Charges for negligence of directors

Tiger Ltd has five share holders whose names are Lily, John, Anne, Bill, and Carol. The two directors of the company are Lily and John. Each one of the member owns 1,000 shares for the company. It has been several years and the directors don’t show interest in the company and rather go spend their office hours playing golf. The accounting book keeping has not been kept up to date which is causing the other members concern and it is very difficult to see under what economic status the company stands. The shareholders want to dismiss the directors because they know that there investment is at jeopardy. The members have decided for a majority vote but under short notice of the meeting Anne and Bill were not able to attend. Carol vote was not enough to re-appoint the directors and lily and john voted in favour of them. The other option was to sell back the shares to the directors but they denied there proposal. Now Anne, Bill, and Carol are facing a difficult challenge and need legal advice in order to not lose their investment. The directors also need to be concerned with the situation and need to realize that if they do not change the way they are running the company they are at risk of losing the company and getting sued for breach of duty.

If the shareholders are dissatisfied in the way the directors of the business are running the company there are several ways the shareholders can act to solve the situation and come to a solution. The members can claim that under CA 2006, s324 every member in a company is entitled to vote at a meeting and may employ a proxy if allowed and there for the directors do not have the right to refuse the proxy votes.

It is important to re-appoint another extraordinary general meeting (EGM) within 14 days of notice since the first one was given in a 5 day notice. In the meeting they can discuss and try to vote off the directors and re-appoint a new one by majority vote or they can liquidate the company and divide all the assets since the directors do not want to buy the shares from the other members.

Shareholders can remove a director by ordinary resolution under special notice CA 2006 s168, and need a majority vote of 50% +1 to be valid of the total voting rights of eligible members who vote in person or by proxy and used when the directors do not want to take a claim to court. When initiating this proposal there must be what is called a special notice of 28 days to the company.

The shareholders need to be aware that they are also accounted liable for the company debt because they have allowed the directors for several years to run the company poorly and have not done anything in the past to solve the situation and can be charged for negligence.

There was a case called sticky fingers restaurant Ltd [1992] BCLC 84 were two members’ named Wyman (W) and Mitchell (M) held shares in a restaurant. There was an issue between both members and Mitchell was concerned and took the problem to court on the basis that the restaurant was being run insufficient and it unfairly prejudiced his interest. The solution was that Wyman would buy Mitchell shares and the situation would be solved. Mitchell did not show up to any meetings there for Wyman was left with no choice and got a court order to call for a general meeting where he would be able to appoint 2 new directors. This is normally the case when members do not show up to a general meeting then it is taken to court were a new meeting is scheduled.

Lily and John are at risk of losing their positions of directors and the company if they keep running it poorly and not following the “eight-point guidance" ;also the Insolvency Act 2000 allows the secretary of state and industry to remove a director he considers inexpert and can disqualify him without the need of court order.

Directors are liable to the company under the breach of duty to act honestly within their powers CA 2006 s.171 and any contract that they made can be voidable if putting a company at any risk of bankruptcy for lack of skill and care. A director has a duty to promote success of the company for the benefit of the members and he must comply with it mentioned in Commercial law 2 handout notes X directors page7

“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"

The legal consequences for not taking the proper precautions can be costly. The member can claim for damages and the contract will then be voidable if sufficient evidence is found. The directors can also be ratified unless there has been illegality or bad faith; and can be indemnified for breach of duty and may have to compensate the company if they have caused some loss or damage. If the company then gets liquidated the directors may not get there part of share and the assets will be shared between the other members.

The following case is evidence of what a negligent director faces. Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498 was a case of three directors of a finance company which only one was appointed full time. This company made business by money lending to customers but were not allowed to lend money to persons with whom the director was connected with and the policy fell under moneylenders Acts. No payment was able to be recovered by the company. The company then sued all three directors for negligence even though the other two were not involved.

This case shows sufficient evidence of what kind of charges can be held for negligence of directors and lily and john seem to fall under this category and can face serious charges.