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Directors

What is a director?
The term director includes any person occupying the position of director. A director is an officer of the company and an agent of the company. Directors are the companys most senior level of management and have the right to take part in the board of management. They are also the people appointed by the shareholders to manage the company. It also includes corporate bodies a company can be a director of another company. The Act does not specify any qualifications that must be held in order to qualify as a company director. However, a companys Articles may require that a director holds a specified qualification, e.g. directors of a residents management company may be required to be property owners or tenants of the particular development. A public company must have at least 2 directors. A private company must have at least 1 director. The first directors are either named in the articles or the articles give authority to appoint the directors. The appointment of subsequent directors is regulated by the articles and they are elected by an ordinary resolution at the AGM. The actual position of a director may be described in a number of ways. (i) they are officers of the company (s.744 of the CA 1985); (ii) the board of directors is the agent of the company and, under Art 84 of Table A, the board may appoint one or more managing directors. They are, therefore, able to bind the company without incurring personal liability; (iii) directors are in a fiduciary relationship with their company. This means that they are in a similar position to trustees. The importance of this lies in the nature of the duties that it imposes on directors (see below); (iv) directors are not employees of their companies per se. They may, however, be employed by the company (see executive directors below), in which case they will usually have a distinct service contract detailing their duties and remuneration. Apart from service contracts, the articles usually provide for the remuneration of directors in the exercise of their general duties. Directors can be: De Jure De Facto Shadow Executive Non-executive 1 De jure directors: Directors who have been properly appointed and who have satisfied the legal formalities regarding their appointment. 2 De facto directors: Employees and other persons who are within the company and who fulfil the role of director even though never (formally) appointed as such.
A de facto director was defined by Mr Justice ONeill in Re Lynrowan Enterprises Ltd [2002] as someone who:

_ is the sole person directing the companys affairs; or _ conducts the companys affairs equally with other individuals who have not been validly appointed as directors; or

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_ conducts the companys affairs equally with other individuals who have been validly appointed as directors. In effect, a de facto director fulfils the role of director even though never formally appointed as such 3 Shadow directors: A shadow director means a person, in accordance with whose directions or instructions, the directors of the company are accustomed to act. A company can be a director of another company. It is possible that someone who in reality exercises control over a companys decision making might seek to evade their responsibilities and potential liabilities as a director. For example they could attempt to do this by appointing some other people as nominal directors without themselves being formally appointed to the board of directors. They would, nonetheless, exercise control over the business. It was in order to regulate such potential activity by those who exercise control over companies from behind the scenes that the concept of the shadow director was introduced. Thus s.251 of the Companies Act 2006 provides that a 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. However it should be noted that a person is not to be regarded as a shadow director simply for the reason that the directors act on advice given by him in a professional capacity. Thus neither accountants nor lawyers are made liable on the simple basis that they provide advice which the board of directors may act on.

Executive directors and non-executive directors


(i) Executive directors usually work on a full time basis for the company and may be employees of the company with specific contracts of employment. Section 318 CA 1985 requires that the terms of any such contract must be made available for inspection by the members. Section 319 renders void any such contract which purports to be effective for a period of more than five years, unless it has been approved by a resolution of the company in general meeting. In fact the Combined Code on corporate governance recommends that the maximum period for directors employment contracts should be one year. Table A, reg. 85 permits the board of directors to appoint a managing director. Managing directors have a special position and wider apparent powers, although their appointment must still be provided for in the Articles. (ii) Non-executive directors (NED) do not usually have a full-time relationship with the company, they are not employees and only receive directors fees. The role of the non-executive directors, at least in theory, is to bring outside experience and expertise to the board of directors. They are also expected to exert a measure of control over the executive directors to ensure that the latter do not run in the company in their, rather than the companys, best interests. NEDs might therefore include individuals who: _ are an executive director in another company; _ hold non-executive director positions and chairmanship positions in other companies; _ have professional qualifications (for example, partners in firms of solicitors); _ have experience in government (for example, politicians or former senior civil servants). Alternate directors Alternate directors may only be appointed if the Articles of Association provide for this and that private company Model Articles do not contain provisions for alternate directors. There are also no provisions for alternate directors within the CA 2006. Hence, private company clients operating under Model Articles will need to be advised that Article changes may be required before they can appoint alternates. Provisions for alternate directors are included in the Model Articles for a public company. During his or her appointment, the alternate director has the same responsibilities and duties as any other director. Public company Model Article 25 states that a director can appoint another Page 2 of 14

