SU9B - Directors\' Duties 2 PDF

Preview

Summary

Company Law inContextDirectors’ Duties 2 - WorkbookContentsWORKSHOP HANDOUT...............................................................................................................Study Unit Objectives................................................................................................

Description

Company Law in Context Directors’ Duties 2 - Workbook

Contents WORKSHOP HANDOUT...............................................................................................................3 Study Unit Objectives.................................................................................................................3

TUTORIAL QUESTIONS..............................................................................................................14 Self-test questions ……………………………………………………………………………………………………………. 16

How to use this Workbook Before the Workshop:    

Print off the Workbook Read the Workshop Handout Attempt Workshop Activities 1 and 2 Read through the rest of the handout to gain familiarity with the subject; you do not need to fill in the gaps as this will be done in the “live lecture” part of the Workshop

During the workshop:    

There will be group discussion of Workshop Activities 1 and 2 at the start You will complete the handout with the aid of the live lecture There will be in-class discussion of Workshop Activities 3 and 4 You will have time to start preparing for the Tutorial, with the tutors “in the background”

After the Workshop:  

Review the handout Continue to prepare for the tutorial

During the Tutorial: 

There will be discussion of the Tutorial Activities

After the Tutorial:  

Review your notes and make sure you understand what has been covered Complete the self-test questions at the end

WORKSHOP HANDOUT

What we have covered so far on the module… • • • • • • • • • •

SU1: Business Organisations SU2: Corporate Personality SU3: Registration – Key Actors & Process SU4: Articles of Association SU5: Corporate Decision-Making SU6: Corporate Capital SU7: Loan Capital SU8: Capital Maintenance SU9A: Directors’ Duties – The Statutory Framework SU9B: Directors’ Duties – Breaches, Liability and Consequences

The Objectives of this Study Unit are to be able to:    

Outline the potential consequences for a director who breaches his or her duties to the company, including authorisation, ratification, how a breach is measured, and how the court may grant relief from liability Outline the remedies available to a company whose director has breached his or her duties Outline the circumstances in which a director may be disqualified, and for how long Apply the above to realistic practical scenarios

3

WORKSHOP ACTIVITY 1 Refresh your memory of directors’ duties from Study Unit 9A. Concisely outline where these duties are set out in statute; in no more than one sentence for each duty, what they entail; and how they relate to the common law duties.

[Write your answers here]

WORKSHOP ACTIVITY 2 To whom are these duties owed? What is the significance of this?

[Write your answers here]

WHERE WE ARE NOW HEADING… 1. 2. 3. 4. 5. 6. 7. 8. 9.

Authorisation Directors’ duties and ratification of breaches (s 239) Removal from office (ss. 168-169 CA 2006) Remedies for breach – enforcement Misfeasance (s 212 Insolvency Act 1986) Actions by liquidators Fraudulent trading (s 213 Insolvency Act 1986) Wrongful trading (s 214 Insolvency Act 1986) Disqualification (CDDA1986)

4

1. AUTHORISATION • Some directors’ actions, which may involve a breach of duty, may be ……………………………… in advance • E.g. the duty to avoid a conflict of interests (s. 175(4)-(6)) o In a private company, there must be nothing in the articles …………………………………………… such authorisation o In a public company, the articles must include a provision ……………………………………………… ………………………………. such authorisation o The director in question cannot count in …………………………… o The matter must be agreed to without their vote or would have been agreed to if their vote had not been counted

2. DIRECTORS’ DUTIES – RATIFICATION OF BREACHES – S 239 CA 2006 • This section enables a company to ratify a breach, i.e. ……………………………………………… • The decision is made by a shareholders’ ………………………………….. resolution unless the company’s articles require a higher majority or unanimity (ss. 239(2) and 281(3) CA 2006). • Ratification is only valid if the decision is made by informed consent: • “by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins” (Harman LJ in Bamford v Bamford [1970] Ch 212)

• NB s 239(7): • In some cases, another rule of law may have additional requirements for ratification • Some acts are incapable of being ratified by the company, e.g.: o Misappropriation of company property o Dishonesty o Fraud on, or oppression of, minority shareholders o Hence it would not be possible to ratify the actions that occurred in Cook v Deeks

5

3. REMOVAL FROM OFFICE (SS. 168-169 CA 2006) WORKSHOP ACTIVITY 3 Using your statute book, or any online source of your choice, refresh your memory of sections 168-169 CA 2006. a)

What mechanism is available to a company to remove a director from office?

b)

What rights does the director have in this situation?

c)

For what type of clause should the articles of association be checked? (Hint: look at your workbook from Study Unit on the Articles of Association).

