Duties + Powers of a Director

Question 1

5 general info about directors

Answer 1

1. Every company must have at least 1 director (Public companies must have 2)
2. At least one director is required to be a natural person (a human being not a company)
3. A director is not required to be a shareholder unless stated in the articles of association
4. Names of the directors must be presented when registering the company
5. The company must keep a Register of Directors

Question 2

Legislation + Articles state what about the Appointment of a director

Answer 2

• Must have at least 1 or 2 directors when registering the company
• Appointment can be done by ordinary resolution i.e. majority votes

Question 3

Legislation + Articles state what about the Retirement of a director

Answer 3

• Director can retire any time by serving notice on the Board

Question 4

Legislation + Articles state what about the Removal of a director

Answer 4

• A director can be removed with a majority vote
• But this is difficult if the director is also a major shareholder

Question 5

Case about the Removal of a director - Bushell v Faith

Answer 5

Facts:
- A director whose removal was proposed owned 1/3 of shares, therefore could not be removed
- The company’s articles provided that in the event of a removal of any director, any shares held by that director carry the right to 3 votes per share

Held: The company’s articles allowed for the director to have more votes based on his shares, therefore the result of the vote was valid.

Question 6

Legislation + Articles state what about a director’s Vacation of Office

Answer 6

• A director’s office can be vacated through resignation, retirement, statutory reasons or removal by shareholders or the court

Question 7

Company Directors Disqualification Act 1986

Answer 7

Disqualification may occur when:
1. Conviction for an indictable offence in connection with the management of a company (e.g. fraud, false representation, bribery, etc)
2. A finding that an offence involving fraud has been committed in the course of winding up a company
3. Persistent default in filing returns with the Registrar (filing docs late)
4. A finding that a person is unfit to be concerned in the management of a company ( only applies when a company becomes insolvent)
5. UNdischarged bankrupts
6. Where a director is suffering from a mental disorder + admitted to hospital
7. Persons disqualified by court
8. Where a director is absent from director’s meetings w/o the Board’s permission for at least 6 months + the directors resolve that the office be vacated

Question 8

Types of Directors (4)

Answer 8

1. Executive: daily operations (formaly appointed)
2. Non-executive: policy + strategic direction of the business (formally appointed)
3. De-facto: ppl who act livke a director in terms of involvement in the company (not formally appointed)
4. Shadow directors: ppl who act like a director + have a lot of power e.g. a majority shareholder (not formally appointed)

Question 9

HOw does the Company’s Act 2006 define shadow directors? (include specific section)

Answer 9

S.251 (1) CA 2006: any person in accordance with whose directions or instructions the directors of a company are accustomed to act

Question 10

Case study for shadow directors: Re Hydrodam (Corby) Ld

Answer 10

The judge outlined the tests of shadow directors:
- The actual directors of the company must be identifiable
- The alleged shadow director must have directed those directors on how to act
- The directors must have acted in accordance with his instructions
- They must have been accustomed so to act

Question 11

State and explain the Articles (in model articles) + section of CA about the Director’s Powers

Answer 11

Article 3: Subject to the artivles, the directors are responsible for the management of the company’s business. for which purpose they may exercise all the powers of the company

Articles 7, 8 and 11: Decisions of the directors must normally be taken either at a board meeting at which a quorum is presnt or by unanimous written agreement

s.43 CA 2006: Directors are agents of the company

Question 12

Case about the directors powers - The RUle in Turquand’s Case

Answer 12

Facts:
- The Royal British Bank lent money to a company which later became insolvent
- The bank argued that the dirctors of the company exceeded in their authority to borrow money because its articles state that the directors only had power to borrow up to an amount authorised by a company resolution

Held: Court ruled in favour of the company as ppl transacting wiht companies are entitled to assume that internal company rules are complied with, even it they are not.
- aka the indoor management rule

Question 13

Name + explain the section of CA about the company’s capacity

Answer 13

s.39A Company’s Capacity: the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution
- when entering into a contract wiht the company, the company cannot go back on the actions of a director

Question 14

Name + explain the section of CA about the Powers of directors to bind the company

Answer 14

s.40 Power of directors to bind the company
- In favour of a person dealing wiht a company in good faith, the power of the directors to bind the company or authorise others to do so is deemed to be free of any limitation under the constitution
Therefore:
- a person deals with a company if he is a party to any transaction

A person dealing with a company is:
- not bound to enquire to any limitation on the powers of the directors to bind the company or authorise others to do so (indoor management principal)
- is presumed to have acted in good faith unless the contrary is proved
- is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution

Question 15

What is s.271 CA 2006

Answer 15

Company secretary:
- required in every public company
- may also be a director
- must be included in the Register of directors and company secretary
- must be suitably qualified
- not required in private companies

Question 16

Responsibilities of a Company secretary

Answer 16

• guiding the chairman + board on their responsiblities
• supporting the chairman in ensuring the board functions efficiently + effectively
• ensuring good info flows
• maintaining good shareholder relations
• developing + overseeing the systems that ensure the company’s legal + statutory compliance
• monitor changes in relevant legislation + the regulatory environment
• oversee the day to day admin of the company

Question 17

Case on Company secretary - Panorama Dev’ts (Guildford) Ltd v. Fidelis Furnishing Fabrics Ltd

Answer 17

Facts:
- company secretary hired cars under the company;s name for their personal use
- company tries to avoid paying for these charges

Held: Company secretaries are recognised as agents of the company as they regularly enter into contracts on behalf of it for daily operations (implied authority), therefore he may be regarded as having the apparent authority to do such things on behalf of the company = the company. is liable.

