Duty to Exercise Independent Judgment

The 2006 Act, s 173(1) codifies the established principle of law under which directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise (unless authorized by or under the constitution to do so).

Disqualification Proceedings

Disqualification from being a director or in any way concerned in the management of a company without the leave of the court was brought into effect by the 1929 Act following the recommendations of the Greene Committee. An undischarged bankrupt was disqualified by virtue of his status and the court was given power to disqualify for up to five years promoters, directors, and officers of a company ordered to be wound up who had committed fraud and persons responsible for fraudulent trading. The 1948 Act extended the power to disqualify to officers of the company who had been guilty of any breach of duty.

Investigations and Public Interest Winding-Up Petitions

Serious misconduct, or breaches of duty by a company or its directors affecting the company’s relationships with members of the public, may trigger an investigation by the Secretary of State into the manner in which the company’s business has been conducted, or even the appointment of inspectors and publication of a formal report. In an appropriate case, the Secretary of State or a regulatory authority may petition the court to wind the company up on the basis that it is ‘just and equitable’ to do so in the public interest. Such a liquidation need not be predicated on insolvency. A winding-up order terminates the directors’ powers of management and is the logical response to misconduct or mismanagement by directors which is revealed by an inspector’s report.

Termination Of Appointment Of Directors

It is an essential feature of the management of any company that directors’ appointments are capable of termination, either voluntarily or upon the occurrence of some specified event, such as a resolution of the company. Termination provisions may be relied upon for a number of reasons: a director may be removed as part the process of accountability to company shareholders; a director may become incapacitated or otherwise unable to perform his duties; or from time to time a director may simply resign and move on or retire. This chapter considers the provisions of the Companies Act and company articles that govern termination, together with the rights and liabilities that arise in the event of termination.

Duty Not To Accept Benefits From Third Parties

One of the consequences of the common law principle that a director must avoid conflicts of interest was that a director could not have an interest in a transaction with the company unless he had disclosed all material facts about the interest to the members and they had approved or authorized his having the interest. Authorization by the board was not sufficient. If the other party to the transaction had notice of the irregularity, the company might rescind the contract. The director might also be liable for breach of duty and under a duty to account for profits obtained by reason of such dealings.

Decision-Making By Members

This chapter describes the ways in which members make decisions for a company and the procedures for obtaining their decisions. The members of the company are the subscribers and any other person who agrees to become a member, by allotment or transfer, and whose name is entered on the register of members. The company is required to keep a register of members, which the court has power to rectify. Alternatively, the company will in due course be able to opt to keep information on a central register in order to avoid the need for a register of members.

Taxation of Directors’ Earnings and Benefits

This chapter outlines the tax issues that arise in the context of directorships. The great majority of these concern the director’s income tax liability, which is in most circumstances the same as that of any other employee. However, there are a number of more elaborate ways of remunerating employees which are likely to be encountered in the context of directors, both because they are often among the higher-paid employees of a business and because their employers often wish to link their remuneration to performance. This chapter therefore covers ‘golden hellos’ and termination payments, other ways of benefiting an employee (including the reimbursement of expenses and making them loans), and pension contributions, before outlining the tax implications of various share schemes that might be used. More complex remuneration planning is mentioned in Section D, but the wider area of remuneration structures is outside the scope of this work.

Pension Schemes

The first decade of the new millennium saw a huge increase in the cost to companies of providing pensions for their current and former employees. Schemes which had previously been assessed as well funded and in surplus became underfunded and in deficit. The costs of funding this deficit and the accruing liabilities of the scheme can often be a very significant drain on a company’s cash flow and resources.

Appointment Of Directors

This chapter deals with directors who are formally appointed to the role (including cases where the formal process is defective). It does not consider de facto or shadow directors. It describes the rules relating to the required numbers of directors, their eligibility for appointment, the appointment process, and the publicity rules relating to the appointment. Appointed directors may be either executive or non-executive directors. The relevant statutory provisions are now found in Part 10 of the Companies Act. The sections about the appointment of directors are ss 154–61. The sections about publicity, concerning the register of directors and directors’ residential addresses, are ss 162–7 and 240–6. Reference should also be made to the company’s own constitution.

Duty To Promote The Success of The Company

Where to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.