The role, appointment, removal and remuneration of directors

The roles of director

It is clear that companies are artificial legal entities and it is can only operate through their human organs.

There are two primary collective corporate organs in the company, which are the board of directors and the shareholder (or ‘company’) in the general meeting.

The Companies Act 2006 does not define the term ‘director’ beyond stating in section 250 that director ‘includes any person occupying the position of director, by whatever name called’.

Historically, the company (shareholder) in general meeting had constitutional supremacy. Hence the board of directors are viewed as its agent and had to strictly act in accordance with decisions of the general meeting (Isle of Wight Rly Co v Tahourdin (1884)).

Following the trend that directors are appointed on the basis of professional merit rather than social standing, the company’s constitutional have been drafted in a way that the board enjoy more directorial autonomy in the early twentieth century.

In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame (1906), the question for the CoA was whether the directors were bound to give effect to an ordinary resolution of the general meeting requiring them to sell the company’s undertaking to a new company incorporated for the purpose. The AA of the company provided that the management of the business and the control of the company were in the hands of its directors. Collins MR having reviewed to the relevant article, observed that it is not competent for the majority of the shareholder at an ordinary meeting to affect or alter the decision of the board, in which the power of the board is derived from the AA of the company, unless the said power was invoked by a special resolution.

Similarly, in Gramophone and Typewriter Ltd v Stanley (1908), Buckley J observed that the directors are persons who are vested with the power to control the business by the regulations, and they can be disposed from that control only by the relevant regulations. Directors are not servants, nor agents, of the company, who are bound to comply with the wishes of the shareholders.

In addition, according to Greer LJ in John Shaw & Sons (Salford) Ltd v Shaw (1935), the only way the shareholder can challenge a valid and legal decision by the board, is to alter the relevant article which confer such a power of management to the board, following the proper procedures stated in the relevant regulations, or re-elect the directors if the opportunity arises under the articles. They cannot challenge the decision of the board individually.  

It has now accepted that in the modern company the board enjoys a position of management autonomy. 

Directors stand in a fiduciary relationship with the company. As such, their fiduciary commitments to the company took the form of a duty of loyalty, duty to avoid a conflict between his personal interests, as well as his general duties to the company (per Mummery LJ in Towers v Premier Waste Management Ltd (2011)).

However it is wrong to consider them as trustees. Rather, the fiduciary relationship to the company arises from their appointment as director, and their fiduciary duties only begin once the appointment takes place (Re City Equitable Fire Insurance Co (1935)).

Unlike trustees, directors do not hold the legal title to the property as the company was a separate legal person. They are analogous to trustees because they have the duty to manage the company’s affairs in the interest of the company (Bairstow v Queens Moat Houses plc (2001)).

The general principle at common law that, the directors owed duties to the company, not to the shareholder, is now carried forward by section 170.

You can download Companies Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf

You can read director's duties here: http://thewallyeffect.blogspot.my/2017/10/directors-duties.html

You can read de facto, de jure and shadow director here: http://thewallyeffect.blogspot.my/2017/06/de-facto-director-and-shadow-director.html

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Appointment of director

Section 154 lays down the minimum number of directors that companies must have: two for public companies and one for private companies.

Section 157 lays down the minimum age of 16 for appointment as a director.

The first directors of the company are appointed in accordance with section 9 and section 12. Their successors are elected by the shareholders in a general meeting.

Article 21(1) of the model articles of association for public companies provides that at the first annual general meeting (AGM) all the directors shall retire from office. Article 21(2) provides that at every subsequent AGM any director who have been appointed by the directors since the last AGM, or who were not appointed at one of the preceding two AGMs, must retire from office and may offer themselves for reappointment by the members. This does not appear in the model articles for private companies.

Section 160 provides that for public companies the appointment of directors shall be voted on individually unless there is unanimous consent to a block resolution. A resolution moved in contravention of this provision is void.

Section 188 provides that where a director’s service contract is for a period longer is, or longer than two years, the provision of the service must be approved by resolution of the members of the company. In addition, if it contains clause that the service contract cannot be terminated by the company by notice, or can be so terminated only in specified circumstances, the contract must also be approved by the company in general meeting. This section was enacted with the intention to prevent directors awarding themselves long-term service contracts in order to obtain inflated compensation payments in the event of dismissal.

Section 189 provides that a provision in contravention of section 188, is void, or the contact is deemed to contain a term entitling the company to terminate it at anytime by giving reasonable notice. 

Historically, a company can be appointed as a director under section 155(1) of the CA 2006, provided that there is at least one director who is a natural person.

However the Small Business, Enterprise and Employment Act 2015 now inserted a new section 156A into the Companies Act 2006, which requires all those appointed as directors to be ‘natural persons’. It is no longer possible for a company to be appointed as a corporate director. Any existing corporate directors will cease to be directors 12 months after section 156A is brought into force. A company is still possible to liable under section 171 to 177 as a shadow director or de facto director.

Directors’ remuneration

As with trustees, directors are not entitled as of right to be paid for their services unless the AA or a service contract between them and the company provide otherwise (Re George Newman & Co (1895)).

Article 18 of the model AA for private companies and Article 22 of the model AA for public companies provide that the directors shall be entitled to such remuneration as they determine.

Section 422(1) provides that the directors’ remuneration report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.

Section 422 provides that where a director’s remuneration report is approved but it does not comply with the statutory requirements, every director of the company who knew of its non-compliance, or reckless as to whether it complied, and failed to take reasonable steps to secure compliance or to prevent the report from being approved, commits an offence punishable by fine.  

Section 439 provides that prior to the accounts meeting, a quoted company must give to those members entitled to receive it notice of its intention to move an ordinary resolution approving the directors’ remuneration report for the financial year. Section 440 provides that failure to comply with this requirement is an offence punishable by fine.

Section 412 requires disclosure in the annual accounts of directors’ remuneration emoluments, including present and past directors’ pensions and compensation for loss of office. Section 228 to section 330 provide that the terms of a director’s service contract must be made available for inspection either at its registered office or the place where its register of members is kept if other than its registered office. Breach of these requirements may result in a fine of conviction. 

Removal of director

Section 168(1) provides that a director can be removed in general meeting by ordinary resolution, notwithstanding anything in the articles or in any agreement between him and the company.

Section 168(2) provides that special notice must be given of the resolution. Section 312(1) provides that at least 28 days’ notice must be given before the meeting at which the resolution is to be moved. Section 169(2) provides that the director (whether or not a member of the company) is entitled to be heard on the resolution at the meeting. Section 169(3) and section 169 (4) provides that the director may also require the company to circulate to the shareholders his representations in writing providing they are of a reasonable length.

The power contained in section 168 does not overrides the AA. In Bushell v Faith (1970), the AA provides that on a resolution to remove a particular director, his shares would carry the right to three votes per share. The HOL approved the relevant clause in the AA.

Section 165(5) provides that the director is entitled to claim compensation or damages in respect of the termination of his appointment. If the members removed a director from his directorship before the expiration of his period of office by ordinary meeting at a meeting, he is entitled to claim compensation for the breach of his service contract.

Executive director and non-executive directors

In legal term, there is no distinction between executive director and non-executive director.

Executive directors are full-time officers who generally have a service contract with the company, and have an overall responsibility for the running of the companies.

Non-executive directors are normally part-time officers, and usually independent of corporate management.

I have written another post on the discussion of de facto, de jure and shadow director: http://thewallyeffect.blogspot.my/2017/06/de-facto-director-and-shadow-director.html

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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

Feel free to comment if you find any mistakes, or if you have anything to share. 

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