director to be his alternate, or may appoint any other person as his alternate, subject to that person being approved by the board of directors. Public company Model Article 25 requires that any appointment of an alternate director must be effected by a notice in writing signed by the appointor. It must contain a statement, signed by the proposed alternate, that he is willing to act as an alternate director. Regarding the alternates termination, the appointing director may terminate the alternates appointment at any time by notice in writing to the company. If an appointing director ceases to hold office for whatever reason, the alternate director will automatically cease to hold office unless the alternate director is already a director. The usual filings with the Registrar of Companies and updates to the register of directors etc. must be made 2 Appointment of directors All companies are required to have directors. In the case of public companies there must be at least two directors, whilst in the case of private companies the requirement is for at least one director. The first directors are usually named in the articles or memorandum. Section 10 of the Companies Act 1985 requires the names of the first directors to be included in the form that that section requires to be submitted to the Companies Registry. Where the company has adopted Table A articles of association, these first directors are required to retire at the first AGM after incorporation and stand for re-election. Subsequent directors are appointed under the procedure stated in the articles. The usual procedure is for the company in annual general meeting (AGM) to elect the directors by an ordinary resolution. However, casual vacancies are usually filled by the board of directors coopting someone to act as director. That person then serves until the next Annual General Meeting when they must stand for election in the usual manner. Appointment of Directors - Details (a) First Directors - Persons named in the statement of first directors and secretary submitted on registration are deemed to be appointed as directors as soon as company is incorporated. (b) Subsequent Directors - Appointed in manner laid down by Articles - usually ordinary resolution. (c) Persons Who cannot be Appointed Directors (i) Share Qualification - If the articles provide for a share qualification, director must obtain this within two months. (ii) Over-age Persons - No upper age limit for private company unless articles so provide. Person cannot be appointed as director of a public company if he has reached the age of 70 (CA 1985 s.293) (iii) Undischarged Bankrupts - CDDA 1986, s.11 - criminal offence unless permission given by the court. Applications for Permission are usually refused: Re Altim Pty Ltd (Case 60) A bankrupt applied to the court for permission to take part in the management of a company. There was no evidence to suggest that the applicant had been dishonest in any way, but the application was refused. Held: The court emphasised that the prohibition on bankrupts acting as company directors was not intended as punishment for the bankrupt individual but to protect the community. The applicant had a long history of failed businesses in the building industry Acting in contravention of s.11 is a strict liability offence:

