COMPANY MANAGEMENT/DIRECTORS NOTES

COMPANY MANAGEMENT/DIRECTORS

Both the Companies Act and case law recognize the general meeting and the Board of Directors (the BOD) as the principal managerial organs of the company and the Articles vest power in both.

Whereas the general meeting makes major decisions the board of directors is responsible for the day to day affairs of the company

DIRECTORS

Introduction

A company, being an artificial person, cannot manage its own affairs. It has no physical existence. It has neither soul nor a body of its own. As such it cannot act in its own person. It can do so through some human agency. It is therefore not surprising to find that the articles of every registered company have provisions regarding the delegation of powers pertaining to the company’s management.  In Aberdeen Rly vs. Blake Bros. the court ruled as follows:

“The directors are a body to whom is delegated the duty of managing the general affairs of the company. A body corporate can only act by agents, and is of course the duty of those agents to act as best to promote the interests of the corporation whose affairs they are conducting”.

The persons who are in charge of the management of the affairs of the company are termed as directors. They are collectively known as Board of Directors.

The directors are the brain of the company and occupy a pivotal position in the structure of the company. They are in fact the mainspring of the company.

Meaning of director

Section 3 of the Companies Act 2015 defines a director as follows:

“Director includes any person occupying the position of director, by whatever name called”. The important factor to determine whether a person is or is not a director is to refer to the nature of the office and its duties. It does not matter by what name he is called. If he performs the functions of a director he would be termed a director in the eyes of the law even though he may be named differently. A look at the following names illuminates the point sufficiently i.e. ‘Mutongoria’, ‘Munene’, ‘Jadoung’ or ‘Mudozi’ are some of the local names.

A director may, therefore be defined as a person having control over the direction, conduct, management of the affairs of a company. Again, any person in accordance with whose directions or instructions, the Board of Directors of a company is accustomed to act is deemed to be a director. But such a person shall be deemed to be a director if the Board acts on advice given by him in a professional capacity.

Numbers of Directors

Every private company must have at least one director and for a public company the minimum is two. There is no statutory maximum but the articles usually impose a limit. At least one director must be a natural person, not a body corporate.

A company may be a director. In that case the director company sends an individual to attend board meetings as its representative.

Shadow directors

A person might seek to avoid the legal responsibilities of being a director by avoiding appointment as such but using his power, say as a major shareholder, to manipulate the acknowledged board of directors.

Company law seeks to prevent this abuse by extending several statutory rules to shadow directors. Shadow directors are directors for legal purposes if the board of directors is accustomed to act in accordance with their directions and instructions.

 Alternate directors

A director may, if the articles permit, appoint an alternate director to attend and vote for them at board meetings which they are unable to attend. Such an alternate may be another director, in which case they have the vote of the absentee as well as their own.

 Executive directors

An executive director is a director who performs a specific role in a company under a service contract which requires a regular, possibly daily, involvement in management.

A director may also be an employee of his company. Since the company is also his employer there is a potential conflict of interest which in principle a director is required to avoid.

To allow an individual to be both a director and employee the articles usually make express provision for it, but prohibit the director from voting at a board meeting on the terms of their own employment.

Directors who have additional management duties as employees may be distinguished by special titles, such as ‘Finance Director’. However (except in the case of a managing director) any such title does not affect their personal legal position. They have two distinct positions as:

  • A member of the board of directors; and
  • A manager with management responsibilities as an employee

 

Non-executive directors

A non-executive director does not have a function to perform in a company’s management but is involved in its governance.

In listed companies, corporate governance codes state that boards of directors are more likely to be fully effective if they comprise both executive directors and strong, independent non-executive directors. \

 

The main tasks of the NEDs are as follows:

  • Contribute an independent view to the board’s deliberations
  • Help the board provide the company with effective leadership
  • Ensure the continuing effectiveness of the executive directors and management
  • Ensure high standards of financial probity on the part of the company

Non-executive and shadow directors are subject to the same duties as executive directors.

 

 The managing director

A managing director is one of the directors of the company appointed to carry out overall day-today management functions.

