Appointment of directors

• When a company is first formed, the application for registration states the person or persons
who have consented to act as directors.

• The procedure for appointing director in set out in the company’s articles.

• The model articles state:

17.—(1) Any person who is willing to act as a director, and is permitted by law to do so, may be
appointed to be a director—

(a) by ordinary resolution, or

(b) by a decision of the directors.

• In PLCs, new directors are generally appointed by the Board, and their appointment lasts to
the next AGM, when the shareholders are asked to vote to re-appoint the new directors.

• A directorship in a PLC is usually for a fixed number of years.

• However, the articles of a small private company may allows for the directors to be
appointed permanently.

Retirement and resignation of directors

• A director can retire from office at the end of a set period and not seek re-election, or can
resign from office at any time.

• Some articles allow for retirement and re-election of directors after a set number of years.

Removal of directors

• S.168 CA 2006:
(1) A company may by ordinary resolution at a meeting remove a director before the
expiration of his period of office, notwithstanding anything in any agreement between it and
him.
(2) Special notice is required of a resolution to remove a director under this section or to
appoint somebody instead of a director so removed at the meeting at which he is removed.
• Special notice: at least 28 days
• s.268 cannot be excluded by a company.
• A meeting is required for both private and public companies.
• The director has a right to speak at the meeting.

Removal of directors
• Removal of an executive director may result in a breach of the contract of employment.
• In reality, when a director is going to be removed from office, he is usually asked to resign,
and the terms of dismissal are then negotiated.
• Weighted Voting Rights in private companies

It is possible for private companies to have weighted voting rights which protect directors from
being removed.
 • Bushell v Faith (1970)

Vacation of office
• It is usual for the articles of company to provide that a director’s office is automatically
vacated if, for example the director becomes bankrupt or has been absent from board
meetings for a consecutive period of time (e.g. 6 months).
• A directorship will also cease if:
– the director dies
– the company becomes insolvent and goes into liquidation.
– the director is required by the articles to hold a certain number of shares, and the
director fails to obtain or ceases to hold the shares.
–
Disqualification
• Company Directors Disqualification Act 1986
Allows a court to disqualify any person (including persons who have not previously been directors)
from being :
• a Director
• a Liquidator
• an Administrator
• a Receiver
• a Manager
• involved in the promotion or formation of a company.

Discretionary Powers
A court MAY make a disqualification order for up to 15 years:
– where a person has been convicted of a serious offence in connection with the
formation, management or liquidation of a company.
– where, on the winding up of a company, it appears that a person has been guilty of
fraudulent trading.
– where a director is guilty of certain breaches of competition law or participating in
wrongful trading.
– where the Secretary of State considers it to be in the public interest.

A court MAY make a disqualification order for up to 5 years:

– where a person has persistently failed to comply with requirements to file returns,
accounts or other documents with the Registrar of Companies.

Mandatory Orders
A court MUST make a disqualification order for between 2 and 15 years:
– where a person has been a director of a company which has become insolvent either
while he was a director or subsequently, and his conduct makes him unfit to be
concerned with the management of a company.
Schedule 1 to the CDDA 1986 lists matters to which the court is to have regard, including:
– Misapplication of company property
– Defrauding creditors
– Breach of director’s duties
 Register of directors
• S167 CA 2006: a company is required to register details about directors at Companies House.
• The company must keep its own register of directors.
• Companies House must be informed of any change in directors within 14 days.

The powers of company directors

• The extent of the directors’ powers is defined by the articles of a company.
• Directors have a statutory duty under CA 2006 to exercise their powers:
– for the proper purpose for which they were given; and
– in the best interests of the company.

Directors authority: Agency

Directors acting without authority

if the company’s articles contain restrictions on the powers of directors, the company will be
bound by the transaction, provided the third party is acting in good faith.
Power of directors to bind the company: CA 2006 S.40
(1)In favour of a person dealing with 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
company's constitution.

(2)(b)a person dealing with a company—

(i)is not bound to enquire as to any limitation on the powers of the directors to bind the company
or authorise others to do so,
(ii)is presumed to have acted in good faith unless the contrary is proved, and
(iii)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.

A third party is presumed to be acting in good faith unless the contrary is proved.

Directors acting without authority in a transaction with a ‘connected person’

 • S.40 does not apply when the ‘third party’ is a director of the company or a person
connected with a director.
• Connected persons include:
– The director’s spouse or partner;
– Children and step-children;
– Companies where the director holds 20% or more of the share capital, or can
exercise 20% or more of the voting rights.
• If the transaction is with a connected person, the transaction is voidable by the company,
and the connected person is liable:
– to account to the company for any gain he has made, and
– to indemnify the company for any loss that the company has incurred.
• But the connected person can avoid liability “if he shows that at the time the transaction
was entered into he did not know that the directors were exceeding their powers”. (s.41(5)).

