THE MANAGEMENT OF A COMPANY law aof clc CQ60/22CLC.pptx

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1. THE MANAGEMENT OF A COMPANY M.A. Bùi Hà Hạnh Quyên [email protected] Faculty of Economics, Academy of Finance, Hanoi, Vietnam 1

2. Content DIRECTORS THE COMPANY SECRETARY THE AUDITOR COMPANY REGISTERS THE ANNUAL RETURN ACCOUNTS AND ACCOUNTING RECORDS 2

3. I. DIRECTOR APPOINTMENT OF DIRECTORS CATEGORIES OF DIRECTOR VACATION OF OFFICE BY DIRECTORS THE REMUNERATION OF DIRECTORS POWERS OF DIRECTOR DIRECTOR AS AGENT DUTIES OF DIRECTOR 3

4. Overview Control of a company belong to the owners. They have the power to appoint and remove the directors or to alter the company’s articles to take away some of the directors’ powers. But while the directors hold office it is they, and not the owners, who run a company. The task of managing a company is therefore entrusted to the directors, who act as agents of the company As a company will need to have directors, it is not possible to register a company without specifying who the first directors should be. There is no requirement that directors should be human beings, and companies may be appointed as directors of other companies. 4

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6. 1. APPOINTMENT OF DIRECTORS The promoters must send a statement to the Registrar of Companies, giving the names and addresses of the company’s first directors and the first company secretary . A company’s articles of association will almost always set out how subsequent directors are to be appointed. If the articles do not deal with the matter, directors will be appointed by ordinary resolution ( nghị quyết thông thường ) of the members. A person can only be appointed as a director if he consents to being appointed, and the appointment must be exercised for the benefit of the company as a whole . 6

7. 2. CATEGORIES OF DIRECTOR 7

8. ‘Shadow director’ Those who provide professional advice are expressly excluded. But a professional person may be held to be a shadow director if his or her conduct amounts to effectively controlling the company’s affairs. In determining whether or not an individual is a shadow director, four factors are relevant, namely that: - the de jure and de facto directors of the company must be identifiable - the person in question directed those directors on how to act in relation to the company’s affairs or that he was one of the persons who did - the directors did act in accordance with his instructions - they were accustomed so to act. 8

9. 3. VACATION OF OFFICE BY DIRECTOR A director might leave office in any one of the following ways: Death of the director or winding up of the company Resignation Where they are required to do so by a provision in the articles Removal Disqualification 9

10. 3.1. REMOVAL A director may always be removed from the BOD by ordinary resolution in a general meeting notwithstanding anything that is stated in the company’s articles or in any contract with the director. 10

11. Its apparent power is subject to certain very real restrictions: 11

12. Weighted voting provisions In British company law, it has always been possible to weight votes attaching to shares. This may, therefore, be used to give a minority shareholder who is a director the power to block his removal. 12

13. Example: Bushell v Faith (1970) Facts A property company called Bush Court (Southgate) Ltd owned a block of flats. There was £300 capital, 100 shares held by Mr Faith and the other 200 by his two sisters, Mrs Bushell and Dr Bayne. Article 9 of the company constitution said that under a resolution to remove a director, that directors’ shares would carry three votes each. When the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two, 200 votes together. Judgment According to the articles, the brother had 300 votes and sisters could not remove him from the office. They could not alter the constitution either because the provision also included that the clause applied to any resolution to alter the constitution of the company. So, he would have had 300 votes against 200 of his sisters for resolution to alter the constitution as well. 13

14. Quorum provisions Quorum means the minimum number of persons who being entitled to attend a meeting must be present at there so that the business of the meeting can be transacted validly. It is possible to draft a shareholders' agreement stating that a member holding each class of share must be present at a general meeting to have a quorum. If so, a member holding shares of a certain class could prevent a director from being removed by not attending the meeting. 14

15. Example: Re BML Group Ltd (1994) There was a shareholders’ agreement which contained a provision that the meeting was only quorate if B or his proxy was present. B was removed as a director in his absence and he issued proceedings to protect right. Held: The Court of Appeal upheld the effect of the shareholders’ agreement saying that B’s right were in effect class rights which could not be overridden. They had the same effect as if they were class rights contained in the company’s articles of association. 15

