Directors

The Purpose of Having Directors

1. Because the company is an artificial person
2. Directors are,
i. the agents of a company (normal rule)
 Salomon v Salomon
- The company is a separate legal entity
 Ferguson v Wilson
- Directors are the agents of the company
- The company is liable for the directors’ actions

ii. the embodiment of the company (exception to the normal rule - under the
doctrine of alter ego)
 Tesco Supermarkets v Nattrass
- A director is not an agent – but an embodiment of the company itself
- The company won’t be vicariously liable

3. Directors are needed to run the company & to transact on behalf of s/holders
(fiduciary duty)

Doctrine of Alter Ego

 Disregards the separate identity of companies (exception to the normal rule)
 Those controlling the company are held personally liable for the company’s actions
 The doctrine applies when,
- A person uses the company as a tool to,
i. Commit fraudulent transactions
ii. Abuse the corporate structure for personal gain
iii. Fail to follow corporate formalities
iv. Mix personal & company finances
 The court considers the company as the “alter ego”(second self) of the person
 This doctrine is closely tied to the idea of piercing the corporate veil

Definition of Directors
 S.529(1) 2007 Act (Interpretation section)
- A director is a person,
i. who is legally appointed/elected to direct the company
ii. whose directions other directors or the whole board usually follows
 iii. who controls powers normally exercised by the board
iv. who has been delegated powers of the board/ who exercises the
board’s power w/ the consent of the board

- These don’t apply to professionals acting solely in their professional capacity

(ie – lawyer/accountants)

Management of the Company

 S.184 2007 Act
- A company will be managed by/under the direction/supervision of the board
- The board shall have powers necessary for directing/supervising the
management

 Automatic Self-Cleansing Filter Syndicate v Cunninghame

- If the AoA states that the directors are responsible for managing the
company, shareholders can’t interfere w/ their decisions
- Exception: If directors act unlawfully

 John Shaw & Sons v Shaw

- Directors & shareholders have separate powers
- Shareholders can only control the exercise of powers by directors by,
i. altering the AoA
ii. not re-electing directors they don’t approve
- Shareholders can’t exercise directors’ powers just like how directors
can’t exercise shareholders’ powers

Appointment of Directors
 S.201 2007 Act – Min number of directors
- Sets down the minimum number of directors required:
1. Pvt companies – 1
2. Public companies - 2
 Apart from this the Act says little about the appointment of directors since its mostly
regulated by the AoA

 S.203 2007 Act – Consent + certification of not being disqualified

- A person will be appointed as a director if they,
i. consent to be a director
ii. certify that they’re not disqualified from being directors
(should be done in the prescribed form)
 S.204 2007 Act – Appointment of first & subsequent directors
- First directors will be appointed by:
i. an application of incorporation
ii. proposal for amalgamation
- They will,
i. be appointed on the date the document takes effect
ii. remain in office until they have to leave under the law
- Subsequent directors,
i. will be appointed by shareholders
 Woolf v East Nigel Gold Mining Co
- Subsequent directors will be appointed by shareholders
through an ordinary resolution
 Worcester Corsetry v Witting
- Even if the AoA is silent on the appointment of directors,
shareholders have a common law right to appoint directors

ii. unless the AoA provides otherwise

 First directors:
- Appointed by subscribers to the AoA
- Their details + consent to act (signed + written) must be sent to the Registrar
upon registration

 Directors will be appointed by,

i. classes of shareholders
ii. debenture holders
iii. third parties

 Temporary/ additional directors can be appointed to the board to fill casual

vacancies or to represent third parties & will hold power until the next AGM
 Munster v Cammell Co
- Casual vacancies = any vacancy not arising out of rotation or
retirement (ie – death, resignation etc.)

 S.205 2007 Act – Appointment of directors should be through a single resolution

(block appointment not allowed)
- In public companies,
i. A single resolution can only appoint one director (general rule)
ii. If multiple directors need to be appointed through a single resolution,
then a prior resolution should be passed to allow that
iii. Any appointment that violates this rule is not valid
iv. Election by poll/ballot is allowed to appoint multiple directors at once
Qualifications of Directors
 S.202 2007 Act – Disqualification criteria
- The following people are disqualified from being directors:
i. Minors
ii. Those of unsound mind
iii. Undischarged insolvents (those who can’t pay their debts)
iv. A person that’s not a natural person
v. A person prohibited from being a director under the 1982 Act
vi. A person prohibited from being a director under the 2007 Act (under
S.213/S.214)
vii. A person who doesn’t qualify to be a director under the AoA of the
company

- Provided:
˃ If a person is disqualified but still acts as a director
˃ The law will treat them as a director for the purpose of duties &
obligations

 S.213 2007 Act – Prohibition criteria

- The following people aren’t allowed to be directors:
i. A person of unsound mind
ii. A person convicted of a crime punishable by imprisonment under
this Act
iii. A person convicted of an offence involving a dishonest/fraudulent
act under this Act
iv. A person adjudged insolvent (under the Insolvency Ord.)