Directors acting without authority

Duties of directors
• The CA 2006 has codified directors’ duties.
• The 7 codified duties are found in ss171-177.
• All the duties are regarded as fiduciary duties, apart from the common law duty to exercise
reasonable care, skill and diligence.
• The articles of a company can impose more onerous duties on a director, but they cannot
reduce the statutory ones.
 S171: A duty to act within powers.
A director of a company must—
(a)act in accordance with the company's constitution, and
(b)only exercise powers for the purposes for which they are conferred.
• Directors must act in accordance with the company’s articles and any later resolutions and
agreements.
• Directors must only exercise their powers for the purpose for which they were given.

S172: A duty to promote the success of the company

1)A director of a company must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in doing so
have regard (amongst other matters) to—

(a)the likely consequences of any decision in the long term,

(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business
conduct, and
(f)the need to act fairly as between members of the company.

• A director must act in a way which he honestly considers would most likely promote the
success of the company for the benefit of the shareholders.
• S.172 provides a non-exhaustive list of factors to be taken into consideration.
• It is up to directors to decide whether a particular factor is relevant to any decision, and how
much weight to give it.

Odyssey Entertainment Ltd (in liquidation) v Kamp (2012)

Facts: Kamp was a director of Odyssey, which traded in film distribution rights. Kamp decided that
he would have better prospects working on his own account. He started to undertake work
keeping it secret from Odyssey’s Board of Directors. Kamp told the Board that Odyssey’s financial
prospects were poor and shortly afterwards the Board decided to wind up the company.
Decision In working behind Odyssey’s back to develop his own opportunities, Kamp had breached
s.172. (He was also in breach of s.175, i.e. his duty to avoid a conflict of interest)

S173: A duty to exercise independent judgment

(1)A director of a company must exercise independent judgment.
(2)This duty is not infringed by his acting—
(a)in accordance with an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors, or
(b)in a way authorised by the company's constitution.

• Directors must exercise their own judgment, and not merely rely on instructions from
others.
• However, directors can agree that their company will act in a particular way, provided at the
time it appears to be in the best interest of the company.

Fulham Football club Ltd & Ors v Cabra Estates plc (1992)
Facts: The directors of Fulham signed an agreement with Cabra to develop the football ground
and gave an undertaking that the club would not oppose the development at a later date. Later
the directors did not want to be bound by the agreement and alleged that they could not fetter
their discretion to act in a particular way.
Decision It was held that the directors had not improperly restricted the future exercise of their
discretion.The agreement was binding on the company.

S174: A duty to exercise reasonable skill, care and diligence.

(1)A director of a company must exercise reasonable care, skill and diligence.
(2)This means the 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.

• The duty has an objective and a subjective test.

• Objective test s.174(2)(a): ‘how would a reasonable director have acted?’
• Subjective test: s.174(2)(b): ‘how would a reasonably diligent person with the director’s
actual knowledge skill and expertise have acted?’
• If a director has a particular skill that is of a higher standard than an ordinary director, he will
be expected to perform with the higher level of expertise.

S175: A duty to avoid conflict of interest

(1)A director of a company must avoid a situation in which he has, or can have, a direct or
indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2)This applies in particular to the exploitation of any property, information or opportunity
(and it is immaterial whether the company could take advantage of the property,
information or opportunity).
(3)This duty does not apply to a conflict of interest arising in relation to a transaction or
arrangement with the company.
(4)This duty is not infringed—
(a)if the situation cannot reasonably be regarded as likely to give rise to a conflict of
interest; or
(b)if the matter has been authorised by the directors.

• A director continues to be subject to his duty under s.175 even after he has ceased to be a
director.
• A director may in breach of s.175 if he takes advantage of an opportunity he knows about
though being a director, even though the company would not have been able to take up the
opportunity. (See IDC v Cooley below).
IDC v Cooley (1972)
Facts: Cooley was an architect and MD of a building construction company. When it
became apparent that the Eastern Gas Board were not going to award a contract to the
company, Cooley accepted the work privately and resigned from the company, falsely
claiming ill health.
Decision Cooley had breached his duty to avoid a conflict of interest, and he was liable to
the company for the profits he had made.

S176: A duty not to accept benefits from third parties

(1)A director of a company must not accept a benefit from a third party conferred by reason of—
(a)his being a director, or
(b)his doing (or not doing) anything as director.
….
(4)This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as
likely to give rise to a conflict of interest.