If the articles provide for it the board may appoint one or more directors to be managing directors. A managing director (‘MD’) does have a special position and has wider apparent powers than any director who is not appointed an MD.

 First Directors of a company

The application for registration delivered to the Registrar to form a company includes particulars of the first directors, with their consents. On the formation of the company those persons become the first directors.

 Appointment of subsequent directors

Once a company has been formed further directors can be appointed, either to replace existing directors or as additional directors.

Appointment of further directors is carried out as the articles provide. Most company articles allow for the appointment of directors:

By ordinary resolution of the shareholders, and  By a decision of the directors.

However the articles do not have to follow these provisions and may impose different methods on the company.

The board of directors

Companies are run by the directors collectively, in a board of directors.

The board of directors is the elected representative of the shareholders acting collectively in the management of a company’s affairs.

One of the basic principles of company law is that the powers which are delegated to the directors under the articles are given to them as a collective body.

The board meeting is the proper place for the exercise of the powers, unless they have been validly passed on, or ‘sub-delegated’, to committees or individual directors

Qualifications of directors

  • Minimum age for director: A person who has not reached eighteen years of age may not be appointed to be a director of a company. An appointment made in contravention of subsection is void.
  • Age limit: under the 2015 Companies Act there is no age limit to be a company director.

Disqualification of directors

  • On convicting a person of an offence relating to the promotion, formation, management, liquidation or administration of a company, the court may make a disqualification order against the person.

 

  • Disqualification for fraud or breach of duty committed while company in liquidation or under administration
  • Disqualification on conviction of offence involving failure to lodge returns or other documents with Registrar
  • Undischarged bankrupts must not act as directors/ Bankrupt.
  • Insanity: if a registered medical practitioner, who is treating that person, gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;
  • Resignation: Notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms.
  • A person if declared bankrupt or enters into an arrangement with his creditors to compromise his debts.

N.B. When a person being indebted to others, proposes an arrangement with those creditors, this constitutes an act of bankruptcy under the Insolvency Act, and is one of the grounds upon which a petition for bankruptcy may be filed against him.

Acting as a director whilst disqualified (Sec 228)

A person who, while subject to a disqualification order or disqualification undertaking, contravenes the order or undertaking commits an offence and on conviction liable to a fine not exceeding one million shillings or to imprisonment for a term not exceeding five years, or to both.

VACATION OF OFFICE OR REMOVAL OF DIRECTORS

A director can leave office either by vacation or removal

Vacation This is the voluntary quitting of office by a director. It can happen during the director’s tenure of office and for any reason such as ill health, age, agreement with the board of directors or even for special reasons.

A director, who is vacating office must follow the procedure, if any, laid down in the Articles of Association or the common law rules. He must give notice of such intention to vacate and reasons too. He should avail himself so that he can sort out his obligations and rights. Anything one while he is a director he must be liable for but not thereafter, hence the date of his vacation is quite important in the determination of his liability or otherwise for wrongful acts.

Removal of directors from office

In contrast, removal means being forced to quit the position of a director. He can be removed in two broad ways

  • By operation of law, and,
  • By the company itself

If a director is in breach of any of his statutory qualifications, the consequences is that the law operates immediately to remove him from such appointment. In addition, when the company goes into liquidation the directors cease to hold office.

A company is empowered to remove a director from office by an ordinary resolution to that effect provided that the following procedure is followed:

Procedure for removal of a director from office:

  • A special notice of the intended resolution to remove a director from office must be given to the company.

N/B: In Section 142, a special notice is defined as notice given twenty (20) days before the meeting in question.

  • Upon receipt of the notice, the company must send a copy thereof to the director concerned who is entitled to make written representations.
  • The director may request the company to notify the members that he has made representations.
  • The directors must summon an extra ordinary general meeting to discuss the matter
  • Notice of the meeting must indicate that the director has made representations and copies thereof must be sent to the members unless received late by the company.
  • If the copies are not enclosed by reason of lateness or default by the company, the director is entitled to have them read out at the meeting however the directors representations need not be sent out to members or read out at the meeting if an application by the company or any other aggrieved person, the Court is satisfied that the director is abusing his right to be heard, to secure needles publicity for a defamatory matter.
  • The Court may hold the director liable for the cost of the applications.
  • The removal of a director from office takes effect when the meeting by ordinary resolution so resolves.