[Write your answers here]

4. DIRECTORS’ DUTIES – REMEDIES FOR BREACH - ENFORCEMENT: WORKSHOP ACTIVITY 4 a)

To whom do directors owe their duties?

b) Who, therefore, has the right to enforce any breach of these duties? c)

Who will normally make this decision on the company’s behalf, and how?

d) What is the potential problem?

[Write your answers here]

6

FOUR PO POTENTIAL TENTIAL SCENAR SCENARIOS IOS i. Wro Wrongdoing ngdoing director(s) in a minorit minority y on the board and hol hold(s) d(s) a minority of shares:

 The majority on the board can ……………………………………………… for the company to bring an action against the wrongdoing directors. ii. W Wrongdoing rongdoing directors in a m majority ajority on the boar board d but hold a minority of the sshares hares

 The majority shareholders can …………………………………….. to remove the wrongdoing director (ss. 168-9 – see the SU on “Registration – Key Actors” and the extract relating to Termination of Office) and/or to ………………………………………………………………………………..  The newly constituted board of directors can then ………………………………………………………. for the company to bring an action against the wrongdoing directors. iii. Wro Wrongdoing ngdoing director(s) control the board AND hold a majo majority rity of the shar shares es

7

 There are mechanisms to protect the …………………………………………… ………………………… this situation – we cover these in SU12A and 12B

iv iv.. The company has gone in into to liquidation: The liquidator can bring actions against the wrongdoing directors using ……………………… ……………………………………………………….

5. LIABILITY FOR BREACH  Standard consequence of a breach of duty = “……………………………………………” of profits (Bishopsgate Investment Management Ltd v Maxwell (No 2) [1993] BCLC 1282)  Illustrative case: JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162: In 1986, the director purchased land from the company for £8,600 He sold part of the land in 1988, for £110,000 He sold the remainder in 1992 for £122,500 When he originally purchased the land from the company, he had not disclosed to the Board that he knew of its development potential  Held: he had to ……………………………………………………………………………………………… for the profits he had made on the subsequent sales    

 NB s. 1157 CA 2006 enables the court to grant a director relief from liability if he has acted ………………………………………………. and ……………………………………………………….

8

6. ACTIONS LIQUIDATORS CAN TAKE AGAINST DIRECTORS S. 212 IA 1986 – action ffor or breach of duties (consider (considered ed above above)) S. 213 IA 1986 – Fr Fraudulent audulent tr trading ading S. 214 IA 1986 – W Wrongf rongf rongful ul tradin trading g  NB in each of these situations, directors may incur ………………………………………………  They may also be subject to a ………………………………………………………….. (CDDA 1986)  c.f. s 172(3) CA 2006 – duty to promote the success of the company “has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of credito creditors rs of the company”

7. S. 213 IA 1986: FRAUDULENT TRADING (1)

If in the course of the winding up of a company it appears that any business of the company has been carried on with ……………………………………………………………………… ………………………………………………. of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2)

The court, on the application of the liquidator may declare that any persons who were ………………………………………………………….. to the carrying on of the business in the manner above-mentioned are to be ……………………………………………………………. ……………………………………………………….(if any) to the company's assets as the court thinks proper.

