To manage a company, certain types of individuals are needed, namely company directors, company secretary and the auditors, in this essay we will focus on one particular function, the directors of a company:
“A director is an officer of the power delegated to them by members of the company under the constitution of the company and the Companies”- Act 2014
According to the companies act, there is no particular qualification to be a director of a company, however in Ireland some restriction exists : the directors must age 18 or over (section 131), cannot be a body corporate (section 130), cannot be an undischarged bankrupt (section 132), cannot be a director of more than 25 companies, need to be resident in a European Economic Area (EEA), also director of a company may be required to hold certain shares in the company called qualification shares. Directors are appointed by the subscribers to the memorandum of association.
In our case the minority shareholder of the private company ABL Ltd Sheelah would like to remove the director Robert from the Board of Directors. In order to advise Sheelah we will in a first time verify if Robert have the individual authority to enter into binding contracts, then we will verify if there is the director’s duty of care are not breached, and finally we will see if the fiduciary duties of directors are not also breached, we will then conclude by listing the possible ways Sheelah will be able to use in order to remove Robert from the board of directors.
In ABL Ltd, the important decisions are made by the board of directors. The Chairman of the Board, Robert take alone all the important decision since the three other directors are not implied in the running of the business and tend not to attend boards meetings. Also Sheelah suspect Robert to take decisions without any reference to other directors. According to the indoor management rule:
“It provides that outsiders to the company are entitled to presume that the fact the internal regulations of the company are adhered to presume that the internal regulation of the company is adhered to correctly according to the company’s constitution”
In order to have a better understanding of the authority of a director we will use the case of LNOC Limited v Watford Association football Club Limited. In this case the managing director and owner of Watford, Mr Bassini, had entered into finance agreements with LNOC on behalf of the company. But when the loans were not repaid LNOC sued the Watford, as a defense the company answered that Bassini had no authority to bind the company. The court decided to analyses that case through two separated way:
The actual authority judgment:
“Director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole.”-Section 172, Companies Act 2006
For the court Bassini had actual authority, because there were no proof, he had not acted in good faith in Watford’s interests.
The apparent authority judgment:
“Contract may be made either by some duly authorized person acting on behalf of the company or by the company itself under its common seal.”-Section 43, Companies Act 2006
“a document is validly executed by a company if it is signed by two “authorized signatories”-Section 44(2), Companies Act 2006
” Every director and the company secretary are taken to be authorized signatory”-Section 44(3), Companies Act 2006
The court conclude that the Mr Bassini had possessed the required authority to make the loans, and the Watford had to repay the loan to LNOC Ltd.
So, if we refer to the LNOC Ltd v Watford, we can confirm that Robert have the actual authority to bind ABL Ltd into a contract since there is no proof that Robert does not act for the company best interest. He also has an apparent authority since he is the chairman of the director meeting board, then his signature is considered as authorized. To conclude this part if Sheelah cannot prove that Robert did not act, in good faith, for the best interest of ABL Ltd, then the chairman has the full authority to enter into binding contracts on behalf of the company.
Because of their importance in the company and their managerial power among it, the directors have certain duties. According to the Act 2014 section 223, the director must writhe a statement above his signature recalling his duties in the following terms:
“I acknowledge that, as a director, I have legal duties and obligations imposed by the companies Act, other statutes and a common law.”
The section 228 of the Ca act 2014 state eight director’s duties:
1. To act in good faith and in the interest of the company
2. To act honestly and responsibly in relation to the conduct of the affairs of the company
3. To act in accordance with the company’s constitution and exercise powers only for the purposes allowed by law
4. Not use the company’s property, information or opportunities for own or anyone else’s benefit
5. Not to agree to a restriction of his or her exercise of independent judgement (unless in specific allowed circumstances)
6. To avoid conflicts of interest between themselves and the company
7. To exercise reasonable care, skill and diligence
8. To have regard to the interest of the members of the company as well as those of the company’s employee.
We know that all of the day to day business decisions are made by Robert without any reference to the other directors also the other directors tend to not attend to the board meeting. This behavior can be a threat on the directors’ duties especially on the duties regarding the reasonable care, skill, and diligence about the best interest for the company.
We can find some similarities with the Dorchester Finance CO v. Stebbing (1977). In this case all three directors of the company were held liable in damages for negligence. They failed to exhibit the necessary skill, care and diligence in the performance of their duties as directors, because there was only one director involved full-time in the company’s affaire when the two others were not attending to the meeting boards and some loans advised by Mr Steebing were made and could not be recovered.
The current situation of the director board can be a good opportunity Sheelah to remove Robert from the board for breach of his duty. We saw earlier that Robert have individually the full authority to bind the company into contract, and because of the lack of implication from other directors, these four directors had clearly failed to exhibit the necessary skill, care and diligence in the performance of their duties as directors of the company. If any loss is registered because of contract signed by Robert, then ABL Ltd. Will be able to bring an action against the directors’ boards for breach of duty.
Those duties stated earlier are also considered as fiduciary duties which can be define as:
“Fiduciary duties reflect those duties which exist where there is a relationship of trust and confidence, as essentially the Shareholders are entrusting their investment to the hands of Directors.” Francis Wilks and Jones Directors Fiduciary Duties.
Sheelah also suspects that Robert has been taking bribes from other companies in order to get ABL Ltd enter into particular contracts. This is also a breach of two of its duties, avoid any conflict of interest between him and the company and not to agree to a restriction of independent judgement. According to the Section 239 of the Act,
“which sets out the general prohibition on a company making a loan or quasi-loan to, or entering into a credit transaction or guarantee or providing security for, a director or a person connected t a director.”
An example of this breach of fiduciary duty can be seen in the case of Fulham Football Club Ltd and others v Cabra Estates plc (1992). In this case the court decided that the directors were in breach of their duties when they received a sum in return for supporting an application by the council for the compulsory acquisition of the defendant’s property.
Also the Section 160 of the Companies Act 1990 provides that a person can be disqualified from being a director when the high court is satisfied that he or she is guilty of fraud or in breach of their obligation under company law. (obsolete ?)
Nevertheless, The Section 242 of the companies Act 2014, also include some exception from that prohibition:
– Where the value of the arrangement or loan is less than 10% of the value of the net assets of the company;
– Where the funds are advanced to a director to cover reasonable time-frame;
– Intra-group transaction;
– Where the transaction is in the normal course of the company’s business.
According to the Section CA 2014, directors have a duty to disclose to the board the existence and nature of any personal interest in a contract to be made by the company before a decision is made on it. A director who fails to disclose his or her interest has committed a category 2 offences.
A category 2 offence can be define as : “An offence punishable by a term of imprisonment of less than two years, or an offence not punishable by a term of imprisonment but punishable by a community based sentence (for example, an offence under section 11B of the Summary Offences Act 1981 which is punishable by a sentence of commuty work or a fine of $500 or both).
Since Robert does not refer to the other director of the board when he make a decision for the company, if Sheelah’s suspicion is true, Robert would be in the same in breach of his fiduciary duty and also making a category 2 offences, and then the company will be able to sue Robert for breach of fiduciary breach.