Compensation of Directors for Loss of Office

Any director may receive non-contractual compensation for loss of office, paid to them voluntarily. Any such compensation is lawful only if approved by members of the company in general meeting after proper disclosure has been made to all members, whether voting or not. This only applies to uncovenanted payments; approval is not required where the company is contractually bound to make the payment.

Compensation paid to directors for loss of office is distinguished from any payments made to directors as employees. For example, to settle claims arising from the premature termination of the service agreements. These are contractual payments which do not require approval in general meeting.

Directors’ Remuneration

Directors are entitled to fees and expenses as directors as per the articles, and compensation for loss of office as per their service contracts (which can be inspected by members). Some details are published in the directors’ remuneration report along with the accounts.

Details of directors’ remuneration are usually contained within their service contract. This is a contract where the director agrees to personally perform services for the company.

Directors’ expenses

Most articles state that directors are entitled to reimbursement of reasonable expenses incurred whilst carrying out their duties or functions as directors.

In addition, most directors have written service contracts setting out their entitlement to emoluments and expenses. Where service contracts guarantee employment for longer than two years then an ordinary resolution must be passed by the members of the company.

Directors’ remuneration report

Quoted companies are required to include a directors’ remuneration report as part of their annual report, part of which is subject to audit. The report must cover:

  • The details of each individual director’s remuneration package o The Company’s remuneration policy
  • The role of the board and remuneration committee in deciding the remuneration of directors

It is the duty of the directors (including those who were a director in the preceding five years) to provide any information about themselves that is necessary to produce this report.

 

Quoted companies are required to allow a vote by members on the directors’ remuneration report. The vote is purely advisory and does not mean the remuneration should change if the resolution is not passed.

However, a negative vote would be a strong signal to the directors that the members are unhappy with remuneration levels. Items not subject to audit

Consideration by the directors (remuneration committee) of matters relating to directors’ remuneration

Statement of company’s policy on directors’ remuneration

Performance graph (share performance)

Directors’ service contracts (dates, unexpired length, and compensation payable for early termination)

Items subject to audit

Salary/fees payable to each director

Bonuses paid/to be paid

Expenses

Compensation for loss of office paid

Any benefits received

Share options and long-term incentive schemes – performance criteria and conditions  Pensions

Excess retirement benefits

Compensation to past directors

Sums paid to third parties in respect of a director’s services

Director’s long-term service contracts (157)

This applies to a contract under which the employment of a person as a director of company is guaranteed with the company; or if the person is the director of a holding company within the group that comprises the company and its subsidiaries, for a period exceeding, or that could exceed, two years.

A company may not enter into such a contract unless it has been approved o By resolution of the members of the company; and

o In the case of a director of a holding company, by a resolution of the members of that company.

Inspection of directors’ service agreements

A company must make available for inspection by members a copy or particulars of contracts of employment between the company and a subsidiary with a director of the company. Such contracts must cover all services that a director may provide, including services outside the role of a director, and those made by a third party in respect of services that a director is contracted to perform. Contracts must be retained for one year after expiry and must be available either at the registered office, or any other location permitted by the Secretary of State.

Prescribed particulars of directors’ emoluments must be given in the accounts and also particulars of any compensation for loss of office and directors’ pensions.

Loans and Other Payments to Directors

A company may not give a loan to a director of the company or of its member, holding company; or give a guarantee or provide security in connection with a loan made by any person to such a director, unless the transaction has been approved by a resolution of the members of the company

Exemptions

Legal Position of Directors

Section 3 (1) of the Companies Act provides that a director includes any person occupying the position of director by whatever name called. This definition fails to identify the director and his relationship with the company.

Every company must have director to manage its affairs. The legal position of directors has been articulated by Courts.

“Directors have been called trustees and managing trustees. It does not matter what you call them so long as you understand what their true position is”

For certain purposes directors are regarded as agents, for others they are considered as trustees but their true legal position is that of fiduciaries.