Question 18

Define fiduciary duties

Answer 18

A fiduciary is a person who is bound to act for another’s benefit in circumstances which give rise to a relationship of trust and confidenec

Question 19

Name the section of CA defining Fiduciary duties of company directors

Answer 19

S.170 CA 2006: The common law general requirement of a director to act in good faith is stated in this section, reaffirming the duty to act in the best interest of the company at all times

• Generally, a director does not owe a fiduciary duty to members, creditors, employees or anyone else
• Only the company can sure for breach of such a duty

Question 20

Duty to act within the company’s powers

Answer 20

s.171 CA 2006
- If the dominant purpose. of the exercise is proper, no breach will occur

• If the dominant purpose is improper, a breach will occur regardless of whether other subservient proper purposes exist

Question 21

Case of duty to act within the company’s powers - Howard Smith Ltd v Ampol Petroleum Ltd

Answer 21

Facts:
- directors of a company issued shares to a favoured bidder to prevent the rival bidder from taking control
- the articles permitted such issances but the purpose was to alter the balance of control

Held: While the issuance was permitted, it was exercised for improper purposes

Question 22

Duty to promote the success of the company

Answer 22

s.172 CA
- To act “bona fide” in the interests of the company

Having regard for the following:
- likely consequences of any decisions in the long run
the interests of the company’s employees
- the need to foster the company’s business relationships w/ suppliers, customers + others
- the impact of the company’s operations on the community + the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company

Question 23

Case of duty to promote the success of the company - Mutual LIfe Insurance Co of New York v Rank ORganisation Ltd

Answer 23

Facts:
- Rank issued shares with a preference to existing shareholders
- But this preference did not extend to its UK and Canada shareholders (including Mutual Life) because it was thought to not be in the company’s interests to register for a share issue in these countires
- Rank’s artivles allowed directors to issue + allot shares based on what htey tihnk is proper
- American + Canadian shareholders claimed a breach of contract due to unequal treatment of shareholders.

Held: The directors were not in breach of duty as thay decided it was in the best interests of the company
- the duties of directors are to exercise their powers to issue shares in good faith + exercise them fairly between shreholders (not necessarily treat shareholders identically)

Question 24

Duty to exercise independent judgement

Answer 24

s.173: This duty is not infringed by a director acting in a way authorised by the company’s constitution
- Directors can bind themselves to act in a certain way if they believe such action to be in the company’s interests

Question 25

Case of duty to exercise independent judgement - Fullham Football Club Ltd v Cabra Estates plc

Answer 25

FActs: - football club leased a football ground - in exchange for substantial payment, the directors of the club agreed to not oppose any future planning made by the owners of the football ground - Directors later sought to get out of the contract claiming it was unlawful to limit/constrain their duty to act in the best interests of the club in the future Held: if the director exercised independent judgement when entering into the contract it is not a breach of s.173 - As the defendant thought the contract was for the benefit of the company when entering it, therefore he cannot claim later on that the contract stops him from acting for the company's benefit.

Question 26

Duty to exercise reasonable care, skill + diligence

Answer 26

s.174: the standard of care expected from a director is based on that of a reasonably diligent person with: A) the general knowledge, skill + experience reasonably expected of a person carrying out the functions B) the general knowledge, skill and experience the director has

Question 27

Case of duty to exercise reasonable care, skill + diligence - Re Cardiff Savings Bank

Answer 27

A common law 'Subjective Duty of CAre' was applied to allow directors to escape the consequences of their negligence

Question 28

Case of duty of reasonable care, skill + diligence - Re Barings Bank Plc

Answer 28

- Introduced an objective test providing a minimum standard of care, skill and diligence togehter with any experience, knowledge + skill possessed by that particular director

Question 29

DUty to avoid conflicts of interest

Answer 29

s.175: Where a director has an interest or possibly may conflict with the interests of the company - A director breaches his duty if he personally takes advantage of an opportunity that rightly belongs to the company, therefore he will be liable to account for any profit that he makes to the company - IN a private company, directors are allowed to approve conflicts of interest involving a director themselves as long as the company;s constitution does not prohibit them from doing so; the authorisation is only effective if the Board approves - Must disclose conflicts to the Board

Question 30

Case of duty to avoid conflict of interest - Bhullar v Bhullar

Answer 30

Facts: - Family memebrs who were directors of a company fell out and divided the assets among 2 halves of the family - One half saw a for sale sign on a lot next to the bowling alley the company owned and bought the land in their own name Held: The court held that the purchase of land would have been commercially attractive and there was a breach of fiduciary duty regardless of whether the company would have bought the land or not - A director owes a duty to avoid conflicts of interests including through the exploitation of a corporate opportunity

Question 31

Duty to not eccept benefits from 3rd parties

Answer 31

s.176: Not nfringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 32

Duty to declare interest in proposed transactions or arrangements

Answer 32

s.177: declaration of interest to let ppl know the t the person's interest may influence his decisoin making - a aperson who ceases to be a director is still subject to this duty in regards to things done or omitted by him b4 he ceased to be a director - any declaration of interest in proposed transactions must be made b4 entering into the transaciton or agreement - a director does not need to declare an interest if it cannot be reasonably regarded as likely to give rise to a conflict of interest