Directors
Chapter 10
Directors
Chapter Contents
10.1 Management of the company
10.2 The appointment of directors
10.3 Executive and non-executive directors
10.4 Qualification of directors
10.7 Statutory disqualification of directors
10.8 Directors’ loss of office and compensation payments
10.9 Loans, quasi-loans and credit transactions in favour of directors
10.1 Management of the company
The company is not a natural person. Therefore, someone needs to act on behalf of the company. The division of powers between the shareholders in general meetings and the directors will be considered later. Suffice it to state at this juncture that the power of management is largely left with the directors. The purpose of this section of the textbook is to consider the role of directors, the appointment of directors, the removal of directors, the powers of directors and directors’ duties. There is no precise definition of a director. Section 250 of the Companies Act 2006 merely states that a director ‘includes any person occupying the position of director, by whatever name called’.
10.2 The appointment of directors
Section 7 of the 2006 Act provides that subscribers may form a company. In order to do so, they must submit registration documents which include a statement of the company’s proposed officers (s 9(4)(c) CA 2006).
Section 12, which deals with the statement of the proposed officers, provides that the statement of the company’s proposed officers required to be disclosed to the Registrar must contain the required particulars of:
(a) the person who is, or persons who are, to be the first director or directors of the company, together with
(b) details of any secretary or joint secretaries of a private company, if there is to be one, and
(c) in the case of a public company the person who is, or the persons who are, to be the first secretary or joint secretaries of the public company.
The statement must also contain a consent by each of the persons named to act in the relevant capacity.
Section 154 of the Companies Act 2006 provides that a private company must have at least one director, and a public company must have at least two directors. Section 155 goes on to provide that a company must have at least one director who is a natural person.
This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office. If it appears to the Secretary of State that a company is in breach of either s 154 or s 155, the Secretary of State may give the company a direction under s 156 indicating what the company must do in order to comply, and the period within which it must do so.
A minimum age is introduced for directors by s 157 CA 2006. A person may not be appointed a director of a company unless he has attained the age of 16 years. Section 158 provides that the Secretary of State may make provision by regulation for cases in which a person who has not attained the age of 16 may be appointed as a director of a company.
With regard to existing underage directors before the Companies Act 2006, any person who is under age will cease to be a director on s 157 coming into force (s 159).
Section 161 provides that the acts of a person acting as a director are valid, notwithstanding that it is afterwards discovered that there is a defect in the appointment, or that the person is disqualified from holding office, or that the person has ceased to hold office, or that he was not entitled to vote on the matter in question. This applies too even if the resolution is void under s 160 (appointment of directors of a public company to be voted on individually).
Every company must keep a register of its directors (s 162 CA 2006). The register must be kept available for inspection either at the company’s registered office or at a place specified in the regulations under s 1136. The company must give notice to the Registrar of the address at which the register is kept available for inspection and of any change in that place unless it has, at all times, been kept at the company’s registered office (s 162(3), (4) CA 2006).
The company’s register of directors should contain details of each director including a service address. It was formerly necessary for a private address to be given but this is no longer the case. The service address that the director has to give may be stated as the company’s registered office (s 163(5) CA 2006).
A company is also obliged to keep a register of directors’ residential addresses and to notify Companies House of its contents (s 165 CA 2006). The contents of this, however, are, with few exceptions, kept private (see s 240 CA 2006). The protection of privacy, however, ceases to apply if the director’s service address is ineffective (s 245 CA 2006).
These provisions do not apply to directors’ residential addresses already on the public register at Companies House. However, the Act does enable regulations to be made requiring the Registrar to make a specific address unavailable to public view if an application is made specifying the address that is to be removed, and its location on the register (s 1088 CA 2006).
Subsequent directors may be appointed in accordance with the articles. The board of directors may generally appoint people to casual vacancies between annual general meetings, but where this is done the people appointed to such vacancies must stand down at the next annual general meeting and be subject to re-election by ordinary resolution.
Changes in directors and registered details of directors (for example, a change of address) must be notified to the companies registry within 14 days of the change (s 167).
Section 251 defines a shadow director. In the Companies Act ‘shadow director’, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
It is provided that a person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity.
