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Chapter 15
Company directors
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What you will learn?

 The role of directors in the operation of a company,
and the different types of directors, such as
executive/ non-executive directors or de jure and
de facto directors, shadow directors
 the ways in which directors are appointed, can lose
their office and the disqualification of directors
 The difference between the powers of the board of
directors, the managing director/chief executive
and individual directors to bind their company
 The duties that directors owe to their companies,
and the controls imposed by statute over dealings
between directors and their companies, including
loans
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1. Role of directors

Any person who occupies the position of director is treated

as such, the test being one of function.

Directors shall take part in making decisions by attending

meetings of the board of directors

A person who is given the title of director under the company

structure (i.e. sales director, HRD) are not a director in
company law
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1. Role of directors
Types directors

De jure
 Expressly appointed by a company
directors

 Held
Held out
out by
by aa company
company asas aa director
director
De
De facto
facto  Performing
Performing the functions of a
the functions of a director and
director and
directors
directors treated by the board as a director
treated by the board as a director
 Having
Having never
never been
been validly
validly appointed.
appointed.

 Seeking the power and influence that come

with the position of director, but without the
legal obligations it entails
Shadow
 Shadow directors are directors for legal
directors
purposes if the board of directors is
accustomed to act in accordance with shadow
directors' directions and instructions.
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1. Role of directors
Types directors

 A director may, if the articles permit, appoint an

Alternate
alternate director to attend and vote for them at
directors
board meetings which they are unable to attend.

Non-
 Not having a function to perform in a company's
executive
management but involved in its governance.
directors

Managing  One of the directors of the company appointed to

directors carry out overall day-to-day management
(CEO) functions
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1. Role of directors
Board of directors
The board of directors is the elected representative of the
shareholders, acting collectively in the management of a
company's affairs (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.

Number of directors:
 One for private company and two for public company
 No limit on statutory maximum number
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2. Appointment of directors
 The application for registration
delivered to the Registrar to form a
Appointment of company includes particulars of the first
first directors directors, with their consents.
 On the formation of the company those
persons become the first directors.

Most company articles allow for the

Appointment of appointment of directors:
subsequent  By ordinary resolution of the
directors shareholders, and
 By a decision of the directors.

 To give notice to the Registrar, within

Publicity
14 days

 At least 16, unless the articles provide

Age limit otherwise
 No upper limit
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3. Remuneration of directors
 Directors are entitled to reimbursement
of reasonable expenses incurred whilst
carrying out their duties or functions as
Directors’ directors
expenses  Most directors have written service
contracts setting out their entitlement to
emoluments and expenses
(>= 2 years => ordinary resolution)

 Any director may receive non-contractual

compensation for loss of office paid to
them voluntarily.
Compensation  Distinguished from any payments made
for loss of office to directors as employees
 Requiring approval of members in
general meeting for uncovenanted
payments
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3. Remuneration of directors
 Quoted companies are required to
include a directors' remuneration report
as part of their annual report, part of
Directors’ which is subject to audit
remuneration  Quoted companies are required to allow
report a vote by members on the directors'
remuneration report.
 Items not subject to audit vs Items
subject to audit

 A company must make available for

inspection by members a copy or
particulars of contracts of employment
Inspection of between the company or a subsidiary
directors’ with a director.
service  Contracts must be retained for one year
agreements after expiry and must be available either
at the registered office, or any other
location permitted by the Secretary of
State.
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4. Vacation of office
 Resignation
 Not offering for re-election when their
term of office ends
Cases of
 Death
vacations
 Dissolution of the company
 Being removed from office
 Being disqualified

Rules under model articles of public

companies:
 At the first AGM of the company all
directors shall retire.
Retirement
 At every subsequent AGM any directors
and re-election
appointed by the other directors since the
of directors
last AGM shall retire.
 Directors who were not appointed or re-
elected at one of the preceding two
AGMs shall retire.
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4. Vacation of office
Removal of directors

In addition to provisions in the articles for removal of directors, a

director may be removed from office by ordinary resolution at a
meeting of which special notice to the company has been given
by the person proposing it.