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R v Brockley (Case 61) Brockley was convicted of taking part in the management of a company while he was an undischarged bankrupt. His defence was that he honestly believed the bankruptcy had been discharged automatically through lapse of time. Held: The honestly held belief of the accused that he was no longer bankrupt made no difference to the conviction. The prohibition was absolute and the offence was one of strict liability. (iv) Persons Disqualified by the Court - CDDA 1986 - it is a criminal offence to act as director of a company while under a disqualification order. Court may make a disqualification order where: Where a person is convicted of an indictable offence in relation to the company (Maximum period - 15 years). Person has been in persistent default in filing returns or documents with the Registrar (Maximum 5 years). Company is being wound up and person has apparently committed fraud in relation to the company (Maximum period - 15 years.) DTI requests a disqualification order in the public interest after and investigation. (Maximum 15 years.) Person has been found liable for wrongful trading under s.214 Insolvency Act (Maximum 15 years) The court must make a disqualification order where: a person is director of a company which has become insolvent and that persons conduct makes him unfit to be concerned in the management of a company. (Minimum 2 years, Maximum 15 years) R v Austen (Case 62) Mr Austen's company operated car dealerships, and he had been convicted of making fraudulent hire purchase arrangements in connection with cars sold from his showrooms. He was disqualified from taking part in the management of a company under s.2 of the Company Directors Disqualification Act 1986 (as being a person convicted of an indictable offence in connection with the promotion, formation or management of a company) Held: His appeal against disqualification was dismissed. The section was wide enough to cover circumstances such as these. Re Sevenoaks Stationers (Retail) Ltd (Case 63) Mr Cruddas was director of five companies which became insolvent leaving unpaid debts of 559,000. Though he was a chartered accountant, the court felt that the absence of proper financial control, which was his responsibility, was the main reason for the failure of the companies. Though there was no evidence that Cruddas was dishonest, the accounts of the companies had not been properly audited and the accounting records of one of them had not been properly kept. He had made loans from one company to another and Sevenoaks Stationers had guaranteed the debts of another of his companies. He had also continued to trade while the company was insolvent. Held: He was disqualified from acting as a director for seven years (later reduced to five by the Court of Appeal) on the grounds that his conduct made him unfit to be concerned in the management of a company.

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Re Firedart Ltd (Case 64) "In my judgement there are a number of matters which, if proved, would generally lead me to the conclusion that a director was unfit to be concerned in the management of a company. They include: trading while insolvent; taking personal benefits over and above any proper remuneration; failing to keep proper accounting records." (per Arden J). (v) Auditors and Secretaries - Auditor of a company cannot also be a director of it. - Secretary of a company cannot also be the sole director of it.

3. Duties of Directors
Directors fiduciary duties are owed only to the company, not to the individual shareholders. _ Directors have a responsibility to use their powers in ways that seem best for the company and its shareholders. _ They should be accountable to the owners of the company, the shareholders, for the ways in which they have exercised their powers, and or the performance of the company. _ They have duties to the company These general duties are based on common law and equitable principles, such as a fiduciary duty and a common law duty of care and skill, which they effectively replace. The general duties are to:

(a) Fiduciary Duties By virtue of article 70 of the Table A model articles of association, directors are given the power to manage the business of their company and may exercise all the powers of the company. It is, therefore, the directors, rather than the shareholders, who actually conduct the day-to-day business of the company. As a consequence of the extensive powers they have in operating capital that they do not actually own, the law has placed company directors in the position of fiduciaries. A fiduciary is a person who assumes a position akin to that of a trustee, although not of trust as such. Certain duties follow from a person being fixed as a fiduciary, and these fiduciary duties are analogous to the duties owed by a trustee to a beneficiary under a trust. Percival v Wright (Case 73) Percival wished to sell his shares in the company and wrote to the company secretary asking if he knew of anyone willing to buy. After negotiations, the chairman of the board of directors arranged the purchase of 253 shares, 85 for himself and 84 for each of his fellow directors at a price based on Percival's valuation of the shares. The transfers were approved by the board and the transactions completed. Soon afterwards, Percival discovered that prior to and during the negotiations for the sale of his shares, another person was negotiating with the board for the purchase of the whole company and was offering various prices for shares, all of which exceeded the price paid to Percival. Percival then brought an action against the directors asking for the sale of his shares to be set aside for non-disclosure. Page 5 of 14

Held: The directors are not trustees for the individual shareholders and may purchase their shares without disclosing that they are negotiating for the sale of the entire company. Allan v Hyatt (Case 74) The directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. Held: The directors had made themselves agents for the shareholders in the sale of the shares and must therefore account to them for the profit they had made on the sale.

