Directors of a company

 

DIRECTORS

A company from juristic point of view is a legal/artificial person.  It has no physical existence.  As such it cannot act in its own person.  It can only do so only through human agency i.e. directors.

Cairns LJ in Furguson v Wilson  observed:

“The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent”.

Lord Cranworth L.C. observed in Aberdeen Rly Co. v. Blaikie Bros. ;

“The directors are a body to whom is delegated the duty of managing the general affairs of the company.  A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting”.

The persons who are in-charge of the management of the affairs of the company are termed as directors.  They are collectively known as the Board of Directors.  The importance of the directors as par Neville J. is that they are the brains of the company:

“The Board of Directors are the brain and only brain of the company which is the body, and the company can and does act only through them”

Definition:

Section 2 of Cap.212 defines director to include any person occupying the position of director by whatever name called.

The important factor to determine whether a person is or is not a director is to refer to the nature of the office and its duties.  It does not matter by whatever name he/she is called.  If he/she performs the functions of a director he would be termed a director in the eyes of the law even though he may be termed differently.

In Re forest of Dean Mining Company  Jessel MR said 

“It does not much matter what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and shareholders in it”.

A director may generally be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company.

Number of directors:

Every company must have at least two directors [s.186 & 187)].

Qualifications of directors

For a person to be appointed a director he must have the following qualifications.

(1) Must be of the age of majority according to the law to which he is subject.

Section 194(1) of the Companies Act 2002 provides: “subject to the provisions of this section, no person shall be capable of being appointed a director of a company which is subject to this section if at the time of appointment he had not attained the age of twenty one or he has attained the age of seventy”.

(2) Must be of sound mind

(3) Must not be disqualified by any law to which he/she is subject.

 Undischarged bankrupts – under Bankruptcy Ordinance

(4) Must not be disqualified by an order of the court [s.197]

(5) If the articles so require, the director must have share qualification.  In such cases, a person cannot be appointed as director unless he acquires he acquires a certain minimum number of shares in a company (share qualification).  Such qualification shares may be acquired within two months after his appointment or such shorter time as may be fixed by the articles [s.190) of Cap.212].

A person shall not be capable of being appointed director unless he signs and deliver to the registrar for registration a consent in writing to act as such director [s.141(1)].

10. POSITION OF DIRECTORS

It has been very difficult to pinpoint the exact legal position of the directors of a company.  They have been described by various names; sometimes as agents, as trustee, and sometimes as managing partners.

Directors as agents:

A company being an artificial person, acts through directors who are elected representatives of the shareholders.  They are, in the eyes of the law, agents of the company for which they act, and the general principles of the law of principal and agent regulate in most respects, the relationship between the company and its directors.

It cannot, however, be said that directors are nothing more than agents of a company.  They have in certain matters independent powers.  They are not bound to consult the shareholders in all matters.  Some powers may, according to the articles, be exercised by the directors.

Directors as Trustees

Directors are treated as trustees

(1) of the company’s money and property; and

(2) of the powers entrusted to them.

In Great Eastern Rly Co. v. Turner  Lord Selborne observed:

“The directors are mere trustees or agents of the company – trustees of the company’s money and property – agents in the transactions which they enter into on behalf of the company”..

(1) Directors are trustees of the company’s money and property in the sense that they must account for all the company’s money and property over which they exercise control.  They have also to refund to the company any of its money or property which they have improperly paid away or transferred [Cook v. Deeks (1916) AC 554]

(2) Directors are trustees of the power entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and shareholders and not in their own interest.  In Percival v. Wright , the directors of a company had the power to issue the unissued shares of the company.  The company was in no need of further capital but the directors made fresh issue for themselves and their supporters with a view to maintaining control of the company. It was held that the allotment was invalid and void.

Directors are, however, not trustees in the real sense of the word because they are not vested with the ownership of the company’s property.  It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company.

(3) True position is that directors are in fiduciary relationship

Jessel MR in Forest of Dean Coal Mining Co., Re  observed:

“Directors have sometimes been called as trustee or commercial trustees and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is; which is that they are really commercial men managing a trade concern for the benefit of themselves and of all the shareholders in it.  They stand in a fiduciary position towards the company in respect of their powers and capital under control”.

11. POWERS

The Board of directors of a company is entitled to exercise such powers, and to do all such acts and things, as the company is authorized to exercise and do.  However, wherever the law requires authorization by the members in a general meeting, the directors can do such act only on receiving such authorization.