S177: A duty to declare an interest in any proposed transaction or arrangement with the
company.
(1)If a director of a company is in any way, directly or indirectly, interested in a proposed
transaction or arrangement with the company, he must declare the nature and extent of that
interest to the other directors.
……
(4)Any declaration required by this section must be made before the company enters into the
transaction or arrangement.
(5)This section does not require a declaration of an interest of which the director is not aware or
where the director is not aware of the transaction or arrangement in question.
For this purpose a director is treated as being aware of matters of which he ought reasonably to
be aware.
(6)A director need not declare an interest—
(a)if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b)if, or to the extent that, the other directors are already aware of it

Breach of duties by directors

• If one or more of the duties are breached, the company can bring an action against the
director in breach.
• If the company is unwilling to do this (perhaps because the director in breach controls the
company), shareholder could bring a derivative claim under s.260.
• Alternatively, shareholders might bring a claim for unfair prejudice

S178 Civil consequences of breach of general duties

(1)The consequences of breach (or threatened breach) of sections 171 to 177 are
the same as would apply if the corresponding common law rule or equitable
principle applied.
(2)The duties in those sections (with the exception of section 174 (duty to exercise
reasonable care, skill and diligence)) are, accordingly, enforceable in the same
way as any other fiduciary duty owed to a company by its directors.
• The remedy available for the common law duty under s.174 to exercise reasonable care and
skill is damages.
• Breach of one of the fiduciary duties gives rise to equitable remedies, such as an injunction
or the restitution of property.
• The primary remedy for breach of fiduciary duty is an order for the payment by the
defendant of the profit which he has obtained from his wrongdoing.
Eg. if a company director has used his position as director to obtain a profit for himself in a
transaction which he should have acquired for the company he may be required to pay the
profit from the transaction even if this exceeds the loss suffered by the company.
• A director will not be liable to the company for the act of his co-directors if he did know of
the act and should have not suspected it.
• BUT: if a director became aware of serious breaches of duty by fellow directors then he
could be liable in negligence if the failed to inform shareholders or take control of the
company’s assets.
• If more than one director is liable for the breach, they are jointly and severally liable.

Ratification of acts giving rise to liability

• S.239 allows ratification by the shareholders when a director’s conduct amounts to
negligence, default or breach of duty or breach of trust in relation to the company.
• The director, or any shareholder connected to him, cannot take part in the vote to ratify the
wrongful action.
• However, the director can count towards the quorum of any meeting and can speak at the
meeting.
• An ordinary resolution of the members is all that is required unless the articles state
otherwise.

• S239: Ratification of acts by directors

• (1)This section applies to the ratification by a company of conduct by a director amounting
to negligence, default, breach of duty or breach of trust in relation to the company.
• (2)The decision of the company to ratify such conduct must be made by resolution of the
members of the company.

Bamford v Bamford (1970)

Facts: The company was in danger of being taken over. To avoid this the directors issued
an extra 500,000 shares to a business which distributed the company’s products. This
might have been contrary to the articles (this point was never decided). The shareholders
approved the issue of the shares by passing an ordinary resolution at a general meeting.
Decision Even if the directors had irregularly exercised their powers, the ratification by
the shareholders made the contract a good one, and absolved the directors from all
liability.

Protection of directors from liability

• S232: provisions in the company’s articles and contracts with directors that purport to
exempt or indemnity a director from breach of duty are VOID.
• However, the company is permitted to provide insurance for a director against such
liabilities.

Directors remuneration salaries and fees

• Articles provide for payment to a non-executive director by way of fees. (Normally the
articles state that the amount of fees to be paid have to be approved by an ordinary
resolution of shareholders.)
• A contract of service provides for payment to an executive director by way of salary.
• An executive director’s service contract must be kept by the company, and shareholders can
view it.
• Generally, the Board of Directors has the authority to deal with contracts of service.

Companies Listed on the London Stock Exchange:

 • A listed company must set up a committee of independent non-executive directors to make
recommendations about remuneration packages and publish an annual report on directors’
pay.
• The report has to be approved by the Board of Directors and voted on by the shareholders
at a general meeting.
• A copy of the report is sent to the Registrar of Companies.
• A listed company must also comply with the UK Corporate Governance Code.

Loans by the company to directors

• S.197: loans made by the company to its directors (and connected persons) are permitted if
the shareholders approve the loan by resolution.

• All transactions involving loans to directors must be disclosed in the company’s accounts.

Existing contracts: duty to declare

- S.182: Where a director of a company is in any way, directly or indirectly, interested in a
transaction that has been entered into by the company, he must declare the nature and
extent of the interest to the other directors.
- NB: If the director does not need to make a second declaration if he has already done so
under s.177 (duty to declare interest in a proposed transaction).
- Any contract involving an undeclared interest may be voidable by the company.

Substantial and material property transactions

- S. 190: A company may not enter into an arrangement (i.e. a contract or a non-binding
agreement) under which:
– a director (or a connected person) acquires from the company a substantial non-
cash asset, or
– the company acquires a substantial non-cash asset from such a director (or
connected person),
- unless the arrangement has been approved by a resolution of the shareholders.
‘Substantial asset’ is:
– One that exceeds 10% of the company’s asset value and is more than £5,000; or
Its value exceeds £100,000.