 Directors as agents

A company, as an artificial person, acts through directors who are elected representatives of the shareholders of a company. They are in the eyes of the law, agents of the company for which they act, and the general principles of the Law of Agency regulates in most respects, the relationship between the company and its directors.

 

They are deemed to be agents when they contract on behalf of the company. On contracts of employment borrowing or in furtherance of the objects of the company, they contract as agents and the company is generally liable as the principal. However in those circumstances in which the agent is personally liable, the directors are liable. It was so held in Ferguson V Wilson.

 

Directors not personally liable as agents:

Where directors of a company act on its behalf, they are not personally liable for contracts they make for the company provided they act within the scoop of their authority and do not make the contracts in their personal name.

In Ferguson V Wilson, the plaintiff had an option to subscribe for some of the company’s shares. The directors allotted the whole of its authorized capital to other persons, including themselves, so that the option became worthless.

It was held that the directors were not liable. The general rule was stated as follows: “wherever an agent is liable, directors would be liable, where the liability would attach to the principal, and the principal only, the liability is the liability of the company”.

 

The directors are, however liable where:- i.      The contract is in their own name

  • They use the company’s name incorrectly, e.g. by omitting the or the words “limited” or “Private Limited” iii. The contract is signed in such a way that it is not clear whether it is the principal (the company) or agent who signed
  • They exceed the powers given to other by the Articles of Association.

 

It is however not true to say that directors are nothing more than agents of a company. They have in certain matters independent powers. They are not bound to consult the shareholders in all matters. Some powers may, according to the Articles, be exercised by the directors. Certain other powers may be reserved for the shareholders in general meetings. If powers of management are vested in the directors, they and they alone can exercise these powers.

Directors as trustees

It is argued that directors are trustees for certain purposes though not ordinarily trustees.

 

Unlike ordinary trustees who have legal title in trust property, directors do not have it as it is vested in the company. Unlike ordinary trustees whose obligation is to preserve trust property for the beneficiary, directors are bound to invest for the benefit of the company.

Money in a company’s bank account which directors are authorized to operate is held in trust for the company. Assets that come into the hands of directors or under their control are held in trust for the company. It was so held in Re: Forest of Dean Coal Mining Co. Therefore, directors are treated as trustees

❖ Of the company’s money and property, and ❖ Of the powers entrusted to them.

Directors as fiduciaries

In the words of Lord Porter in Regal (Hastings) Ltd V Gulliver:

“Directors no doubt are not trustees but they occupy a fiduciary position towards the company whose Board they form. This is the true legal position of directors. There is a fiduciary relationship between the directors and the company, a relationship based on trust, confidence and good faith which imposes upon the directors various fiduciary or equitable duties often referred to as duties of loyalty and good faith”

DUTIES OR OBLIGATIONS OF DIRECTORS

The Companies Act 2015 sets out the seven principal duties of directors.

The Companies Act 2015 sets out the principal duties that directors owe to their company. Many of these duties developed over time through the operation of common law and equity, or are fiduciary duties which have now been codified to make the law clearer and more accessible.

Who are the duties owed to?

Section 140 of the Companies Act makes it clear that directors owe their duties to the company, not the members. This means that only the company itself can take action against a director who breaches them. However, it is possible for a member to bring a derivative claim against the director on behalf of the company.

The effect of the duties are cumulative; in other words, a director owes every duty to the company that could apply in any given situation. The Act provides guidance for this. Where a director is offered a bribe, for instance, they will be breaking the duty not to accept a benefit from a third party and they will also not be promoting the company for the benefit of the members. When deciding whether or not a director has breached a duty, the court should consider their actions in the context of each individual duty in turn.

Who are the duties owed by?

Every person who is classed as a director under the Act owes the company a number of duties. Certain aspects of the duties regarding conflicts of interest and accepting benefits from third parties also apply to past directors. This is to prevent directors from exploiting a situation for their own benefit by simply resigning. The courts are directed to apply duties to shadow directors where they are capable of applying. Directors must at all times continue to act in accordance with all other laws; no authorisation is given by the duties for a director to breach any other law or regulation.