The codification of the general duties of a director by the Companies Act 2006
The general duties of a director have been codified in the CA 2006. The codification of the general duties of directors reflects the concept of enlightened shareholder value. The aim is to make the duties clearer and more accessible. The general duties are contained in ss171-177. The provisions in ss171-174 came into force on 1 October 2007, but those contained in ss175-177 will not come into force until 1 October 2008. The Companies Act (CA) 2006 sets out a new statutory statement of seven general duties owed by directors to their companies as follows: (i) Duty to act within their powers

Section 171 CA replaces existing similar common law duties and requires directors to act in accordance with the companys constitution. Section 17 of the Act provides that a companys constitution includes not only the companys articles of association but the resolutions and agreements specified in s.29, which includes special resolutions passed by the company and any resolutions or agreements that have been agreed to, or which otherwise bind classes of shareholders. Directors are also required to use powers only for the purposes for which they were conferred. This is a restatement of the long-standing proper purposes doctrine. (ii) Duty to promote the success of the company for the benefit of members as a whole Section 172 CA 2006 replaces the previous common law duty on directors to act in good faith in the best interests of the company. In the course of making their decisions under Part 1 of the section, then, directors are now required to have regard to each of the following list of matters: the likely consequences of any decision in the long term, the interests of the companys employees, the need to foster the companys business relationships with suppliers, customers and others, the impact of the companys operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company. The above list is non-exhaustive and directors must also have regard to other non-specific matters. (iii) Duty to exercise independent judgement Page 6 of 14

This duty, stated in s.173 CA 2006, reflects the previous rule prohibiting directors from fettering their discretion unless acting in accordance with an agreement duly approved by the company. The duty to exercise independent judgment is contained in s173 CA 2006. This is a codification of the previous position which prevented directors from fettering their future discretion by agreeing to act in a particular way. Section 173(2) provides that there is no breach of this duty if directors are acting in accordance with an agreement entered into by the company that restricts the future exercise of discretion by its directors, or if they act in a way authorised by the companys constitution. An example of a breach of this duty would be a contract between a director and a third party as to how a particular discretion conferred by the articles will be exercised, see Kregor v Hollins [1913]. Where, however, the board is able to show that an arrangement would benefit the company there will be no breach. In Fulham Football Club Ltd v Cabra Estates plc [1994], it was held that there was no breach of duty when the directors of Fulham agreed to support the planning application of their landlords, Cabra, to redevelop their football ground rather than those of the local authority. In return for their support, Cabra paid the football club a substantial fee. This arrangement would benefit the company (iv) Duty to exercise reasonable skill, care and diligence

Section 174 CA 2006 codifies and replaces the previous common law duty but in a way that reflects the recent tightening of control over directors in line with the standard set out in relation to wrongful trading in the Insolvency Act 1986, s.214.

This relates to directors competence in managing the company. Traditionally, the duty has been minimal - director is judged according to his own knowledge and experience: A director should not act negligently in carrying out his or her duties, and could be personally liable for losses suffered by the company as a consequence of such negligence. The standard of skill and care expected of a director is the higher of the skill that he has or the skill that would objectively be expected of a director of the particular company. In the case Re DJan of London [1993], the judge ruled that the common law duty of care was the equivalent to the statutory test applied by the Insolvency Act 1986, s. 214. This statutory test refers to what would be expected of: a reasonably diligent person having both: _ the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and _ the general knowledge, skill and experience that that director has Relates to directors competence in managing the company. Traditionally, the duty has been minimal director is judged according to his own knowledge and experience: Re City Equitable Fire Insurance Co Ltd (Case 83) The chairman of the company committed frauds by purporting to buy Treasury Bonds just before the end of the accounting period and selling them just after the audit. By this method a debt due to the company from a firm in which the chairman had an interest was reduced on the balance sheet by increasing the assets. The liquidator of the company attempted to make the other directors liable for failing to discover the fraud. (They had left the management of the company Page 7 of 14

