Module 8 – Tutorial
1. What kinds of conduct by directors can lead to their disqualification from office? Explain the
difference between director disqualification and the removal of a director.
2. Jim, Ann and Sarah are the directors of Winklepicker Ltd. Jim and Anne have been content to leave all
business matters to Sarah, and in the last few years they have not bothered to attend board meetings.
Sarah arranged for the company to employ her son as its marketing manager, even though he had no
experience of marketing and he has caused the company to undertake some very expensive and loss-
making campaigns. Jim and Ann have been unaware of this, as they do not generally look at the accounts.
Jim has many contacts in the business world, and has successfully tendered (in the name of another
company of which he is a director) for a contract in the same line of business as that of Winklepicker Ltd,
even though Winklepicker Ltd would have wanted to win that contract itself. The contract has proved
extremely profitable for Jim’s new company. It is so long since Ann attended a board meeting that she has
forgotten that she is a director of Winklepicker Ltd.
The shares in Winklepicker Ltd have been acquired by new shareholders who are appalled by the way the
company has been run. They seek your advice on the following:
(a) Whether they can remove the whole board of directors from office, and if so, how;
ISSUE: Can the members remove the Board of Directors?
RULE:
Companies Act, s. 168-169.
APPLICATION:
Law Facts Conclusiom
s. 168 – removal by ordinary The members want to remover
resolution with special notice the whole board – may have to
Sourthern pay out their contracts even if
Foundries. they are removed
s. 169 The Directors get the right to
make representations
CONCLUSION
ANSWER
ISSUE: Can the members remove the Board of Directors?
RULE:
Members can remove a Director under s. 168-169 of the CA 2006. Section 168 allows for Directors to be
removed using an ordinary resolution at a meeting, with special notice. This is because in s. 169 a Director
has the right to make representations before the meeting. Case law, as well as s. 168 do state howoever,
that if you remove a director the company can still be in breach of contract and liabl for damages (Southern
Foundries).
Sourthern Foundries.
APPLICATION:
In this scenario the members are unhappy with the whole Board and want to remove them. They can do so
but they need to give special notice, an opportunity for the Directors to make representations, and they
need to win a vote on an ordinary resolution. They also need to consider if they are going to be in breach of
any of the Directors contracts.
CONCLUSION:
The members can remove the Directors if they follow the procedure in the CA 2006./
(b) Whether the directors have breached any statutory duties;
OUTLINE
ISSUE: Has J breached any duties as a D?
RULE:
CA 2006, s. 172 – promote success, s. 174 – care and skill, s. 175 – conflict of interest, s. 177-declare interest
Smith v Fawcett – promote success it is a subjective test. Did the director think he was doing the right thing
City Equitable Fire Insurance, s. 174 – subjective and objective test, s. 168 – directors removal, s. 178 civil
consequences
APPLICATION:
s. 172 Not checking accounts
Not attending meeting
Working for company in
competetion
Smith v Fawcett –
promote success it is
a subjective test. Did
the director think he
was doing the right
thing
s. 174 same City Equitable
Fire Insurance, s. 174
– subjective and
objective test
s. 175 Director of company in the same
line of work – competing contract.
s. 177 Should have declared interest in
the other comapny
CONCLUSION
ANSWER – J
ISSUE: Has J breached any duties as a D?
RULE:
Directors have duties to the members of the company. These duties originated in the common law (trust
law), but are now codified in the Companies Act 2006. The first relevant duty is the duty to promote the
success of the company (s. 172). The test for breaching this duty is subjective – or did the Director think he
was working in the best interest of the company (Smith v Fawcett). Section 174 is the duty of care and skill.
This duty has a subjective and an objective test meaning that the Director must have thought he was using
due care and skill, and a reasonable person with the same experience would also think so. (City Equitable
Fire). Section 175 is the duty to avoid a conflict of interest. Unlike trust law in company law a conflict of
interest can be approved by the members. Another relevant provision is section on 177 which is the duty to
declare an interest in a proposed transaction. A director can suffer a range of penalties such as being
removed as director, having to pay damages or accounting for any profits from breach (s. 178)
APPLICATION:
In this situation J has failed to attend meetings, he has failed to review the company accounts, he has been
the Director of a competing company, and he has entered into contracts for the competing company that
would have been of interest of W. If we consider s. 172 (duty to promote the company), any of these
behaviours would probably put him in breach of duty. He could try to argue that he thought that these
behaviours were in the best interest of the company as this section is a subjective test. J also is probably in
breach of s. 174 (duty of care and skill). Not attending meetings or reviewing accounts would probably not
meet the subjective or objective test in City Equitable ire. J as a Director of a competing company has also
put himself into a position of conflict of interest (s. 175). If he had disclosed this earlier and gotten
permission then this would not be a breach. Similarly. Under s. 177 he had a duty to disclose any interests in
potential transactions, which if he has not he is in breach. J may be removed as a director (s. 168). He may
also be required to pay damages for losses to the company. Any profits that he received from the conflict of
interest can also be ordered to be paid over to the company.
CONCLUSION
J is likely in breach of s. 172, 174, 175 and 177 of the CA 1006. Pursuant to s.
ISSUE:
RULE:
APPLICATION:
CONCLUSION
ISSUE:
RULE:
APPLICATION:
CONCLUSION
3. Splash Ltd owns and operates several boating and leisure centres in Scotland. The company seeks your
advice on a number of issues:
(a) James, a director of Splash, contracted for the purchase of several canoes from Boats Ltd and the
canoes arrived within 2 weeks of being ordered. Unknown to Splash Ltd, James received a substantial
commission on the transaction. James feels he is entitled to the money as it was only his friendship
with Hamish, the managing director of Boats Ltd, which secured such prompt delivery of the canoes.
ISSUE:
RULE:
APPLICATION:
CONCLUSION
(b) Sid, one of the directors, is a chartered accountant. He lives and works in London and seldom visits the
company. He has only been to three board meetings in the last five years, but he is happy to allow the
arrangement to continue because he receives high fees as a director. James sends him books of blank
cheques on the company’s account for Sid to sign, which Sid signs and sends back to James for him to
use. James used a cheque to make an illegal loan on behalf of the company, which the company cannot
recover.
ISSUE:
RULE:
APPLICATION:
CONCLUSION
(c) There was previously a third director, Ann, but she resigned after suffering a nervous breakdown owing
to the stress of negotiating a big contract with an American tour company. Unfortunately the contract
was never concluded, but Ann made a speedy recovery. James has now heard that Ann has set up her
own boating and leisure complex on the west coast of Scotland and that it is a great success, thanks to
Ann’s American contacts in the tour industry.
ISSUE:
RULE:
APPLICATION:
CONCLUSION