The duties and the articles

The articles may provide more regulations than the Act, but they may not reduce the level of duty expected unless it is in the following circumstances:

  • If a director has acted in accordance with the articles they cannot be in breach of the duty to exercise independent judgement.
  • Some conflicts of interest by independent directors are permissible by the articles.
  • Directors will not be in breach of duty concerning conflicts of interest if they follow any provisions in the articles for dealing with them as long as the provisions are lawful.
  • The company may authorise anything that would otherwise be a breach of duty.

The duties of directors

The statutory duties owed by directors are to:

Act within their powers

Promote the success of the company

Exercise independent judgement

Exercise reasonable skill, care and diligence

Avoid conflicts of interest

Not to accept benefits from third parties

Declare an interest in a proposed transaction or arrangement

Duty to act within powers (s 142)

The directors owe a duty to act in accordance with the company’s constitution, and only to exercise powers for the purposes for which they were conferred. 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. This ‘honest belief’ is effective even if, in fact, the interests of the company were not served.

This duty is owed to the company and not generally to individual shareholders. The directors will not generally be liable to the members if, for instance, they purchase shares without disclosing information affecting the share price.

In exercising the powers given to them by the articles the directors have a fiduciary duty not only to act bona fide but also only to use their powers for a proper purpose.

The powers are restricted to the purposes for which they were given. If the directors infringe this rule by exercising their powers for a collateral purpose the transaction will be invalid unless the company in general meeting authorises it, or subsequently ratifies it.

Most of the directors’ powers are found in the articles, so this duty means that the directors must not act outside their power or the capacity of the company (in other words, ultra vires).

Ratification is not effective when it attempts to validate a transaction when  It constitutes fraud on a minority.

It involves misappropriation of assets.

The transaction prejudices creditors’ interests at a time when the company is insolvent. Under the Companies Act, any resolution which proposes to ratify the acts of a director which are negligent, in default or in breach of duty or trust regarding the company must exclude the director or any members connected with them from the vote.

This is only one of the powers given to directors that are subject to this fiduciary duty. Others include:

Power to borrow

Power to give security

Power to refuse to register a transfer of shares

Power to call general meetings

Power to circulate information to shareholders

Duty to promote the success of the company (s 143)

It is the duty of duty of directors to act in a way, which, in good faith, promotes the success of the company for the benefit of the members as a whole, was created.

The requirements of this duty are difficult to define and possibly problematic to apply, so the Act provides directors with a non-exhaustive list of issues to keep in mind.

When exercising this duty directors should consider:

  • The consequences of decisions in the long term
  • The interests of their employees
  • The need to develop good relationships with customers and suppliers
  • The impact of the company on the local community and the environment
  • The desirability of maintaining high standards of business conduct and a good reputation
  • The need to act fairly as between all members of the company

The list identifies areas of particular importance and modern-day expectations of responsible business behaviour. For example, the interests of the company’s employees and the impact of the company’soperations on the community and the environment.

The Act does not define what should be regarded as the success of a company. This is down to a director’s judgement in good faith. This is important, as it ensures that business decisions are for the directors rather than the courts.

  • Duty of director to exercise independent judgement (s 144)

A director of a company shall exercise independent judgment

.Duty to exercise reasonable skill, care and diligence (s 145)

Directors have a duty of care to show reasonable skill, care and diligence.

Section 145 provides that a director owes a duty to their company to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with: (a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (b) The general knowledge, skill and experience that the director has. There is, therefore, a reasonableness test consisting of two parts:

An objective test

Did the director act in a manner reasonably expected of a person performing the same role? A director, when carrying out their functions, must show such care as could reasonably be expected from a competent person in that role. If a ‘reasonable’ director could be expected to act in a certain way, it is no defence for a director to claim, for example, lack of expertise. (b) A subjective test

Did the director act in accordance with the skill, knowledge and experience that they actually have?