- However, they can apply to be directors 5 years after the

conviction/adjudication

 S.214 2007 Act – Court’s disqualification criteria

- Court can order that a person can’t be a director/ promoter or involved in
the management of a company directly/indirectly w/out the leave of the
court for 10 years or less
- The criteria for such an order:
i. Prohibition from being a director under S.213
ii. Conviction for an offence involving dishonest/fraudulent acts in a
foreign country
iii. Persistent failure to comply w/ the provisions of the Act
iv. Being a director of an insolvent company + their conduct as a director
in that company/another company makes them unfit to be a director
Retirement of Directors
 S.210 2007 Act – Retirement
- Retirement age = 70
- Applies to directors of,
i. Public companies
ii. Private subsidiaries of public companies
- Directors meeting the above criteria must retire at the first AGM after
turning 70
- If reappointed they have to retire again at the AGM after that

 S.211 2007 Act – Extension of retirement

- Retirement can be extended through a special resolution (stating that the
retirement age doesn’t apply) at a general meeting
- This has to be renewed every year

 S.212 2007 Act – Disclosure of Age

- If a person appointed as a director is 70 or above (or a lower age set in the
AoA) must notify the company of their age
- Failing to disclose age or acting under an invalid appointment are considered
offences under the Act (finable)

Removal of Directors
 S.206 2007 Act – Removal of directors
- Directors can be removed through an ordinary resolution
- The removal of the director should be named a purpose of the meeting prior
to the meeting
- After notice of removal is given, a director can make written representations
within 14 days & ask them to be shared among the shareholders (the
company has to do this, unless they get court order to deny this on the
grounds of the director trying to abuse the process to gain publicity for a
defamatory matter)

 S.207 2007 Act – Grounds for Vacating Office

i. Resignation of the director (through notice)
- The resignation takes effect once the written + signed notice reaches
the company’s registered office
ii. Removal under the law or AoA
 iii. Retirement under S.210
iv. Disqualification under S.202
v. Death
vi. Vacate office as required by the AoA

Validity of Directors’ Acts

 S.209 2007 Act
- A director’s acts would be valid even if,
i. their appointment was defective/
ii. they’re not qualified for appointment (similar to the attachment of
obligations in S.202)
 Haddow Nominees v Rarawa Farm (New Zealand case)
- Debentures issued under the signature of directors who
were not validly appointed were considered valid

The Relationship Between the AoA & Directors

 The AoA serves as a legally binding contract between the company & its
shareholders & stakeholders

 S.188 2007 Act

- Directors can’t act in a way or allow the company to act in a way that
violates the Companies Act & the AoA

Powers of Directors
 Bears fiduciary duties
 Acts through the board
- Board
˃ Proceedings are governed by the AoA
˃ Responsible for the company’s actions
- Violations draw:
Statutorily codified
i. Personal liability for the first time in SL
ii. Criminal sanctions under the 2007 Act
˃ Makes policy decisions on behalf of shareholders (fiduciary duty)
 The extent of the directors’ authority depends on the AoA

 These duties used to be under common law & judicial decision – the codification has
conferred greater obligation on directors
  S.184 2007 Act – Powers of Directors
- Directors shall be given the power necessary to direct/supervise the
management of the company

 S.185 2007 Act – Exceptions to the Powers of Directors

- A company can’t carry out a major transaction w/out,
i. Getting approval through special resolution (written agreement of all
shareholders)
ii. Express authorisation in the AoA at incorporation (initial intention)
- “Major transactions” =
i. Acquiring assets worth more than ½ the company’s current assets
ii. Selling more than ½ the company’s current assets
iii. Entering into agreement that attach rights/obligations more than ½
the company’s current assets
iv. Transactions that significantly change the business
- Exceptions to “major transactions”:
i. Transactions involving floating charges (ie – floating charge over an
inventory)
ii. Transactions done by administrators/liquidators

 S.186 2007 Act – Delegation of Power

- The board can delegate its powers to,
i. to a committee of directors
ii. director
iii. employee (could be a manager)
- If the delegate abuses their power the directors will be directly responsible
for it if,
i. They had reason to believe before the abuse of power that the
delegate wouldn’t exercise the power properly (in compliance w/ the
Act/AoA)
ii. The board failed to monitor their exercise of power
 Hely-Hutchinson v Brayhead
- A company can be bound by the acts of its officers not
explicitly authorized to do something, but however their
conduct & the company’s acquiescence creates
implied/apparent authority

Fiduciary Duties
 Fiduciary:
- A word derived from the Latin word ‘fiducia’, meaning faith/trust
- It’s a person who holds a legal/ethical relationship of trust with another
  Bristol & West Building Society v Mothew
- Fiduciary = someone who acts on behalf of another in
circumstances that give rise to a relationship of trust &
confidence

- Such a relationship exists between the board & shareholders, w/ regard to,
i. corporate assets
ii. shareholder rights

 Fiduciary duties:
1. Duty of good faith
- Duty to act in the best interest of the company
2. Duty of care
- Exercising a degree of skill & care reasonably expected of a person w/ that
level knowledge & skill
- Diligent oversight to assure legality of transactions & to protect assets
3. Duty of loyalty
- Duty to avoid conflicts of interest