It is further provided that a body corporate is not to be regarded as a shadow director of any of its subsidiary companies for the purposes of:
Chapter 2 (general duties of directors),
Chapter 4 (transactions requiring members’ approval), and
Chapter 6 (contract with sole member who is also a director)
by reason only that the directors of the subsidiary are accustomed to act in accordance with its directions or instructions.
The overriding intention of the definition is to prevent controllers of the company from escaping legal responsibilities and liabilities.
Section 223 provides that in certain situations a shadow director is treated as a director. These are:
(a) ss 188 and 189 (directors’ service contracts) (see section 10.5.3);
(b) ss 190–196 (property transactions) (see section 12.14);
(c) ss 197–214 (loans etc.) (see section 10.9);
(d) ss 215–222 (payments for loss of office) (see section 10.8).
It is further provided in s 223 that any reference in these provisions to loss of office as a director does not apply in relation to loss of a person’s status as a shadow director.
It is important to stress that a person is a shadow director of a company only if ‘the directors of the company’ are accustomed to act in accordance with that person’s directions or instructions. The shadow director must be ‘the puppet master controlling the actions of the board’ whilst the directors ‘must be the “cat’s-paw” of the shadow director’. Furthermore, the reference to ‘accustomed to act’ indicates that the acts must be done not on one individual occasion but over a period of time and as a regular course of conduct (see Re Unisoft Group Ltd (No 2) [1994] 1 BCLC 609 per Harman J). Furthermore, if only a minority of the board follows the instructions then the person will not be regarded as a shadow director (see Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 All ER 404).
It seems clear from the judicial interpretation of s 251 that a high degree of control of a company’s business is necessary for a person to be adjudged to be a shadow director. In Re PFTZM Ltd [1995] 2 BCLC 354, PFTZM ran a hotel. The hotel had financial difficulties and the hotel’s landlord company permitted the company to continue trading on the basis that a director and a manager of the landlord company attended the company’s management meetings and decided which of the company’s creditors would be paid. The court held that there was no prima facie case for deciding that the landlord company’s director and manager were shadow directors.
Judge Paul Baker QC said, speaking of the term ‘shadow director’ ([1995] 2 BCLC 354, at p. 367):
This definition is directed to the case where the nominees are put up but in fact behind them their strings are being pulled by some other persons who do not put themselves forward as appointed directors. In this case, the involvement of the applicants here was thrust upon them by the insolvency of the company. They were not accustomed to give directions. The actions they took, as I see it, were simply directed to trying to rescue what they could out of the company using their undoubted rights as secured creditors.
In Re Mumtaz Properties Ltd [2011] EWCA Civ 610, the Court of Appeal provided guidance on the criteria as to whether an individual is to be taken to be a de facto director of a company in relation to s 212 of the Insolvency Act 1986.
Liability will be imposed on people who act as directors or exercise the powers of directors and discharge the tasks and functions of directors. This is irrespective of whether or not there has been a valid appointment as a director. See also Re Sykes (Butchers) Ltd [1998] 1 BCLC 110.
In Revenue and Customs Commissioners v Holland [2010] UKSC 51, decided on 24 November 2010, the Supreme Court held that a human director of a corporate director of a company is not thereby a de facto director of the company and liable for the misuse of any assets where he has acted appropriately as a director of the corporate director.
10.3 Executive and non-executive directors
A distinction is often made between executive and non-executive directors. A nonexecutive director is a director who is employed under a contract for services and is not working full time for the company and will receive, in exchange for his work for the company, a director’s fee. By contrast, an executive director is a director who is employed under a contract of service, i.e. an employment contract, and will be generally working full time for the company and will be receiving a salary in exchange for his work.
There is no great significance in the distinction between the two in company law. For example, they are subject to the same regime of directors’ duties (see in particular section 12.6.1). However, in relation to corporate governance, discussed below (Chapter 13), non-executive directors have an important role to play in seeking to ensure that the board of a company acts in the interests of the company rather than of individual members of the board. The Combined Code provides for a balance of executive and non-executive directors, and in particular independent non-executive directors. It is their task to control the executive directors. At least half of the board of companies in the FTSE 350 should be independent, while smaller quoted companies should have at least two independent directors. Independent non-executive directors should form the majority on the nomination committee which recommends appointments of directors, and the remuneration and audit committees should consist entirely of independent nonexecutive directors. The role of non-executive directors (and particularly independent non-executive directors, as defined in the Combined Code – see section 13.9) are therefore vital in ensuring appropriate corporate governance.