In the case of Re City Equitable Fire and Insurance Co Ltd 1925 

Facts: The Company lost £1,200,000 in failure of investments and the large scale fraud of the chairman, Gerard Lee Bevan. The liquidator sued the other directors for negligence. The auditors were sued too, but the Court of Appeal held they were honest and exonerated by provisions in the company’s articles.

It was held that a director is expected to show the degree of skill which may reasonably be expected from a person of their knowledge and experience. The standard set is personal to the person in each case. An accountant who is a director of a mining company is not required to have the expertise of a mining engineer, but they should show the expertise of an accountant.

Rules established in the case.

  • A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
  • A director is not bound to give continuous attention to the affairs of his company. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.
  • A director is, in the absence of grounds for suspicion, justified in trusting that official of the company will perform such duties honestly.

The company may recover damages from its directors for loss caused by their negligence. However, something more than imprudence or want of care must be shown. It must be shown to be a case of gross negligence.

The company by decision of its members in general meeting decides whether to sue the directors for their negligence. Even if it is a case in which they could be liable the court has discretion under the Act to relieve directors of liability if it appears to the court that:

  • The directors acted honestly and reasonably. o They ought, having regard to the circumstances of the case, fairly to be excused. Duty to avoid conflicts of interest (s 146)

Directors have a duty to avoid circumstances where their personal interests conflict, or may possibly conflict, with the company’s interests. It may occur when a director makes personal use of information, property or opportunities belonging to the company, whether or not the company was able to take advantage of them at the time. Therefore directors must be careful not to breach this duty when they enter into a contract with their company or if they make a profit in the course of being a director. This duty does not apply to a conflict of interest in relation to a transaction or arrangement with the company, provided the director declared an interest.

As agents, directors have a duty to avoid a conflict of interest. In particular:

  • The directors must retain their freedom of action and not fetter their discretion by agreeing to vote as some other person may direct.
  • The directors owe a fiduciary duty to avoid a conflict of duty and personal interest.
  • The directors must not obtain any personal advantage from their position as directors without the consent of the company for whatever gain or profit they have obtained.

Regal (Hastings) Ltd v Gulliver 1942

The facts: The Company owned a cinema. It had the opportunity of acquiring two more cinemas through a subsidiary to be formed with an issued capital of £5,000. However the company could not proceed with this scheme since it only had £2,000 available for investment in the subsidiary.

The directors and their friends therefore subscribed £3,000 for shares of the new company to make up the required £5,000. The chairman acquired his shares not for himself but as nominee of other persons. The company’s solicitor also subscribed for shares. The share capital of the two companies (which then owned three cinemas) was sold at a price which yielded a profit of £2.80 per share of the new company in which the directors had invested. The new controlling shareholder of the company caused it to sue the directors to recover the profit which they had made.

Decision:

  • The directors were accountable to the company for their profit since they had obtained it from an opportunity which came to them as directors.
  • It was immaterial that the company had lost nothing since it had been unable to make the investment itself.
  • The directors might have kept their profit if the company had agreed by resolution passed in general meeting that they should do so. The directors might have used their votes to approve their action since it was not fraudulent (there was no misappropriation of the company’s property). (d) The chairman was not accountable for the profit on his shares since he did not obtain it for himself.

The solicitor was not accountable for his profit since he was not a director and so was not subject to the rule of accountability as a director for personal profits obtained in that capacity.

 

Directors will not be liable for a breach of this duty if:

  • The members of the company authorised their actions.
  • The situation cannot reasonably be regarded as likely to give rise to a conflict of interest.
  • The actions have been authorised by the other directors. This only applies if they are genuinely independent from the transaction and:

– If the company is private: the articles do not restrict such authorisation; or – If it is public: the articles expressly permit it.

  • The company explicitly rejected the opportunity they took up

 

Duty not to accept benefits from third parties (s 147)

This duty prohibits the acceptance of benefits (including bribes) from third parties conferred by reason of them being director, or doing (or omitting to do) something as a director. Where a director accepts a benefit that may also create or potentially create a conflict of interest, they will also be in breach of their s 146 duty. Unlike s 146, an act which would potentially be in breach of this duty cannot be authorised by the directors, but members do have the right to authorise it. Directors will not be in breach of this duty if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

 

Duty to declare interest in proposed transaction or arrangement (s 151)

Directors are required to disclose to the other directors the nature and extent of any interest, direct or indirect, that they have in relation to a proposed transaction or arrangement with the company. Even if the director is not a party to the transaction, the duty may apply if they are aware, or ought reasonably to be aware, of the interest. For example, the interest of another person in a contract with the company may require disclosure under this duty if that other person’s interest is a direct or indirect interest on the part of the director.

