Codification of Directors Duties

For each of the issues raised by Hattie, the following rules apply: -

The Companies Act 2006 has codified directors’ duties. Under sections 170 – 177 CA 2006, company directors must act within his powers (in accordance with the company Articles) (s.170); promote the success of the company (s.171); exercise independent judgment (s.173); exercise reasonable skill, care and diligence (s.174); avoid conflicts of interest (s.175); not accept benefits from third-parties (s.176); and must declare any interest in a proposed transaction or arrangement (s.177).

Granting Des and Harry their service contracts:

As established in Secretary of State for Trade and Industry v Bottrill [1998]), directors of a company can be granted service contracts (s.277 of the Companies Act 2006).

The service contracts can only be granted if it to promote the success of the company (s.172 CA 2006).

Under section 188 of the CA 2006, if a service contract exceeds two-years, an ordinary resolution is required and the members must approve by simple majority (s.282 CA 2006). This requires 50% of members’ votes to be in favour of the service contract.

This rule therefore applies to Des as his is for three-year’s, but not to Harry as his is only two-years long.

There are two methods of voting: a show of hands and a poll vote. Article 46 of Table A provides that the former method is used, unless at least two shareholders, or a single shareholder with at least 10% of the company shares demand a poll vote.

The difference between the two methods is that shareholders only have one vote each with a show of hands, but with a poll vote, each share represents a vote.

Either way, the fact that Beryl and Christa are against the awarding of service contracts produces the same result. As (assuming all of the other shareholders are for the service contract) the votes in favour are over 50%, the resolution would be passed.

If any other shareholders vote against, so as to shift the balance, with 50% or more voting against, the fixed term of Des’ contract will be ineffective and can be terminated if reasonable notice is given (s.188 CA 2006).

A resolution approving Des’ contract, must not be passed ‘unless a memorandum setting out the proposed contract incorporating the provision is made available to members’ (s.188(5) CA 2006).

It seems (but further clarification it required) that Hattie wishes to award Des a service contract subject to the company being able to terminate it with two-months’ notice before the end of the three year period.

Section 188 (3) CA 2006, deals with the period of notice required for employment terminable by the company by notice.

It states that service contracts can only be terminated in specified circumstances (s.188 (3)(a)(ii) CA 2006).

It also states rather ambiguously that the guaranteed term of a director’s employment is, in the case of employment terminable by the company by notice, the period of notice required to be given. In the absence of case law to assist in the construction, it appears to require the period of notice to be the same length of time as the period of employment. If this is the true construction of the Act, then two-months’ will not be sufficient notice.

However, on another interpretation, the words ‘guaranteed term of a director’s employment is … the period of notice … given’ could be referring to the period of notice arranged in the contract. If this is the case, then two-months’ notice will be acceptable as it has already been agreed in the service contract.

However, whether two-months’ notice is not acceptable or not, if the company wishes to remove Des during his ‘guaranteed’ period of employment, s.168(1) CA 2006 provides that ‘a company may by ordinary resolution, at a meeting remove a director before the expiration of his period of office.’

Purchasing Ricaldo’s van:

Under s.190 of the Companies Act 2006, if a company is purchasing a non-cash asset from a director of the company, which also constitutes a substantial property transaction, approval from the company members by way of an ordinary resolution is required. This requires 50% of members’ votes to be in favour of the service contract.

Failure to pass a resolution means that the contract to buy the non-cash asset is voidable.

Substantial transactions are those over £5k and exceeding 10% of the company’s asset value, or if (as in this case) there are no statutory accounts, it must be over £5k (s.191 CA 2006) and over 10% of the company’s share capital (s.190 CA 2006).

As the total share capital here is 82,746 then £8,300 equates to 10.03% of the share capital, which therefore constitutes a substantial transaction. The van is clearly a non-cash asset.

Ricaldo cannot rely on s.192 CA 2006, which allows transactions between a company and a shareholder to take place without members’ approval, as he is not a company member.

Hattie cannot therefore proceed with the purchase without complying with s.190 CA 2006.

In Regal Hastings Ltd v Gulliver [1967], it was held that directors were in breach of their fiduciary duty not to make a personal profit by virtue of their position, notwithstanding they acted honestly and in the best interests of the company.