10.4 Qualification of directors
Unlike company secretaries, directors do not need to have any particular qualification to serve even in a public company. However, there are some negative conditions that must be considered.
In addition, there are statutory disqualifications from office. By virtue of the Company Directors Disqualification Act of 1986, both undischarged bankrupts and those disqualified by the court are ineligible to serve. Disqualification of directors will be considered below, in section 10.7. In addition, persons aged over 70 can only be elected or re-elected as directors of public companies or private companies that are subsidiaries of public companies if special notice is given before the meeting in accordance with CA 2006 (special notice is considered below, in section 16.4.1).
Section 168 of the Companies Act 2006 provides that a company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding any agreement between the company and him.
This provision was first introduced in the Companies Act 1948 in response to the recommendations of the Cohen Committee of 1945. At first sight it seems to be a very powerful weapon in the hands of shareholders but its apparent power is subject to certain very real restrictions.
10.5.1 Weighted voting provisions
Although the section prohibits the exclusion of the right to remove a director by ordinary resolution, it does nothing to counteract normal principles of company law that may make that power very difficult to exercise. Thus, in British company law, it has always been possible to weight votes attaching to shares. This may, therefore, be used to give a minority shareholder who is a director the power to block his removal. In Bushell v Faith [1970] AC 1099, the House of Lords held that a weighted voting provision was valid in this context. Shares were held in a property company that owned a block of flats in Southgate, North London, by two sisters and a brother. The shares were held equally. The sisters wished to remove the brother from the board of directors. In normal circumstances, they would have had no problem as they had more than half of the shares. However, there was a provision in the articles of association that stated that on a resolution to remove a director, his shares would carry three votes each. The House of Lords held by a majority of four to one that this provision was valid. The effect of this was sufficient to block the brother’s removal as a director. It is perhaps worth noting that the senior Law Lord, Lord Morris of Borth-y-Gest, dissented in this case. He said the effect of finding that weighted voting was permissible in such circumstances was to drive a coach and horses through the intention of the legislature. It is possible that a shareholder could, in appropriate circumstances, use such a weighted voting provision used against the petitioner as the basis of a petition under ss 994–996 of the Companies Act 2006.
By the same token, it would seem that other devices may be used. For example, a quorum provision that stated that the meeting was inquorate in the absence of the director threatened with removal would not be contrary to the Companies Act 2006. However, it may well be that a shareholder wishing to remove a director may be able to use such a provision as the basis of a petition under ss 994–996 CA 2006 as being unfairly prejudicial (see section 15.3). In Harman v BML Group Ltd [1994] 1 WLR 893, there was a shareholders’ agreement which contained a provision that the meeting was only quorate if B or his proxy was present. B was removed as a director in his absence and he issued proceedings under s 994 contesting his removal. The Court of Appeal held that those wishing to remove the director could not use s 168 as the section could not be used to override class rights. The shareholders’ agreement attached rights to shares and this has the same effect as if the class rights were contained in the company’s articles.
In Phillip John Smith v James Carl Butler and Contract Holdings Ltd [2011] EWHC 2301, the issue involved the holding of a corporate meeting with the quorum fixed at one by the court. Butler, as the Managing Director of Contract Holdings Ltd, purported to suspend Smith, the majority shareholder and Chairman of the company. The reason for the purported suspension was in relation to an alleged fraud. This alleged fraud had been committed several years previously and had been known about by Butler for some time, but he had taken no action in relation to it until after Smith had declared that he wished to appoint a chief executive for the company as he was concerned about how Butler was running the company.
After the purported suspension, Smith was denied any role in the company’s business. He subsequently attempted to hold a company meeting to consider the removal of Butler as a director of the company. Butler refused to attend such a meeting and, in consequence, under the company’s articles, the meeting could not be quorate.
Smith then applied for relief from the court. He sought a declaration that his suspension was void as it was not consistent with the company’s articles of association, and also sought an order under s 306 CA 2006, authorising a company meeting to be ordered with the quorum fixed at one.