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"They do infinite mischief;
they bring into disrepute one of the most useful statutes of modern
times by perverting its legitimate use, and by making it an instrument
for checking honest creditors."
These words, which would undoubtedly reflect the
attitude of many lawyers and business people in 1996 of and concerning
limited liability companies, were surprisingly enough originally
uttered in May, 1895, in the Court of Appeal in England by Lord
Justice Lindley, in the case of Broderip -v- Salomon.
The undoubted abuse of the corporate structure by
unscrupulous business people over many years has brought about
a change in the attitude of legislators and lawyers alike in relation
to their dealings with and attitudes, in relation to limited liability
companies. Perhaps the greatest illustration of the change in
attitude towards companies is to be found in the Companies Acts,
1990, in this jurisdiction, which have created a web of intricate
controls and regulations to prevent the outright abuse of the
corporate personality as had previously been seen. Directors now
would be well advised to be familiar with their duties and obligations
and furthermore the restrictions placed upon them by the Companies
legislation, and set out below is a general overview of these
duties, obligations and restrictions as they exist today.
The primary Act governing the law relating to companies
in Ireland is the Companies Act, 1963, and Section 2 defines a
director as including "any person occupying the position
of director by whatever name called". Section 27 of the 1990
Companies Act, (No. 33 of 1990) provides that for various provisions
of the said Act, "a person in accordance with whose directions
or instructions the directors of a company are accustomed to act
(in this Act referred to as a shadow director) shall be treated
. . . as a director of the company . . . ". This is clearly
an attempt by the legislature to bring within the framework of
the Companies legislation those parties who, whilst not describing
themselves as directors, are effectively the reins behind the
relevant company.
Every company must have at least two directors and
a company secretary.
When a company is formed, the first directors of
the company will be named and any subsequent directors are to
be appointed pursuant to the provisions of the Articles of Association,
which is effectively the document governing the internal running
of the company. If the Articles of Association do not provide
any specific mechanism for the appointing of a director the members
in general meeting may appoint one.
Equally, any director, other than a director for
life, can be removed in general meeting and the Articles of Association
cannot interfere with this statutory power. A notice of 28 days
must be given of the intention to hold a general meeting for the
purposes of removing a director.
It should be borne in mind that it is a useful practice
to separate a person's role as a director from his position as
an employee of the company. Therefore, an individual's removal
as director of a company and the termination of his contract of
employment, must be deemed to be separate acts. It should always
be borne in mind that in relation to the removal of an employee,
the unfair Dismissals legislation must be carefully adhered to.
In addition, the company must keep a copy of all its service contracts
at its registered office for inspection by the members of the
company. Any director who is purported to be appointed for a period
in excess of 5 years, pursuant to the 1990 legislation, must be
approved in general meeting by the members.
The basic function of the directors is to manage
the affairs and activities of the company and in order to do so,
they must have certain powers. It is common in legal parlance
to say that wherever powers go, obligations must surely follow.
It is now time to consider some of these.
POWERS
AND OBLIGATIONS OF COMPANY DIRECTORS
1. General Introduction
The powers of the directors are normally those delegated
to them by the company. In practical terms the directors of a
company can do anything that the company can do. It should be
borne in mind that neither the directors nor the company can do
anything which is ultra vires; by this is meant beyond the powers
of the company. The powers of the company are defined in the Memorandum
of Association and contained in what is known as the Objects Clause.
In addition, a company obviously cannot do anything which is illegal
and the same limitation is placed upon company directors. Once
the directors are acting in good faith and doing their best for
the company, the company in general meeting does not have power
to set aside the day-to-day actions of the directors, provided
it can be established that the actions of the directors were within
the powers of the directors.
N.B. This does not however make the company powerless in the face
of directors. They have a number of options available to them,
one option is by special resolution, i.e. a vote of 75% or more
of the members in general meeting, where they can amend the Articles
of Association and thereby alter thepowers of the directors.
In addition, it should be noted that directors can
be removed from their office as directors by an ordinary resolution,
i.e. a vote of 51% or more of the members in general meeting.
2. Good Faith
Every director has a duty to act in good faith in
the interests of the company. Even though the company itself is
an artificial legal personality, the duty is still owed to the
company, not to the shareholders or creditors of the company,
though some duties to creditors and shareholders are in fact imposed
by statute.
3. Conflict of Interest
At all times directors have a duty to avoid conflicts
of interest and by this is meant effectively that a director must
not do anything for and on behalf of the company where his motivation
and loyalites would be divided in that his own self interest,
of someone connected to him, may be given equal stature to that
of the company. As we will see later, in the event of such actions
taking place, the director has a duty to account to the company
for any profits or gains he may have made as a result of this,
and in consequence thereof, the companies have certain rights
against the director for acting in circumstances of such conflict
of interest.
4. Limitation on Use of Powers
The powers conferred by the Articles of Association
on the directors for the purposes of managing the affairs of the
company may only be used for the purposes for which they were
intended. Therefore, any hidden motivation or purpose which is
not in the interest of the company may lead to the allegation
of abuse of powers and could lead to considerable difficulties
for the director in question.
5. Skill and Diligence
It is a generally accepted principle that the position
or status of director is not a professional position. However,
a director in excercising his duties is expected to exercise skill
and diligence. What is often problematic is to determine the level
of skill or diligence which is to be required. It is generally
accepted and has been stated in a number of cases in English and
Irish Courts, that a director is expected to exercise reasonable
skill and diligence to a level which could reasonably be expected
from a person of the director's individual knowledge and experience.
