By Hamilton Li, Paralegal, Lewis Nedas Law
Many people easily become confused when considering the duties of the shareholders and directors of a company which can be found within the articles of association (AAs) or the Companies Act 2006 (CA2006).
One must first understand that there are three different type of limited companies; namely companies limited by shares, by guarantee and public companies. In circumstances where the AAs are not amended then model articles will imply automatically.
The model articles of association (MA) were altered by the Mental Health (Discrimination) Act 2013 on 28 April 2013 to remove the provision for terminating a director’s appointment/employment on grounds of mental health. This article will only examine limited companies incorporated before 28 April 2013 with MA for private companies limited by shares and the subsequent impact of such MA. Thus, this article will not be examining other forms of directors and their power.
Please note that AAs can be amended after the incorporation of the company by way of shareholders passing a special resolution, which by definition is 75% or above as per s.283, CA2006.
GENERAL POWER
To begin with, a private company must have at least one director at all times; who must be a natural person and be age of 16 years or above (exceptions can be located under s.158 of the CA2006). A director can be appointed by ordinary resolution or by a decision of the directors. Once appointed, the director must be registered accordingly. Nonetheless, shareholders can remove a director by way of passing an ordinary resolution (this means simple majority i.e. above 50%) and s.18 of the MA sets out further provisions on the termination of director’s appointment. Thus, a long term (more than 2 years) directors’ service contracts require shareholders’ approval.
In general, directors have control of the day to day decision within a company by either a majority decision at a meeting or by a unanimous decision. In addition, directors have power to allot shares as per ss.549-551 of the CA 2006 and delegate its power.[1] Notwithstanding the directors’ power, shareholders actually have the ultimate control over the directors as they can demand them to take, or refrain from taking, specified action by way of passing special resolution[2].
MEETINGS & TRANSACTIONS
According to s.9 of the MA, any director may call a directors’ meeting by giving notice of the meeting to the directors or by authorising the company secretary (if any) to provide the aforementioned notice. The remaining requirements for directors meeting are set out in ss.10-14 of the MA and the conditions for general meetings are detailed in ss.37-47 of the MA, ss.301-335, CA2006. The spectrum of directors’ power includes the ability of the directors being able to bind the company in any transaction.[3] Despite the binding power of the directors’, such transaction may be void as specified under s.41 of the CA 2006.
FIDUCIARY DUTIES
A person who ceases to be a director carries the burden of the fiduciary duties implemented by the CA 2006. These duties includes to act within power, to promote the success of the company, to exercise independent judgement, to exercise reasonable care, skill and diligence, to avoid conflicts of interest, not to accept benefits from third parties and to declare interest in proposed transaction or arrangement.[4] There are exceptions in relation to the duties to avoid conflicts of interest and to declare interest in proposed transaction or arrangement, which are set out in ss.180 and 182(6), CA 2006
One must pay close attention to the duty to declare their interest in existing transaction or arrangement because failure to do so means you will be guilty of an offence and liable either on conviction on indictment, to a fine or on summary conviction, to a fine not exceeding the statutory maximum.[5] There are different ways to declare your interest in existing transaction or arrangement. You can either declare your interest by notice in writing, which must be sent to other directors of the company. Thus, such notice must be sent by hand or by post or electronically if agreed. [6] In addition, a general notice can also be deemed as a sufficient declaration.[7]
Last but no least, directors also have the duty to prepare directors’ report.[8]. Failure to comply with these duties means that the company can file a lawsuit against such director in breach.[9] Please also note that there are provisions that protect directors from liability which are set out in ss.232-238, CA 2006.
SHAREHOLDERS
The scope of CA 2006 implements less duties and more benefit on shareholders in comparison to directors’ duties. For instance, an existing shareholders have right of pre-emption over ‘equity securities’[10] (ordinary share in the company[11]). Moreover, there are certain transactions with directors that require approval of shareholders/members; namely substantial property transactions, loans, quasi-loans, credit transactions and payments for loss of office.[12] Without dwelling on the details ‘substantial’ means non-cash assets which either exceed 10% of the company’s asset value and is more than £5,000.00 or exceeds £100,000.00.[13]
HOW CAN WE AT LEWIS NEDAS LAW HELP YOU?
We have a highly experienced dynamic specialist team of Company Commercial lawyers who act for company director and shareholders alike, they can deal with every eventuality at reasonable rates, please contact us using our online enquiry telephone on tel. 020 7387 2032.
[1] s.5, MA.
[2] s.4, MA.
[3] s.40, CA 2006.
[4] ss.171-177, CA 2006.
[5] s.183, CA 2006.
[6] s.184, CA 2006.
[7] s.185, CA 2006.
[8] s.415, CA 2006.
[9] s.178, CA 2006.
[10] Chapter 3, CA 2006.
[11] s.560, CA 2006.
[12] Chapter 4, CA 2006
[13] s.191, CA 2006.