entirely in the hands of the chairman). The liquidator failed. Romer J laid down the duties of care and skill to be expected of a director: (a) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from someone of his knowledge and experience. (b) A director is not bound to give continuous attention to the affairs of the company. (c) Where duties may properly be left to some other official, a director is justified, in the absence of grounds for suspicion, in trusting that official to perform his duties honestly. Re Brazilian Rubber Plantations & Estates (Case 84) A rubber company made serious losses in a ruinous speculation in Brazil. The directors, who had no experience in the business of rubber plantations, were sued for negligence. The action failed. Neville J said of a director's duty of skill and care: "He is, I think, not bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which result from such ignorance." Dorchester Finance Co Ltd v Stebbing (Case 85) Dorchester Finance was a moneylending company with three directors, only one of whom was involved in the business on a full-time basis. No board meetings were held and the other two directors rarely visited the company. All three directors were experienced accountants. The fulltime director made loans to persons with whom he was connected and which did not comply with the Moneylenders Acts. Payment could not therefore be recovered by the company. The company sued all three directors for negligence. Held: All three were liable. The full-time director had only been able to do what he did because the others showed no interest in the affairs of the company, and had signed blank cheques at his request. More recent cases suggest a move to a tougher standard - the level of skill reasonably to be expected from a person undertaking the same duties. (v) Duty to avoid conflicts of interest

Section 175 CA 2006 reflects the long-standing common law rule that directors, as fiduciaries, must respect the trust and confidence placed in them and should do nothing to undermine or abuse their position as fiduciaries. The practical effect of the rule is that any conflict of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. In the case of a private company, a conflict can be authorised by the other directors of the board unless the companys constitution provides to the contrary. The position is the same for public companies, except that the constitution must expressly permit authorisation by the board. (vi) Duty not to accept benefits from third parties

Under s.176, a director must not accept a benefit from a third party, which is conferred by reason of (a) his being a director or (b) his doing (or not doing) anything as director. This duty is an aspect of the previous general duty to avoid conflicts of interest, but it has been stated separately in order to ensure that the obtaining of a benefit from a third party by a director can only be authorised by members of the company rather than by the board. (vii) Duty to declare to the companys other directors any interest a director has in a proposed transaction or arrangement with the company Under s.177 CA 2006 a director must declare to the other directors any situation in which they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the Page 8 of 14

company. Again this further emphasises the duty to avoid a conflict of interests by ensuring that directors are transparent about personal interests, which could, even remotely, be seen as affecting their judgement. Duties of directors and delegation Matters that could be an issue in any particular case include: _ whether the authority was delegated to the appropriate person; _ whether the individual should have checked how the subordinate was discharging the delegated functions; _ whether the system itself, within which the failure occurred, was itself inadequate (for which the person with overall responsibility must accept criticism); _ the extent of the directors duties and responsibilities in this case. When there is a question about the extent of the directors duties and responsibilities, a significant factor could be the level of reward that the director was entitled to receive from the company. Prima facie, the higher the rewards, the greater the responsibilities should be expected. 4. Powers of Directors (a) Directors have sole power to manage the business of the company, but power vests in the shareholders if the directors are unable or unwilling to act: Barron v Potter (Case 71) The articles gave the board of directors power to appoint an additional director. The company had two directors, but the business of the company had come to a halt because one of them refused to attend any board meeting at which the other was present. Held: Where the directors were unable or unwilling to exercise the powers given to them, as here, the members of the company could do so. The shareholders in general meeting thus had power to appoint an additional director.

(b) A director who exceeds his powers may be liable for any loss the company suffers, unless the shareholders ratify his actions: Bamford v Bamford (Case 72) The directors of a company wished to fight a takeover bid. They allotted 500,000 shares to a company which distributed their products because the distributors agreed not to accept the takeover bid. A shareholder brought an action claiming that the allotment was invalid, as it was not bona fide in the best interests of the company. Held: The allotment of shares was valid. It was an improper use of the directors' powers, but was not ultra vires, therefore the members could ratify the directors' actions by ordinary resolution in general meeting. This had been done.

Shareholders can now also ratify ultra vires transactions, unless this amounts to a fraud on the minority. (d) Third parties are protected by CA ss.35A and 35B - can enforce transactions even if directors exceed their powers.