• S. 190 is designed to prevent directors (or connected persons) acting without shareholder
approval and buying from the company assets for less than their market value, or selling
assets to the company for more than their market value.
• If the shareholders have not given their approval:
– the transaction is VOIDABLE by the company; and
– the director (or connected person) is liable to the company for any profits arising
from the contract.

Company secretary
 - an officer, an agent, an employee, may also be one of the directors
- can be a corporate body or a partnership.
- responsible for much of the company’s administrative work

- Private companies: may appoint a company secretary, but it is not mandatory.

- PLCs: must appoint a company secretary.

Qualifications
Private companies: no special qualifications required.

PLCs: the directors must be satisfied that the secretary has the knowledge and expertise to do the
job, and that he or she satisfies one or more of the requirements set out in s.273.

Duties
- There are no specific statutory duties set out in CA 2006.
- The duties of a secretary vary according to the size and nature of the company.
- Typical duties include organising Board and shareholder meetings, and drafting agendas and
minutes of meetings.
- A company secretary is also responsible for ensuring that the annual return and other
documents are filed at Companies House

- A company secretary has the authority to act as the company’s agent.

- The company secretary has a limited power to bind the company, but only in respect of the
type of administrative contracts which a company secretary would be expected to make.
- A company secretary cannot borrow money or sue on the company’s behalf without
authority

- A company secretary has the authority to act as the company’s agent.

Panorama Dev Ltd v Fidelis Furnishing Fabrics Ltd (1971)

Company auditors
- An accountant
- An independent contractor appointed:
. to check that the company accounts are accurate and properly prepared; and
. to report to the shareholders.
- Must be a member of a recognised accountancy body (e.g. Institute of Chartered
Accountants).

Appointment
- Companies are required by law to appoint an auditor each financial year to carry out an
audit of the accounts, unless:
. It is dormant (i.e. no significant transactions have occurred); or
. It is a small private company (i.e. annual turnover of less than £5.6 million and total assets not
more than £2.8 million); or
. It is a not-for-profit company (and therefore subject to a public sector audit).
 - NB: Even if exempt under law, an auditor must be appointed if insisted upon by 10% of the
shareholders (or by a shareholder holding at least 10% of the nominal share value of the
company’s shares).

PRIVATE COMPANIES
- The directors can appoint the first auditor of the company.
- Subsequent auditors are appointed by ordinary resolution of the shareholders.
- An auditor must be appointed for each financial year of the company, unless the directors
reasonably resolve otherwise on the ground that audited accounts are unlikely to be
required.
- The appointment must be made within 28 days of the accounts being circulated to
members.

PUBLIC COMPANIES
- The first auditor of a PLC is appointed by the directors and holds office until the first general
meeting at which accounts are considered.
- Subsequent auditors are appointed by ordinary resolution of the shareholders at each
meeting at which the accounts are considered.
- An auditor must be appointed for each financial year of the company, unless the directors
reasonably resolve otherwise on the ground that audited accounts are unlikely to be
required.

Rights and duties

S.499: auditors have a right of access at all times to the company’s books and are entitled to
require information and explanations from the officers of the company.
S.501: it is a criminal offence for any company officer to knowingly or recklessly give false,
deceptive or misleading information to an auditor
S.502: an auditor is entitled to attend company meetings and to receive written resolutions.
S.507: it is a criminal offence if an auditor knowingly or recklessly causes his report to include
any matter that is false, deceptive or misleading

An auditor owes a duty of care and skill to the company and to the shareholders as a whole.
However, the duty is not owed to members of the public nor to individual shareholders:

Caparo Industries plc v Dickman (1990)

Facts: The claimants, Caparo, owned shares in Fidelity plc. The accounts of Fidelity plc were
audited by Dickman. Caparo relied on these accounts when making their decision to purchase
additional shares and to mount a successful takeover bid. However, the accounts were inaccurate
and showed a profit of £1.3m instead if a loss of £465,000.
Decision: Dickson was not liable because auditors owed no duty to the public at large or to
individual shareholders who rely on the accounts to buy further shares. The purpose of audited
accounts was to enable shareholders to exercise proper control over a company.

Removal
S.510: an auditor can be removed from office, before the expiry of his term of office, at any time.
This can be achieved by an ordinary resolution at a meeting, and special notice of the resolution
(i.e. 28 days).
S.511: the auditor must be given a copy of the resolution and has a right to compel the company to
circulate written representations.
S.512: If an auditor is removed, the Registrar must be informed within 14 days.
S.513: an auditor is not prevented from claiming damages on account of the termination of his
contract.

Resignation
S.516: an auditor can resign by delivering written notice to the company’s registered office.
S. 517: a copy of the auditor’s notice of resignation must be sent to the Registrar within 14 days.