Restrictions on power to remove directors

Quorum:
Shareholding
 10% of the paid up share capital, or
qualification to
 10% of the voting rights, where the company
call a meeting
does not have shares

Shareholding to Where a meeting is already convened, 100

request a members holding an average £100 of share capital
resolution each may request a resolution to remove a director.

A director who is also a member may have

weighted voting rights given to them under the
Weighted voting
constitution for such an eventuality, so that they
rights
can automatically defeat any motion to remove
them as a director.

It is possible to draft a shareholder agreement

Class right stating that a member holding each class of share
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5. Disqualification of directors
5.1. Under model articles

Grounds for disqualification

• A person ceases to be a director by virtue of any provision
of the Companies Act 2006, or is prohibited from being a
director by law;
• A bankruptcy order is made against that person;
• A composition is made with that person’s creditors
generally in satisfaction of that person’s debts;
• 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;
• 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.
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5. Disqualification of directors
5.2. Under statute

A court may formally disqualify a person from being a director or

in any way directly or indirectly being concerned or taking part in
the promotion, formation or management of a company.

Therefore, the terms of the disqualification order are very wide,

and include acting as a consultant to a company. The Act,
despite its title, is not limited to the disqualification of people who
have been directors. Any person may be disqualified if they fall
within the appropriate grounds.
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5. Disqualification of directors
5.2. Under statute

Grounds for & Maximum period of disqualification of directors

Where a person is convicted of an indictable offence (either

in the UK or overseas) in connection with the promotion, 15 (5)
formation, management or liquidation of a company or with years
the receivership or management of a company's property.

Where it appears that a person has been persistently in

5 years
default in relation to provisions of company legislation.

Where it appears that a person has been guilty of 15

fraudulent trading. years

Where the Secretary of State, acting on a report made by

the inspectors or from information or documents obtained 15
under the Companies Act, applies to the court for an order years
believing it to be expedient in the public interest.

Where a director was involved in certain competition 15

violations. years

Where a director of an insolvent company has participated 15

in wrongful trading. years
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5. Disqualification of directors
5.3. Mitigation of disqualification

Examples of circumstances which have led the court to imposing

a lower period of disqualification include the following.
 Lack of dishonesty
 Loss of director's own money in the company
 Absence of personal gain, for example excessive
remuneration
 Efforts to mitigate the situation
 Likelihood of reoffending
 Proceedings hanging over director for a long time
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5. Disqualification of directors
 Resignation
 Not offering for re-election when their term
of office ends
Procedures for
 Death
disqualification
 Dissolution of the company
 Being removed from office
 Being disqualified

Rules under model articles of public

Acting as a
companies:
director whilst
 At the first AGM of the company all
disqualified
directors shall retire.

 The courts’ approach has been to view

‘ordinary commercial misjudgement’ as
Disqualification insufficient to justify disqualification.
for commercial  A lack of commercial probity, or gross
misjudgement negligence or total incompetence,
however, might render disqualification
appropriate.
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6. Power of directors
Restrictions on directors' powers

Statutory restrictions Restrictions imposed by articles

 Held out by a company as  Held out by a company as

a director
 Performing the functions of
a director and treated by
the board as a director
 Having never been validly
appointed.
a director
 Performing the functions of
a director and treated by
the board as a director
 Having never been validly
appointed.
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7. Powers of the CEO (Managing Director)

In their dealings with outsiders the CEO or MD has apparent
authority as agent of the company to make business contracts.

The CEO or MD's actual authority is whatever the board gives

them.

Holding outis a basic rule of the law of agency. This means, if

the principal (the company) holds out a person as its authorised
agent they are estopped from denying that they are its
authorised agent. They are bound by a contract they enter on
the company's behalf.

Apparent authority is the authority which an agent appears to

have to a third party. A contract made within the scope of such
authority will bind the principal, even though the agent was not
following their instructions.
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8. Duties of directors

7 statutory duties owed by directors:

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