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A 1 2 3 4 5

5. Vacation of Office by Directors or Termination of office person may cease to be a director by: retirement; resignation; removal; death; disqualification

5.1 Retirement A director may cease to hold office by retirement. This usually occurs by virtue of some provision in the Articles which requires him to retire, as in the case of the Table A provision for retirement by rotation. CA 1985, s. 293 requires all directors over the age of 70 to retire at the end of the first annual general meeting after they reach the age of 70. However, this does not apply where: 1 the company is a private company which is not the subsidiary of a public company; 2 the Articles otherwise provide; or 3 the director in question was appointed or approved by the company in a general meeting by a resolution of which special (i.e. 28 days) notice, stating his age, had been given. Any person who is appointed or proposed to be appointed as a director of a company to which s. 293 applies must give notice of his age to the company. Failure to do so is a criminal offence. Table A, Art 81 - a director must vacate office if: 5.2 Resignation A director may resign his office in the manner provided by the companys Articles. If there is no such provision in the Articles, the resignation should be on reasonable notice or as provided by his service contract. A director who has given proper notice of resignation cannot withdraw that notice. 5.3 Removal By CA 1985, s. 303 a company may, by ordinary resolution, remove a director before the expiration of his period of office, regardless of anything to the contrary in the Articles or any contract with the director. As with the appointment of over-age directors, the removal must follow special notice. As soon as the 28 days special notice of the proposed resolution is given to the company, the company must also send a copy to the director concerned. He is then entitled to make a statement about the resolution at the general meeting where it is proposed to remove him from office. He is also entitled to make written representations before the meeting and ask that these be notified to shareholders. Before the Companies Act 1948, it was not unusual for private companies to provide in their Articles that a particular director should be irremovable or removable only by special or extraordinary resolution. Section 303 was introduced to abolish this. The section does not apply to he becomes bankrupt or insane he becomes disqualified he is absent from board meetings for more than six months without permission. Director can also resign by giving notice.

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directors appointed for life to private companies prior to 18 July 1948, although, in more ways than one, such directors are very much a dying breed. However, it is possible in a small company for a director to entrench his appointment by using a method recognised as valid by the House of Lords in the case of Case Example 8.7 Bushell v Faith [1970] AC 1099 The company had an issued share capital of 300 fully paid shares of 1 each. They were held equally by two sisters and a brother. The sisters, Mrs Bushell and Dr Bain, held 100 shares each. The brother, Mr Faith, also held 100 shares. All three were directors of the company. The companys Articles provided that in the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director should carry the right to three votes. Problems arose between the sisters and the brother, and the sisters sought to remove the brother from office. When a vote was taken on a poll at the general meeting of the company, the brother exercised the weighted voting rights attaching to his shares and defeated the sisters resolution by 300 votes to 200. Mrs Bushell then sought an order that the Article giving the director three votes for every share he held was unlawful as being contrary to what is now s. 303. The House of Lords held that the Article was valid. The practical effect was therefore to prevent the removal of Mr Faith from office. 5.4 Death A director obviously vacates office upon his death, which also terminates the contract of employment. As such, the director is only entitled to be paid salary up to the moment of death. 5.5 disqualification of directors A person cannot be appointed a director or continue in office if: Is disqualified by the Act Becomes bankrupt or enters into an arrangement with his creditors Becomes of unsound mind Resigns by notice in writing Is absent for a period of six consecutive months. 6. The Company Directors Disqualification Act 1986 (CDDA). - The grounds

upon which a person may be disqualified under the Company Directors Disqualification Act 1986.