    

Fraudulent trading introduced in CA 1929 Now in s 213 IA 1986 Also a criminal offence – s 993 CA 2006 Requires ……………………………………. “intent to defraud creditors” – i.e. difficult to prove Illustrative cases:   

Re Wil William liam C Leitch Bros Ltd [1932] 2 Ch 71 Re P Patrick atrick & LLyon yon Ltd [1933] Ch 786 Morphitis v Bernasconi [2003] Ch 442

Re Wil William liam C Leitch Bros Ltd [1932] 2 Ch 71 “In my opinion I must hold with regard to the meaning of the phrase carrying on business "with with intent to defr defraud aud creditors creditors" that, if a company continues to carry on business and to incur debts at a time when there is to the …………………………….. of the directors no reasonable pros prospect pect of the creditors ever recei receiving ving payment of those debts debts, it is, in general, a proper inference that the company is carrying on business ………………………… ………… …………………………………………………………………………………….”(Maugham J at p. 77)

9

Re P Patrick atrick & LLyon yon Ltd [1933] Ch 786 “I will express the opinion that the words "defraud" and "fraudulent purpose," where they appear in the section in question, are words which connote …………………………………………….. involving, according to current notions of fair trading among commercial men, real moral blame.” (Maugham J at p 790) This will be ……………………………………………………………………………………!

Morphitis v Bernasconi [2003] Ch 442  Bernasconi was director of a haulage company. Business struggled because of onerous obligations under a lease  Following legal advice, the business was transferred to a new company as part of a restructuring scheme. Creditors of the original company were paid in full, other than the landlord.  For the restructuring scheme to work, it was necessary to avoid action from the landlord for a period of time. Rent continued to be paid, but only after numerous requests by the landlord. Eventually, company promised to pay an instalment of rent the following month – but had no intention of paying it – and did not pay it.  Company placed into liquidation  Liquidator brought fraudulent trading action against the directors – alleged that the directors …………………………………………………………………………………………….. the landlord when they knew that no further rent payments would be made  HELD (CA):  No fraudulent trading – even though the landlord had been intentionally misled, it did not follow that the business had been carried on with intent to defraud creditors as a whole  i.e. it is ………………………………………………………………………………………. fraudulent trading  These difficulties led to the introduction of the offence of …………………………………………. …………………………………………………. in s. 214 IA 1986.

8. S 214 IA 1986: WRONGFUL TRADING (EXTRACT) (1)

(2)

Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a per person son who is or has been a director of the compa company ny, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper. This subsection applies in relation to a person if— (a) the company has gone into insolvent liquidation, (b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and

10

[NB …………………………………………………………………………………. …………………………………………………………………………] (c) that person was a director of the company at that time time… […] (4) For the purposes of subsections (2)… the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company [an …………………………………………. test], and (b) the general knowledge, skill and experience that that director has [a ………………. test] […] (7) In this section “director” includes a shadow director. (8) This section is without prejudice to section 213.  How does the operation of s. 214 IA 1986 differ from the operation of s. 213?  Illustrative cases:

 Re Pro Produce duce Marketing Consortium Ltd (No 2) [1989] BCLC 520 DKG KG Contr Contractors actors Ltd [1990] BCC 903  Re D Re Pro Produce duce Marketing Consortium Ltd (No 2) [1989] BCLC 520  Company ran a business importing fruit. Mr David & Mr Murphy were the directors  1981 onwards – financial position gradually worsened – traded at a loss directors knew this. Accounts not delivered in time.  Mr Tough, the company’s auditor, warned the directors they might face fraudulent trading or wrongful trading actions if company was wound up  Company went into liquidation. Liquidator applied for an order for the directors to contribute  Held: directors found liable for wrongful trading – required to ………………………………….. …………………………………

Re D DKG KG Contr Contractors actors Ltd [1990] BCC 903  Work which the co. had contracted to do was carried out by a director – used his own equipment & materials but the company purchased the materials. Money paid to the company was almost entirely paid out to the director.  Company was insolvent for the last 10 months of its existence – paid the director over £400K in that time!  Company went insolvent – liquidator successfully sued director both for breach of fiduciary duties (using ………………………………………..) and for wrongful trading (using ….

11

……………………………………………)  The directors had become aware that creditors were pressing ffor or payment and one creditor was withholding delive deliveries. ries.  At that point, they should have instituted some form of finan financial cial control which would have revealed the company’s position.

