Directors
Directors are appointed at general meetings, and if they are appointed by other directors, must be re-elected at a general meeting. Since 2010, as a result of the economic crisis, directors of the largest companies must be re-elected annually. This makes it easier to get rid of a director. Companies Act s 155: it is possible to appoint a company as a director of another company, as long as one is a person. Directors can be removed by not voting for them at an AGM or by ordinary resolution (s 168). They can be removed in accordance with any provisions under the articles e.g. by other directors. A director can be removed by ordinary resolution or any provisions - these are binding. However, a director can have an employment contract with the company and can sue for damages if it is in breach with the service contract - even if they breach themselves. Bushell v Faith (three shareholders, 100 shares each, each share worth one vote. One is a director. They convene a general meeting and pass a resolution. In the articles there was a clause: any vote to remove a director, where the director was a shareholder, the director/shareholder in question would have 3 votes per share. He had 300 votes so could not be removed) clauses are a way of getting around the inability of directors to entrench themselves. In small family companies this is easily defendable.
Notice of a resolution to remove the director must be sent to them 28 days before and they have a chance to be heard at the meeting. Directors must be removed at a meeting. Disqualification is not a shareholder remedy.
Company Director Disqualification Act 1986
A disqualified person is not permitted to be a director; take part in the management or formation of a company; or act as an insolvency practitioner. This is a regulatory right. They don't have to be directors, but must be acting like a director at least. If you are disqualified, and breach the disqualification order, (s 13) you are guilty of the offence and can be fined and sent to jail; and (s 15) are personally liable for the company's debts and obligations. The creditors can bring proceedings directly against you, or any officer who knew that you were disqualified and cooperated, for the company's debts.
Grounds for disqualification include bankruptcy (s 11 - automatically disqualified); conviction for indictable offences connected with the promotion, formation, management or liquidation of a company (s 2, 4 - automatic); persistent non-compliance with provisions requiring the filing of documents (s 3, 5); and where the person is shown to be unfit to act following the insolvent winding up of their company (s 6). Section 6 applies only for directors and those where the company has become insolvent. Most disqualifications that occur are under s 6 (1,151 in 2011-12).
Re Blackspur Group plc 1998: the purpose of CDDA is to protect the public (creditors) against directors who run a company into the ground and leave the creditors unpaid and then go onto another company and do the same, by banning those directors from participating in companies where there is limited liability and separate legal personality. It also acts as a deterrent from acting in such a way, and encourages higher standards of honesty and diligence for the protection of creditors.
Unfitness is not purely for bad decisions: it is for gross negligence and the negligent conduct of the person as a director. Unfit directors will continue business when they know they are suffering and only repay those creditors who are pressing for payment. Re Lo-Line Motors: ordinary commercial misjudgement is insufficient, but a lack of commercial probity/gross negligence/total incompetence would render him unfit. The court takes into account matters specified of sched 1 and 2 of CDDA.
MG Rover: 5 years after a company was bought out, it collapsed. They owed £1.3bn to creditors with a loss of 6,500 jobs. Four directors had paid themselves £42mn and asset stripped the company. They were disqualified for six, five and three years. There is no obligation to pay any money back. They were technically working within the law.
In deciding how long a person should be disqualified for, the courts apply a sentencing exercise: they take into account the seriousness of conduct, the extent and role of the person, the director's state of health and age, what periods of disqualification have been ordered for co-directors (Re Westmid Packing Services Ltd 1998). These can't get you out of disqualification but can make it a shorter period. Re Sevenoaks (Retail) Ltd 1991: 2-5 years least serious; 6-10 years for serious cases that don't warrant the higher bracket; 10-15 years for the most serious (extreme dishonesty in ripping off creditors; breaching disqualification order). Two years is the minimum. The period of disqualification should reflect the director's risk to the public (R v Evans 2000: the 'ringleader' was disqualified for 6 years, the younger one was given lesser on appeal of 3 years). Re Sevenoaks is not the only port of call: the court takes other factors into account, for example whether they need to make an example of the case.