The Company Directors Disqualification Act (CDDA) 1986 was introduced to control individuals who persistently abused the various privileges that accompany incorporation, most particularly the privilege of limited liability. The Act applies to more than just directors and the court may make an order preventing any person (without leave of the court) from being: (i) a director of a company; (ii) a liquidator or administrator of a company; (iii) a receiver or manager of a companys property; or (iv) in any way, whether directly or indirectly, concerned with or taking part in the promotion, formation or management of a company. The CDDA 1986 identifies three distinct categories of conduct, which may, and in some circumstances must, lead the court to disqualify certain persons from being involved in the management of companies. (a) General misconduct in connection with companies Page 11 of 14

This first category involves the following: (i) A conviction for an indictable offence in connection with the promotion, formation, management or liquidation of a company or with the receivership or management of a companys property (s.2 of the CDDA 1986). The maximum period for disqualification under s.2 is five years where the order is made by a court of summary jurisdiction, and 15 years in any other case. (ii) Persistent breaches of companies legislation in relation to provisions which require any return, account or other document to be filed with, or notice of any matter to be given to, the registrar (s.3 of the CDDA 1986). Section 3 provides that a person is conclusively proved to be persistently in default where it is shown that, in the five years ending with the date of the application, he has been adjudged guilty of three or more defaults (s.3(2) of the CDDA 1986). This is without prejudice to proof of persistent default in any other manner. The maximum period of disqualification under this section is five years. (iii) Fraud in connection with winding up (s.4 of the CDDA 1986). A court may make a disqualification order if, in the course of the winding up of a company, it appears that a person: (1) has been guilty of an offence for which he is liable under s.993 of the CA 2006, that is, that he has knowingly been a party to the carrying on of the business of the company either with the intention of defrauding the companys creditors or any other person or for any other fraudulent purpose; or (2) has otherwise been guilty, while an officer or liquidator of the company or receiver or manager of the property of the company, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or manager (s.4(1)(b) of the CDDA 1986). The maximum period of disqualification under this category is 15 years. (b) Disqualification for unfitness The second category covers: (i) disqualification of directors of companies which have become insolvent, who are found by the court to be unfit to be directors (s.6 of the CDDA 1986). Under s. 6, the minimum period of disqualification is two years, up to a maximum of 15 years; (ii) disqualification after investigation of a company under Pt XIV of the CA 1985 (it should be noted that this part of theprevious Act still sets out the procedures for company investigations) (s.8 of the CDDA 1986). Once again, the maximum period of disqualification is 15 years. Schedule 1 to the CDDA 1986 sets out certain particulars to which the court is to have regard in deciding whether a persons conduct as a director makes them unfit to be concerned in the management of a company. In addition, the courts have given indications as to what sort of behaviour will render a person liable to be considered unfit to act as a company director. Thus, in Re Lo-Line Electric Motors Ltd (1988), it was stated that: Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although . . . in an extreme case of gross negligence or total incompetence, disqualification could be appropriate. (c) Other cases for disqualification This third category relates to: (i) participation in fraudulent or wrongful trading under s.213 of the Insolvency Act (IA)1986 (s.10 of the CDDA 1986); (ii) undischarged bankrupts acting as directors (s.11 of the CDDA 1986); and (iii) failure to pay under a county court administration order (s.12 of the CDDA 1986). Page 12 of 14