I. Duty of Good Faith

 S.187 2007 Act
- Duty to act in good faith – in what they believe the best interest of the
company (duty to act in good faith)
- Proviso – A director of a subsidiary is allowed to act in the best interest of the
parent company, even if it’s not in the best interest of the subsidiary

II. Duty of Care

 S.189 2007 Act
- Directors,
i. Can’t be reckless or grossly negligent
ii. Are expected to act w/ a degree of skill & care reasonably expected
of a person w/ their knowledge & experience

 Re City Equitable Fire Insurance Co

- A director is expected to act w/ a degree of skill reasonably
expected of a person of their knowledge & experience
- Also a director is allowed to delegate their power

- The standard differs from one director to another

 III. Duty of Loyalty
- The duty of loyalty includes:
i. Duty to act in good faith (subjective)
 S.187 2007 Act
ii. Duty not to take advantage of the other’s trust

IV. Duty to Act Within Powers

 S.188 2007 Act
- A director can’t act nor allow the company to act in a way that contravenes
the provisions of the 2007 Act or the company’s AoA

V. Duty to Disclose Interests

- This derives from the ‘no profit rule’ which forms a part of a director’s duty
to act in good faith
 S.192 2007 Act
- After a director becomes aware of a conflict w/ a company transaction they
have to,
i. Enter it in the interest register
ii. Disclose it to the board (where there’s more than one director)
- A general notice stating the nature & extent of the interest is sufficient
- Even if a director fails to disclose the interest, the transaction would be valid
- However, the director will be liable for an offence

Directors’ Duty on Insolvency & Serious Capital Loss

- In both these provision a high standard of care is expected of a director
- This is because insolvency & serious capital loss occur as a result of a long
process of mismanagement

 S.219 2007 Act – Duty at insolvency

(1) A director who believes that the company can’t pay its debt should call a board
meeting on whether to apply to court to wind up
(2) If a director fails to do this & later the company goes into liquidation, the
director would be liable for the losses suffered by creditors
(3) At the above meeting,
a. if the board doesn’t resolve to wind up
 b. even though there are no reasonable grounds to believe that the company is
solvent
c. and the company is subsequently placed in liquidation
all directors who didn’t vote for winding up will be made liable in whole or part
for the losses suffered by the creditors

 S.57 (2007 Act) – Solvency test

(1) A company is deemed to have satisfied the solvency test if:

a. It can pay back its debt as they become due
b. It’s Assets ≥ Liabilities + Stated capital

(2) In determining whether a company satisfies the solvency test the following
should be taken into account by the board:
a. Its most recent financial statements
b. Circumstances which affect the value of the company’s assets & liabilities
c. Fair valuation/ other methods of assessing the value of assets & liabilities

 Instances where its done:

1. Before distribution of dividends
- S.56 2007 Act – The board has to be satisfied that the company will pass the
solvency test after distribution (criminal liability attaches for the failure to do
this)
2. Reduction of stated capital
- S.59 2007 Act – Due to share redemption/buy back of shares the company
fails the solvency test, then the stated capital should be reduced

 Exceptions:
1. Where a shareholder acquires a right to force a company to buy back shares –
stated capital won’t be considered in the solvency test
Ie –
˃ Normal solvency test: Assets ≥ Stated capital + Liabilities
˃ Solvency test for forced buy outs: Assets ≥ Liabilities
 Objectives of the test:
1. To prevent directors from misapplying funds
2. A form of indirect application of ultra vires

 S.220 2007 Act – Duty at serious capital loss

 – When a director realizes that a company’s net assets are less than half its stated
capital, they have to call an extraordinary general meeting w/ the shareholders
(within 20 working days)
– The meeting notice should include a report from the board explaining:
 What losses the company has suffered (nature)
 Why those losses happened (reason)
 What the board is doing to stop further losses (remedy)

– If the board doesn’t call the meeting, they can be held personally liable

Liability of Directors
 S.224 2007 Act – Shareholder action against oppression
- Shareholders can make an application to the court against oppressive actions
of the company against shareholders (including themselves)
- The court can make an interim order to regulate the company’s affairs on
just & equitable terms, until a decision is made

 S.225 2007 Act – Shareholder action against mismanagement

- Shareholders can make an application to the court against conduct of affairs/
material changes in the management which are detrimental to the
company’s interests
- The court can make an interim order to regulate the company’s affairs on
just & equitable terms, until a decision is made

Other Relevant Sections

Section Aspect
S.270 (d) A company would be wound up if it has
no directors
S.290 Directors can rely on advice of
experts/other members, if they act
carefully & in good faith
S.297 Directors can’t misuse confidential
company information, unless lawfully
authorised/not prejudicial to the
company
S.42 Banking Act To be a director of a licenced commercial
bank a person must have,
i. Qualifications & experience in
baking/related fields
ii. Not be guilty of fraud/deceit
etc. (by a
regulatory/professional/legal
body)