonable skill, care and diligence
- Avoid conflicts of interest
- Not to accept benefits from third parties
- Declare the interest or benefit in a proposed transaction
Court consider Company Act 2006 to decide whether duty has been broken and help other by including previous cases before 2006 to understand different types of situation that arise, how the law interpreted and applied by court in future
Fiduciary duty is imposed on some particular persons who have trust and confidence in each other relation. Fiduciary duty has more obligations than contract or tort law.
Section 170 of CA 06 clearly states that directors owed duty to the company not to any member. Hence company can take action itself on directors but member can take action on directors on behalf of company.
Director have owed every duty to company that could apply in every situation like ,if director refused to accept bribe from 3rd party , then he is breaching of duty by not promoting his company for benefit of company members.
Any person acting as a director has some duties as stated in Company Act. Court also applied some duties on shadow directors through common law.
All time directors have to take care of all others law and regulation. No authorization is given to break any law for performing their duties.
5.3.1 Duty to act with in power
Directors must exercise their power properly for the purpose which were given as stated in section 171 of CA 06, use of power for proper purpose can be seen in case of Hogg v Cramphorn 1967
In this case directors issued further share and gave financial assistant for purchase in attempt to take over the bid honestly and in best interest of company. The directors were in breach of duty to act with in power but members can ratify which they did.
Director has fiduciary duty to use their power honestly and for proper purpose as stated in Bamford v Bamford 1969
5.3.2 Duty to promote the success of company
Directors must have act in good faith to promote the success of company and benefit for members as stated in section 172 of CA O6
Director should consider these matters during exercising his duty
- Result of long term decisions
- Interest of company’s employees
- Needs to establish company business relationship with customers, suppliers and others.
- Effect of company operation on different people and environment
- Need to act fairly between company members
- Seeking reputation for maintaining standards of business conduct
5.3.3 Duty to exercise Independent Judgment
Director should Exercise independent judgment as stated in section 173.Directors should not transfer their power of independent judgment to others. Director may transfer functions to others but he must continue to make independent decisions.
This duty is not violated by director if he acts in authorized way according to company’s constitution.
5.3.4 Duty to take reasonable care , skills and diligence
Director must show reasonable care and skills and act like a careful director.
- The general knowledge, skills and experience expected of a reasonable person must be in the director going to carry out functions.
- Director must have actual knowledge, skills and experience.
This duty can be seen in case of Dorchester Finance Co Ltd v Stebbing 1989
Company was money-lending company which had three directors Hamilton, Parson and Stebbing. All three had accountancy knowledge, no board meeting was held and matters was left to Stebbing, however two other directors turn up from time to time and signed blank cheques and laid the matter to Stebbing to deal with. Stebbing deal them without following any regulation .All three were liable in negligence because they have a skills of accountancy but no one is using them.
5.3.5 Duty to avoid conflict of interest
Director must avoid from any situation which cause conflict of interest between him and company as stated in section 175 of CA 06
If article authorize the director, then conflict of interest can not violate his position as a director
5.3.6 Do not accept benefit from other company
Director must not accept any benefit or gift from third party for reason to act as a director or performing at the position of director as stated in section 176 of CA 06.
5.3.7 Duty to declare interest in proposed transaction
Director must declare nature and extent of such interest to other director as stated in section 177 of CA 06.
Declaration is made in written to the board at general meeting that he has interest in third party.
This situation can be seen in the following case law.
IDC V Cooley 1972
In this case director Cooley entered into the contract on behalf of company but third party want to give this contract personally to Cooley not to company, without disclosing this matter to company, Cooley resign from company to take contract personally. Cooley is breach in fiduciary duty, he is accountable to company for getting profit from directorship.
5.3.8 Duties by the article
Article provides easy regulation than Ac but they may not decrease the level of duty expected unless it is in the following situation;
- Directors cannot be in breach of duty for making independent judgment, if they acted according to article director’s duty statement.
- Independent director have permission for some conflicts of interest through article.
- If some provision is available in article for conflict of interest, then director is not causing breach of duty regarding conflict of interest, if it is lawful.
- Company may authorize anything through article.
6 Breach of director’s duties
Directors are liable regarding all duties imposed by the company because of the agreement between directors and the company. If directors failed to meet their duties then they are in the breach of their duties. As it is discussed before those directors have seven major responsibilities so it is required to meet all these duties by directors.
As we know that every breach results in damage of loss to innocent party and under the law remedies are available to reimburse that damage or loss.