“Mrs Gibbons was awar aware e of pressing credito creditors rs in April and Mr Knight's first visit to her occurred in May. In April, Mr Gibbons himself became aware of a supplier refusing to make further deliveries to the company… the warning signs were such that by the end of April the directors should hav have e instituted some fform orm of financial control. If they had done, they would, in my judgment, have concluded then that there was no reasonable prospect of avoiding liquidation liquidation.. If one applies the standards required by subsection section 214 (4)(a) , therefore, the directors are liable in respect of trading after 31 April. Under subsection (1) I have jurisdiction to declare that the directors are to be liable to mak make e such contribution contribution, if any to the company's assets as I think proper. I therefore propose to make a declaration that the directors are liable, jointly and sev sever er erally ally ally, to make a contribution equal to the amount of the trade debts incurred by the company on or after 1 May 1988.” (from the judgment of John Weeks QC)

9. DISQUALIFICATION UNDER CDDA 1986 This Act enables the court to disqualify a person from acting as a director in certain situations.  Ss. 2-5 CDDA 1986: disqualification for general misconduct  Ss. 6-9 CDDA 1986: disqualification for unfitness  S. 10 CDDA 1986: disqualification for fraudulent or wrongful trading Ss. 2-5 CDDA 1986: disqualification for gen general eral m misconduct isconduct  s 2 – Disqualification on conviction of indictable offence in connection with promotion, formation, management, liquidation of a company - ………………………………………………….  Ss 3 & 5 – Disqualification for 3 or more breaches of company law (e.g. failure to submit accounts or other documents to Companies House) – …………………………………….  s 4 – Disqualification following crime of fraudulent trading – ……………………………………… Disqualification for gen general eral misconduct – example:

R v Corbin [1984] Crim LR 302  Corbin set up 3 companies to sell yachts  Obtained money and property by fraud, obtained money from finance companies to buy yachts by falsely saying he had already paid a deposit and took part-payment on a yacht from a customer but never delivered the yacht  Imprisoned for 2 ½ years  Disqualified from acting as a director for five years under what is now s. 2 CDDA 1986 (disqualification on conviction of an indictable offence)

12

Ss. 6-9 CDDA 2006 – Disqualification ffor or unfitness  Secretary of State for Business, Innovation and Skills can apply to court for a disqualification order if: - company has become insolvent - person’s conduct as director of that company makes him unfit to be concerned in the management of a company  “Unfitness” determined in Sch. 1 – e.g.: -

breach of duty misapplication of company money failure to keep proper records failure to sign company accounts

 …………………………………………………………………… Disqualification for unfitn unfitness ess – example:

Re Firedart Firedart Ltd [1994] 2 BCLC 340 Director continued to trade through medium of a company when it was insolvent Awarded himself excessive remuneration Failed to keep proper accounting records Found to be unfit to be concerned in the management of a company under s. 6 CDDA 1986  Disqualified for ………………………………………………..

   

Ss. 10 CDDA 1986: Disqualification ffor or frau fraudulent dulent or wrongf wrongful ul  Where a court finds a person liable to contribute to the company’s assets for fraudulent or wrongful trading under s. 213 or s. 214 IA 1986 respectively, the court can also make a disqualification order for …………………………………………………………………………..

WORKSHOP RECAP:         

General duties – recap Directors’ duties and ratification of breaches (s 239) Removal from office (ss. 168-169 CA 2006) Remedies for breach – enforcement Liability for breach Actions liquidators can take against directors Fraudulent trading (s 213 Insolvency Act 1986) Wrongful trading (s 214 Insolvency Act 1986) Disqualification (CDDA 1986)

13

We still need to think abou aboutt Corporate Governance (extra controls on directors of listed plcs) – we come back to this in Study Unit 11)

TUTORIAL

Introduction This part of the Study Unit, the tutorial, is dedicated to consolidating your learning. This is your opportunity to ask questions about anything that remains unclear. In this tutorial we will 

Ensure that the Study Unit objectives are met,



Practise your research skills,



Practise your ability to work in teams, use technology and take effective notes, and



Answer any questions that remain.