As Ricaldo won the van in a national trade association raffle, this raises the issue of whether this would have been possible but for his position as director. Strict application of the Regal Hastings doctrine could result in Ricaldo having to return the £8,300 to Hagoja Ltd if the transaction has already been completed, despite the sale being in the best interests of the company, or he could give the van to Hagoja Ltd.

Ratifying Lucinda’s breach of duty:

As a director, Lucinda has a duty to promote the success of the company (s172 CA 2006). Agreeing to offer the national supermarket new products before any other retailer may not be in the company’s best interests, if (for example) it would have been more lucrative to supply to others or another supermarket instead. Furthermore, she ought to have exercised reasonable care skill and diligence (s174 CA 2006) when making her decision.

Under s.175 of CA 2006, a director must avoid conflicts of interest between themselves and the company. In accepting the £2000, Lucinda entered into an agreement with the supermarket in which her personal interest conflicted with the interests of the company.

Under s.175(4)(b) CA 2006, if the directors have authorised the breach, the duty is not infringed. However, even though Article 14 of the Model Articles has been replaced with the special Article giving directors the power to vote to ratify such breaches, as Lucinda has failed to obtain prior authorisation, before accepting the £2000, the board cannot authorise retrospectively.

Under s.178 CA 2006, the consequences of a breach of a duty under section 171 to 177 are the same as those that apply to the corresponding common law or equitable principle applied.

Under s.176 of CA 2006 a director ‘must not accept a benefit from a third party conferred by reason of his being a director’. As the supermarket constitutes a ‘third party’ (s176(2) CA 2006), Lucinda has clearly breached her statutory duty by accepting £2000. Authorisation of the board is not permitted under this section.

However, s.239 CA 2006 provides inter alia, that if a director breaches their duty, it is possible for such breach to be ratified by ordinary resolution of the company members. Lucinda can therefore rely on s.239 CA 2006 to have both the s.175 and s.176 breaches ratified.

Section 239 does exclude any members’ votes in favour of the resolution made by the director (Lucinda) or any members connected with that director (s.239(4) CA 2006)).

Section 252 CA 2006 defines ‘connected person’ as inter alia, a member of the director’s family. This includes parents, civil partners and any person in an enduring relationship (s.253 CA 2006).

As Lucinda’s father, Harry’s vote (if in favour of the resolution) would, under these rules, be disregarded. As Lucinda’s civil partnership with Christa was never formally dissolved, Christa will also constitute a family member, and her vote would also be disregarded (s.253(2)(a) CA 2006).

Although ‘enduring’ is not defined in the 2006 Act, as Hattie’s relationship with Des has only just started, it seems unlikely that this would amount to an enduring relationship, therefore it is probable that Des’ vote will count.

In order to ratify Lucinda’s breach of duty, an ordinary resolution is required. This requires a simple majority to be passed. Ergo, more than 50% of the members’ votes must be in favour (s.282 CA 2006).

If the vote is in the form of a show of hands, on the basis that Christa and Harry are precluded from voting and Beryl’s vote is against ratification, if all other shareholders eligible to vote namely, Hattie, Des and Summer vote for ratification, this would amount to 75% in favour. As this is more than 50%, the resolution ratifying Lucinda’s breach will be passed.

However, if Summer is against ratification, there would be a deadlock and the resolution would fail. If this occurs, Hattie, as chairperson can under s.88 of Table A, use a casting vote to tip the balance.

However, if a poll vote is called, Hattie would not have a casting vote and ratification would depend on whether Summer voted for or against. If she votes for, there would be 35,655 votes for and Beryl’s 27,120 against. But if Summer votes against, 26,554 for and 36,221 against.

Formalities and consequences of Lucinda’s resignation

Under s.18(f) of the Companies (Model Articles) Regulations 2008, ‘a person ceases to be a director as soon as notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms’.

However, under section 170(1)(a) CA 2006, a person who ceases to be a director continues to be subject to certain duties viz. s.175 ‘as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and (b) …s.176 as regards things done or omitted by him before he ceased to be a director.’

Under s.167 CA 2006, a company must give notice to the registrar, within 14 days of Lucinda ceasing to be a director, of the date on which her cessation occurred. This can be achieved by submitting form TM01.