Disqualification Undertakings (s 1A(1)): Director can give an undertaking that they will not be involved in the management of a company. This saves time, directors get less publicity, reduced costs etc. Most disqualifications have been by way of undertakings (s 6, s 6 and s 9A. They have the same effect as a disqualification order.
A director may apply to the court for leave of the court to act despite the original order: they may act in relation to one company but not another, especially where that director is the face of a company. They may be monitored and have meetings when ordered etc. If the court makes the order, they must ensure there is no danger to the public (Re Grayan Building Services Ltd 1995).
Notice of a resolution to remove the director must be sent to them 28 days before and they have a chance to be heard at the meeting. Directors must be removed at a meeting. Disqualification is not a shareholder remedy.
Company Director Disqualification Act 1986
A disqualified person is not permitted to be a director; take part in the management or formation of a company; or act as an insolvency practitioner. This is a regulatory right. They don't have to be directors, but must be acting like a director at least. If you are disqualified, and breach the disqualification order, (s 13) you are guilty of the offence and can be fined and sent to jail; and (s 15) are personally liable for the company's debts and obligations. The creditors can bring proceedings directly against you, or any officer who knew that you were disqualified and cooperated, for the company's debts.
Grounds for disqualification include bankruptcy (s 11 - automatically disqualified); conviction for indictable offences connected with the promotion, formation, management or liquidation of a company (s 2, 4 - automatic); persistent non-compliance with provisions requiring the filing of documents (s 3, 5); and where the person is shown to be unfit to act following the insolvent winding up of their company (s 6). Section 6 applies only for directors and those where the company has become insolvent. Most disqualifications that occur are under s 6 (1,151 in 2011-12).
Re Blackspur Group plc 1998: the purpose of CDDA is to protect the public (creditors) against directors who run a company into the ground and leave the creditors unpaid and then go onto another company and do the same, by banning those directors from participating in companies where there is limited liability and separate legal personality. It also acts as a deterrent from acting in such a way, and encourages higher standards of honesty and diligence for the protection of creditors.
Unfitness is not purely for bad decisions: it is for gross negligence and the negligent conduct of the person as a director. Unfit directors will continue business when they know they are suffering and only repay those creditors who are pressing for payment. Re Lo-Line Motors: ordinary commercial misjudgement is insufficient, but a lack of commercial probity/gross negligence/total incompetence would render him unfit. The court takes into account matters specified of sched 1 and 2 of CDDA.
MG Rover: 5 years after a company was bought out, it collapsed. They owed £1.3bn to creditors with a loss of 6,500 jobs. Four directors had paid themselves £42mn and asset stripped the company. They were disqualified for six, five and three years. There is no obligation to pay any money back. They were technically working within the law.
In deciding how long a person should be disqualified for, the courts apply a sentencing exercise: they take into account the seriousness of conduct, the extent and role of the person, the director's state of health and age, what periods of disqualification have been ordered for co-directors (Re Westmid Packing Services Ltd 1998). These can't get you out of disqualification but can make it a shorter period. Re Sevenoaks (Retail) Ltd 1991: 2-5 years least serious; 6-10 years for serious cases that don't warrant the higher bracket; 10-15 years for the most serious (extreme dishonesty in ripping off creditors; breaching disqualification order). Two years is the minimum. The period of disqualification should reflect the director's risk to the public (R v Evans 2000: the 'ringleader' was disqualified for 6 years, the younger one was given lesser on appeal of 3 years). Re Sevenoaks is not the only port of call: the court takes other factors into account, for example whether they need to make an example of the case.
Disqualification Undertakings (s 1A(1)): Director can give an undertaking that they will not be involved in the management of a company. This saves time, directors get less publicity, reduced costs etc. Most disqualifications have been by way of undertakings (s 6, s 6 and s 9A. They have the same effect as a disqualification order.