This is not to say however that errors of judgment would not occur,
but provided that the errors of judgment are reasonable, the director
will not necessarily be answerable therefore. It is also acknowledged
that the directors are not generally 24 hours servants of the
company and that they may devote some of their energy and time
to other pursuits and interests, and this is not per se to be
taken as a failure to exercise reasonable skill and diligence.
6. Duty to Account
A director of a company is under a duty to account
for all benefits that he receives by virtue of his position as
a director. Any contract that a director enters into where the
company of which he is director is the other party to that contract,
is voidable, i.e. can be set aside at the election of the company
in general meeting. In addition of course, the contract can be
ratified. Any contract which is proposed between the director
and the company must, pursuant to statute, be preceded by a disclosure
of the director's interests to the board of directors.
Pursuant to the 1990's legislation, a register must
be kept of said director's interests. It should be noted in additon
that the duty to account for all benefits received by virtue of
position as director is not limited exclusively to contracts but
also includes loans and quasi loans given by the company, any
credit transactions, and any guarantees or security given by a
company for loans given by third parties to directors.
7. Notification
Directors are also under a duty to notify the company
in writing of their interests in company shares or debentures,
and dealings in the company shares or debentures. This also includes
interests of spouses and minor children in the same shares and
debentures. Failure to notify the company is a criminal offence.
8. Interests of Employees
Pursuant to Section 52 of the Companies Act, 1990,
it has now been brought to the level of statutory requirement
that the directors whilst acting in the interests of the company
have a duty to have regard to the interests of the company's employees
as well as the members/shareholders of the company.
9. Directors Liabilities
A director can always be sued at common law under
the tort of negligence, i.e. the failure to take reasonable care
or a breach of a duty of care to the company in circumstances
where he has acted negligently. In general terms, the director
as an agent of the company is entitled to an indemnity against
claims being made against the company, which said acts may in
fact have been carried out by the company director.
10. Fraudulent or Reckless Trading
Directors should be aware of the fact that pursuant
to Section 297A of the Companies Act, 1963 as inserted by the
Companies Act, 1990, that if in the course of a winding-up or
liquidation of a company, it appears that a director was knowingly
a party "to the carrying on of any business of the company
in a reckless manner", or was knowingly a party to the carrying
on of any business of the company "with intent to defraud
creditors of the company or creditors of any other person or for
any fraudulent purposes, the Court is at liberty to make such
a director personally liable without any limitation of liability
for all or any part of the debts or liabilities of the company".
Section 298 of the Companies Act, 1963 as amended
provides that if in the course of a winding-up or liquidation,
it appears, inter alia, a director has misapplied or retained
or become liable or accountable for any money or property of the
company, or has been guilty of any misfeasance or other breach
of duty or trust in relation to the company, the Court may order
the director to repay or restore the money or property, or any
part, with interest at such rate as the Court thinks fit, or to
contribute monies to the assets of the company by way of compensation
in respect of the misapplication, retainer, misfeasance or other
breach of duty or trust, as the Court thinks just.
These provisions, which clearly have civil implications,
are without prejudice to the fact that in addition the director
may be prosecuted for a criminal offence.
11. Qualifications as Director
Most parties would be qualified to act as a director
of a company as no specific qualifications are required. However,
there are certain categories of person who are specifically excluded
and prohibited from being directors of companies.
For instance,
(1) Undischarged bankrupts;
(2) Auditors;
(3) Other corporate entities;
(4) Persons under a Section 150 Disqualification Order;
would not be entitled to act as company directors.
12. Restriction Orders
Section 150 of the Companies Act, 1990 (No. 33 of
1990), allows a company post-liquidation to declare that directors
shall not for a period of 5 years, be appointed or act in any
way, directly or indirectly, as a director or take part in the
promotion or formation of a company, unless it meets specific
requirements.
Section 150 Disqualification Orders are generally
heard by way of Motion in the High Court, where the individual
directors are entitled to a right of audience whereby if they
can establish to the satisfaction of the Court that they had acted
honestly and reasonably in relation to the conduct of the affairs
of the company or that the director was a director solely by reason
of his nomination by a financial institution, then the Court may
decline to make a Disqualification Order.
If however the Disqualification Order is made, the
only circumstances in which the disqualified person may act as
a director of a private limited company is in circumstances where
the paid-up share capital is at least £20,000.
13. Automatic Disqualification
Again pursuant to the provisions of Section 160
of the Companies Act, 1990 (No. 33 of 1990), certain persons are
automatically disqualified from acting as directors or auditors
of, or managing, companies. The circumstances in which these automatic
disqualifications would apply include:
1) A conviction on indictment of any offence in
relation to a company or involving fraud or dishonesty;
2) Any fraud in relation to the company, its members
or creditors;
3) Any breach of duty as determined by the Court
in the person's role as director of a company;
4) Any person against whom a Declaration has been
granted under Section 297 (a) of the 1963 Act;
5) Where the conduct of a director makes him unfit
to be concerned in the management of a company (as determined
by the Court);
6) A person who has been persistently in default
in relation to the relevant requirements of the Companies legislation.
These parties will be automatically disqualified
for a period of 5 years, from being directors of a company.
This again is without prejudice to any criminal
prosecutions.
Civil implications again are that any monies paid
by a company to a person subject to an automatic disqualification
are recoverable from the said director.
In addition, in the event of a liquidation, it is
possible that the disqualified director, on being found to have
acted as a director, may be made personally liable without limit
for the debts of the company.
The above may be taken as a general overview
of the duties and obligations of company directors but should
not be treated as an exhaustive examination of same.
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