12. DUTIES OF THE DIRECTORS

The essence of the duties of directors is twofold. On the one hand, having been elected to office, directors become responsible for the company finances and assets. As such, in the absence of any legal controls, the directors have virtually a free hand over the manner the corporate property may be used. As trustees, the directors become subject to fiduciary duties. On the other hand, the directors are in practice conferred with almost unlimited powers by the company Articles of Association. The agency principle relates to the exercise of directorial powers in that the directors, as agents, owe a duty to exercise their directorial powers carefully, skillfully and with diligence.

Before examining the directors’ duties in extenso it is important to note that the extent of the duties of directors is limited to the company. That is, the directors owe these duties to the company only and not to individual shareholders. Courts have reasoned that shareholders choose their own directors and if they decide to choose incompetent amateurs to run their business, then law would not prevent them. The only exception to the above rule restricting the scope of the duties of directors is where shareholders appoint directors specifically as their agents in any matter. In such cases the directors will owe such shareholders the ordinary fiduciary duties arising form that agency relationship. In the New Zealand case of Colemn v. Myers the court of appeal held that in determining whether the duty arises when a director is dealing with a shareholder, regard must be paid to all surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder.

Duties of directors 

The fiduciary position occupied by directors, that which arise from their being characterized as trustees and agents, gives rise to three major duties.

1. Duty to act bonafide in the interest of the company (181 & 182(1)

A director of the company when performing his duties is required to act honestly and in good faith and in what he believes to be the best interest of the company.

Evershed, M.R. in Greenhalgh v. Arderne cinema Ltd. stated that it is the subjective opinion of the director as to the interests of the corporations as a general body which courts.

The gist of this rule is that, where a director makes some judgment which he is required or permitted to exercise under his company’s constitution, if he does so bonafide, there is no liability for the consequences of a faulty judgment. 

2. Duties of care, skill and diligence (s. 185)

The director owes the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both-

a) The knowledge and experience that may reasonably be expected of a person in the same position as the director, and

b) Any special knowledge and experience which the director has.

Romer, J. in Re: city equitable fire insurance co. Ltd laid down three propositions which define the directors’ duty of care, skill and diligence.  

First, that a director need not exhibit in the performance of his duties a greater skill than may reasonably be expected of a person of his knowledge and experience. This means that no minimum reasonable amount of skill is required. Thus, the less knowledge and experience a director has, the less skill is expected of him and the less likely he is to be liable when something goes wrong. The standard of care expected of a director is that of a reasonable man. This proposition positively encourages incompetent people to accept directorship, because the law expects little or nothing of them.

Second that a director is not bound to give continuous attention to the affairs of his company. The law thus considers the director’s duties to be of an intermittent nature in that a director executes his duties at periodic board meetings and at meetings of any committee of the board upon which he happens to be placed, but he is not bound to attend all such meetings.

For example, in Re: Cardiff Savings Bank, Marguis of Bute’s case where Marguis of Bute was not liable as president of Cardiff irregularities in the bank for losses resulting from irregularities in the bank’s operations. He had been appointed president when only six months old, and had attended one board meeting in thirty eight years.

In Re: city equitable fire insurance co. Ltd (supra) no blame was attached to a director who lived in Aberdeen and found it difficult to attend board meeting in London, or another director who attended no board meeting for five years due to illness.

Lord Hatherly opined in Land credit company of Ireland v. Lord Fermay that where a director does attend, however, it is reassuring to know that the law expects him to remain awake.

Third, that a director is, in the absence of grounds for suspicious, justified in trusting some other official to perform certain duties honestly. That is a director is not necessarily required to do everything himself, or to distrust and continuously supervise those to whom he has delegated task. However, as pointed out in Fisheries development corporation of SA Ltd. V. Jorgenson.  

They are not absolved from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of lack of knowledge of wrongdoing, if that ignorance is the result of gross inattention.

3. The non-conflict rule                              

This rule imposes a duty upon a director not to place himself in a position where his duty to the company and his personal interests conflict. Also that he should not profit from his position in that he should not divert company opportunities to himself. The law thus imposes strict prophylactic rules involving onerous disclosure rules to prevent directors shrouding their transactions in secrecy. 

4. Duty to exercise powers for proper purpose (s. 185)

5. Duty to have regard to interests of employees

DIRECTORS’ LIABILITY

 Fraudulent trading (s.383)

 Wrongful trading (s.384 CA)

 Disqualification order (s. 197)

 Criminal liability(s.314PenalCode)