A director may apply to the court for leave of the court to act despite the original order: they may act in relation to one company but not another, especially where that director is the face of a company. They may be monitored and have meetings when ordered etc. If the court makes the order, they must ensure there is no danger to the public (Re Grayan Building Services Ltd 1995).
Types of Director
Executive directors are at the top of the company, concerned with the daily running of the company.
Non-executive directors (NEDs) are not full-timers. They are not employees of the company, but have been appointed to the board for their expertise, independence and abilities. They are expected to monitor was goes on on behalf of the shareholders. They are expected to challenge management constructively. The UK code of corporate governance sets out what NEDs are meant to be doing. One thing is setting out directors' renumeration. They are usually paid a fee and expenses, and attend board meetings.
Alternate directors are appointed if one director cannot attend board meetings. The alternate director is not an agent. A de facto director is someone who acts as a director but was not appointed according to law. They are a real director even though they were not properly appointed. The concept comes from common law. A de facto director will owe fiduciary duties to the company, a senior manager will not. They can be disqualified under s 6 1986 Act. A de facto director is a person who assumed the functions and status of a director (Re Hydrodam (Corby) Ltd 1994; Re Kaytech International).
Re Paycheck Services 3 Ltd 2010: The company tries to sue D, who was not a director, for breach. D was the only human being doing anything but he was not a de jure director. Was he a de facto director? The court said he was not. "What is important is not what a director calls himself by what he does." The courts held that the companies were separate legal entities and that everything he did clearly meant he acted as a director but he only worked for the first company, not the company trying to sue him: he was not part of the corporate governing structure of the second company. He didn't assume a role in the company: he didn't mean to be a director. De facto directors: was there a holding out of the person as a director? Did the person use the title of director? Did the person have proper information on which to base decisions? Were they part of the governing structure of the company? Secretary of State for Trade and Industry v Tjolle 1998: insolvent company, wanted to sue D. She wasn't held to be a de facto director as she was paid less, had no involvement in financial matters.
Shadow directors: a person in accordance with whose directions or instructions the directors of the company are accustomed to act. However, a person is not deemed a shadow director by reason only hat the directors act on advice given by him in a professional capacity. Deverell.
Non-executive directors (NEDs) are not full-timers. They are not employees of the company, but have been appointed to the board for their expertise, independence and abilities. They are expected to monitor was goes on on behalf of the shareholders. They are expected to challenge management constructively. The UK code of corporate governance sets out what NEDs are meant to be doing. One thing is setting out directors' renumeration. They are usually paid a fee and expenses, and attend board meetings.
Alternate directors are appointed if one director cannot attend board meetings. The alternate director is not an agent. A de facto director is someone who acts as a director but was not appointed according to law. They are a real director even though they were not properly appointed. The concept comes from common law. A de facto director will owe fiduciary duties to the company, a senior manager will not. They can be disqualified under s 6 1986 Act. A de facto director is a person who assumed the functions and status of a director (Re Hydrodam (Corby) Ltd 1994; Re Kaytech International).
Re Paycheck Services 3 Ltd 2010: The company tries to sue D, who was not a director, for breach. D was the only human being doing anything but he was not a de jure director. Was he a de facto director? The court said he was not. "What is important is not what a director calls himself by what he does." The courts held that the companies were separate legal entities and that everything he did clearly meant he acted as a director but he only worked for the first company, not the company trying to sue him: he was not part of the corporate governing structure of the second company. He didn't assume a role in the company: he didn't mean to be a director. De facto directors: was there a holding out of the person as a director? Did the person use the title of director? Did the person have proper information on which to base decisions? Were they part of the governing structure of the company? Secretary of State for Trade and Industry v Tjolle 1998: insolvent company, wanted to sue D. She wasn't held to be a de facto director as she was paid less, had no involvement in financial matters.
Shadow directors: a person in accordance with whose directions or instructions the directors of the company are accustomed to act. However, a person is not deemed a shadow director by reason only hat the directors act on advice given by him in a professional capacity. Deverell.