Directors are required to disclose their interest in any transaction before the company enters into the transaction. Disclosure can be made: o By written notice o By general notice o Verbally at a board meeting

Disclosure to the members is not sufficient to discharge the duty. Directors must declare the nature and extent of their interest to the other directors as well. If the declaration becomes void or inaccurate, a further declaration should be made. No declaration of interest is required if the director’s interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest.

Consequences of breach of duty

Breach of duty comes under the civil law rather than criminal law and, as mentioned earlier, the company itself must take up the action. This usually means the other directors starting proceedings.

Consequences for breach include:

Damages payable to the company where it has suffered loss

Restoration of company property

Repayment of any profits made by the director

Rescission of contract (where the director did not disclose an interest)

Examples of remedies against directors

Remedies against directors for breach of duties include accounting to the company for a personal gain, indemnifying the company, and rescission of contracts made with the company.

The type of remedy varies with the breach of duty.

  • The director may have to account for a personal gain.
  • They may have to indemnify the company against loss caused by their negligence, such as an unlawful transaction which they approved.
  • If they contract with the company in a conflict of interest the contract may be rescinded by the company. However, under common law rules the company cannot both affirm the contract andrecover the director’s profit.
  • The court may declare that a transaction is ultra vires or unlawful.

Directors’ liability for acts of other directors

A director is not liable for acts of fellow directors. However, if they become aware of serious breaches of duty by other directors, they may have a duty to inform members of them or to take control of assets of the company without having proper delegated authority to do so.

In such cases the director is liable for their own negligence in what they allow to happen and not directly for the misconduct of the other directors.

Directors’ personal liability

As a general rule a director has no personal liability for the debts of the company. But there are certain exceptions.

  • Personal liability may arise by lifting the veil of incorporation.
  • A limited company may by its articles or by special resolution provide that its directors shall have unlimited liability for its debts.
  • A director may be liable to the company’s creditors in certain circumstances.
  • In cases of fraudulent or wrongful trading liquidators can apply to the court for an order that those responsible (usually the directors) are liable to repay all or some specified part of the company’s debts.

Powers of Directors

The powers of the directors are defined by the articles. The directors are usually authorized ‘to manage the company’s business’ and ‘to exercise all the powers of the company for any purpose connected with the company’s business’.

Therefore they may take any decision which is within the capacity of the company unless either the Act or the articles themselves require that the decision shall be taken by the members in general meeting.

Exercise of powers

Although directors may have very wide powers they must nevertheless exercise these powers only for the purpose for which they were conferred if directors exercise a power, for an improper purpose or exceed their power, the court may intervene and set it aside, directors must use their powers for the proper purpose and for the best interests of the company and not to further their own interests.

In Piercy –v- Mills & Co. Ltd 1920

The directors made a fresh issue of shares to themselves and their supporters with the object of maintaining control and resisting the election of three additional directors which would have made them a minority on the board.

Held: The issue of shares in order to further their own interests was an improper purpose and therefore invalid.

Powers of the Chief Executive Officer (Managing Director)

The CEO or MD has apparent authority to make business contracts on behalf of the company. Their actual authority is whatever the board gives them.

In their dealings with outsiders the CEO or MD has apparent authority as agent of the company to make business contracts. No other director, even if they work full time, has that apparent authority as a director, though if they are employed as a manager they may have apparent authority at a slightly lower level. Although appointment as CEO or MD has special status, it may be terminated just like that of any other director (or employee); they then revert to the position of an ordinary director. Alternatively the company in general meeting may remove them from their office of director and they immediately cease to be CEO orMD since being a director is a necessary qualification for holding the post.

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