Breach of duty may cause following possible effects to directors
- Director may require to pay the monitory value of damage or loss to the company
- If director still holding some property of company then those property may be taken from director.
- Property may be recovered directly from third party in case if party aware about the director’s position of breach.
- If directors have made some secret profits then they may be recovered from the directors immediately
- The contracts made by the directors will be cancelled automatically if those contracts are not in the good faith of company or contracts are personal and company did not aware about it.
- Injunction may be best way to relieve where breach has not occurred.
Section 232 of CA06 provides provision to exempt director or protect them from any action against liability for negligence.
Section 239 states that company can approve the action of director by passing a special resolution.
7 Other Controls on director
There are following possible other controls on directors.
- If director’s service contract is more than two year , then his contract must be approved by members as stated in section 188 of CA06
- Director may not take any non cash asset without approval from members. Those assets which has value of £ 5000 or equal to the 10% of company assets as stated in section 190 of CA06.
- Loan given to director must be approved, if its value is £10,000 as stated in section 197 of CA06.
- In section 198 expands section 197 to prevent un approved loan of £ 10,000
- Section 201 prevents the un approved credit transaction of £15,000 for benefit given to director.
- Director must need approval for the loan more than £15,000 in course of business as stated in section 204 of CA 06.
- Non contractual payment for the loss of office must be approved by director as stated in section 217 of CA06.
8 Directors’ liability for act of other directors
As we know that directors are the stewards of the assets of the company so they have duty to in the good faith of company but they have no liability for the acts of fellow directors if they did not aware about their activities. And if they are aware of serious offence of other director, then they must have to report those breaches to the members.
Directors are liable for what they allow to act to others directors not for their personal misconduct.
8.1 Directors’ personal liability
Directors are liable for their personal acts in following conditions
- Director is liable for lifting veil of incorporation.
- Director shall have unlimited liability on debts of company for limited company.
- Director may be liable to creditors in some circumstances.
Situation for personal liability can be understood through following case law;
Williams and another v Natural Life Food Health Ltd 1998
Through this case law it was concluded that director is only personally liable if he/she accepted personal responsibility and claimant have strong evidence about it.
9 Company secretary
Company secretary a natural person but in the organization/company, a senior officer who is responsible for the efficient administration of the company and typically termed as corporate secretary
Public companies must have one qualified secretary as it is statutory requirement but there is no such requirement for private companies unless it is required to do so.
Sectary is usually removed and appointed by directors
9.1 Who can be the company secretary?
The person who is going to appoint for the position of company secretary must have following qualification and capacity to meet all responsibilities otherwise the person will not be considered eligible.
- They must have held office of company sectary for three years out of their last five years at public company (plc).
- They must have professional degree like ACCA, ICEAW, ICCAS and CIMA or may be barrister or advocate within UK.
- They must be able to discharge the functions by virtue of their qualification.
- They must be competent and efficient
9.2 Duties and roles
Secretary has following duties decided by board the board of directors
- Secretary has to check that documentation is in order and filling accurate returns with the registrar.
- Duty to maintain company’s statutory registers for example register of members, directors, secretaries, register of charges, register of minutes and resolutions and etc.
- Duty to give notice and keep minutes of meeting.
- Signing documents which are authenticated by company.
- Keep checking on the annual and quarterly accounts according to the statutory requirements and international reporting framework.
- Monitoring overall statutory requirements of the company and deal the legal matters related with provisions and claims
- Communication with shareholders and auditors and ensure that dividends paid to members if residual profits available.
- Company secretary must have a major role in corporate governance
- They are the primary source of advise in corporate matters like governance and legal issues
- Report on directors and other company officers to chairman
9.3 Breach of duties
if secretaries are in breach of duties or investigated in any fraudulent activity then their power or authority can be ceased immediately. They may be fined or imprisoned according to the intensity of illegal act
9.4 Power and authority of secretary
In past there was little authority to secretaries in all matters but later on both authorizes gave to the secretaries so they can use their power more efficiently.
- They have actual authority given by the board.
- They have apparent authority to bind contract on administrative matters.
Panorama developments v Fidelis furnishing fabrics 1971
Acompany sectary ordered cars, apparently for customers service but later on it was clear that they purchased for his own for his own use now company is binding to pay for services as contract states that company secretary may have apparently authority to enter into contract related with company administration.
But two cases describes the limit of authority
Re Maidstone Building provision 1971
In this case law it was decided that Secretary has not enough power to make a commercial contract
Cleadon Trust Ltd 1938
This case law describes that usually secretary has no power to borrow money.