For the purposes of most of the CDDA 1986, the court has discretion to make a disqualification order. Where, however, a person has been found to be an unfit director of an insolvent company, the court has a duty to make a disqualification order (s.6 of the CDDA 1986). Anyone who acts in contravention of a disqualification order is liable: (i) to imprisonment for up to two years and/or a fine, on conviction on indictment; or (ii) to imprisonment for up to six months and/or a fine not exceeding the statutory maximum, on conviction summarily (s.13 of the CDDA 1986). The effect of a disqualification order against a director? A person against whom a disqualification order has been made may not, without the leave of the court: _ be a director of the company; _ be a liquidator or administrator; _ be a receiver or manager of the companys property; _ be in any way concerned or take part in the promotion, formation or management of a company Six grounds for the court to make a disqualification order? Conviction of an indictable defence relating to company matters. (a) Persistent breaches of companys legislation. (b) Disqualification for fraud, fraudulent trading or breach of duty revealed in the winding up. (c) Disqualification on summary conviction. (d) Disqualification for unfitness. (e) Disqualification for wrongful and fraudulent trading. (f ) Disqualification following the investigation of a company. 7. Agency Contract & Directors An agent is a person who is empowered to represent another legal party, called the principal, and to bring the principal into a legal relationship with a third party. Any contract entered into is between the principal and the third party, each of whom may enforce it. In the normal course of events the agent has no personal rights or liabilities in relation to the contract. The principal/agent relationship can be created in a number of ways. It may arise as the outcome of a distinct contract, which may be made either orally or in writing, or it may be established purely gratuitously, where some person simply agrees to act for another. In establishing a relationship of principal/agent, however the principal does not give the agent unlimited power to enter into any contract whatsoever but is likely to place strict limits on the nature of the contracts that the agent can enter into on his behalf. In other words the authority of the agent is limited and in order to bind a principal any contract entered into must be within the limits of the authority extended to the agent. The authority of an agent can take a number of distinct forms. (a) Express authority In this instance, when the principal/agency relationship is established, the agent is instructed as to what particular tasks are required to be performed and is informed of the precise powers given in order to fulfil those tasks. If the agent subsequently contracts outside of the ambit of their express authority then they will be liable to the principal and to the third party for breach of warrant of authority. The consequences for the relationship between the principal and third party depends on whether the third party knew that the agent was acting outside the scope of their authority. For example, an individual director of a company may be given the express power by the board of directors to enter into a specific contract on behalf of the company. In such circumstances the Page 13 of 14

company would be bound by the subsequent contract but the director would have no power to bind the company in other contracts. (b) Implied authority This refers to the way in which the scope of express authority may be increased. Third parties are entitled to assume that agents holding a particular position have all the powers that are usually provided to such an agent. Without actual knowledge to the contrary they may safely assume that the agent has the usual authority that goes with their position. In Watteau v Fenwick (1893) the new owners of a hotel continued to employ the previous owner as its manager. They expressly forbade him to buy certain articles including cigars. The manager, however, bought cigars from a third party, who later sued the owners for payment as the managers principal. It was held that the purchase of cigars was within the usual authority of a manager of such an establishment and that for a limitation on such usual authority to be effective it must be communicated to any third party. Directors of companies can also bind their companies on the basis of implied authority. In HelyHutchinson v Brayhead Ltd (1968) although the chairman and chief-executive of a company acted as its de facto managing director he had never been formally appointed to that position. Nevertheless, he purported to bind the company to a particular transaction. When the other party to the agreement sought to enforce it, the company claimed that the chairman had no authority to bind it. It was held that although the director derived no authority from his position as chairman of the board he did acquire such authority from his position as chief executive and thus the company was bound by the contract he had entered into on its behalf, as it was within the implied authority of a person holding such a position. (c) apparent/ostensible authority This type of authority, which is an aspect of agency by estoppel, can arise in two distinct ways: (i) Where a person makes a representation to third parties that a particular person has the authority to act as their agent without actually appointing them as their agent. In such a case the person making the representation is bound by the actions of the ostensible/apparent agent. The principal is also liable for the actions of the agent where they are aware that the agent claims to be their agent and yet does nothing to correct that impression. In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964), although a particular director had never been appointed as managing director, he acted as such with the clear knowledge of the other directors and entered into a contract with the plaintiffs on behalf of the company. When the plaintiffs sought to recover fees due to them under that contract it was held that the company was liable: a properly appointed managing director would have been able to enter into such a contract and the third party was entitled to rely on the representation of the other directors that the person in question had been properly appointed to that position. (ii) Where a principal has previously represented to a third party that an agent has the authority to act on their behalf. Even if the principal has subsequently revoked the agents authority they may still be liable for the actions of the former agent unless they have informed third parties who had previously dealt with the agent about the new situation (Willis Faber & Co Ltd v Joyce (1911)). Thus companies should inform their previous clients where a director has had his authority, either express or implied, removed or reduced.

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