16. Compensation provisions When a director is removed from office, this might amount to breach of contract by the company. If the director is an employee, there might be a claim for unfair or wrongful dismissal. 16

17. Southern Foundries Ltd v Shirlaw (1940) Facts Shirlaw (S) was appointed managing director of Southern Foundries (SF) for a fixed term of 10 years. SF was taken over by another company who altered the pre-existing articles of association empowering 2 directors and a secretary to remove a director, irrespective of the terms of his contract. S was sacked prior to the expiration of the fixed term, and he brought a claim to recover damages for breach of contract. Issues SF contended they were empowered to amend their articles of association. The new articles had been appropriately adopted, and the new procedures correctly followed. Given the statutory right to alter articles, it would be inappropriate for a court to interfere with the company’s right to do so. S argued his employment contract was for a fixed term of 10 years, and the articles could not amend that contract. He argued there was an implied term of the contract that the company would not amend its articles in a way which would be detrimental to him. Held S successfully recovered damages for breach of contract. It was an implied term of his employment contract that he would not be removed from his role during the fixed 10 year period. SF could not be prevented from altering its articles of association, but it may be liable in damages if it amends the articles so as to prejudice a contract validly made prior to the amendments. 17

18. Petition for a winding up order A director member who is removed from a quasi partnership company may seek to wind the company up on the just and equitable ground. Example: Ebrahimi v Westbourne Galleries Ltd (1973). 18

19. 3.2. DISQUALIFICATION The effect of a disqualification order is that a person shall not, without the leave of the court, ‘be a director of a company, or a liquidator or administrator of a company, or be a receiver or manager of a company’s property or, in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order’. 19

20. A disqualification order may be made under CDDA 1986 : (i) Conviction of an indictable offence in connection with promotion, formation, management, or liquidation of a company, or with the receivership or management of a company’s property. Although the offence must be indictable, disqualification under s.2 is still possible if the offence was in fact tried in the magistrates’ court (CDDA 1986 s.2). (ii) Persistent default in sending annual returns, accounts or other documents which have to be filed with the Registrar of Companies. Three convictions within five years is conclusive evidence of persistent default (CDDA 1986 s.3). (iii) If an officer or receiver of a company which is in liquidation has been guilty of fraud in relation to the company, or has been in breach of his duty as a company officer, or has committed an offence of knowingly being a party to fraudulent trading. (A criminal conviction for this is not necessary.) (CDDA 1986 s.4.) (iv) Conviction in the magistrates’ court, of an offence only triable summarily, of failing to provide the Registrar of Companies with information required to be provided. However, it must also be shown that this is the third conviction for doing this within the past five years (CDDA 1986 s.5). (v) If a person acting as a director or shadow director of a company which has become insolvent, has engaged in conduct which makes him unfit to be concerned with the management of a company (CDDA 1986 s.6). (vi) If the Trade Secretary concludes from an inspector’s report that the person’s conduct makes him unfit to be concerned in the management of a company, or that a disqualification order should be made in the public interest (CDDA 1986 s.8). (vii) If the person has been held by a court to be responsible to contribute to the assets of a liquidated company on the grounds of fraudulent or wrongful trading which are considered below at 19.1.4 (CDDA 1986 s.10). Orders made on the ground of (ii) above, may not be for longer than five years. Nor may an order on the grounds of (i) and (iv), if made by a magistrates’ court. As regards the other grounds the maximum period is 15 years, and if the order is made on ground (v) it may not be for less than two years. 20

21. 4. THE REMUNERATION OF DIRECTORS Directors will only be entitled to be paid fees for their services if the constitution of the company provides for payment. Payments to directors do not depend upon the company having made a profit. If a person acting as a director has no contract with the company then he can be paid for his services on a “quantum meruit”. 21

22. Example: Craven-Ellis v Canons Ltd [1936] The claimant was appointed as managing director of a company and had a contract which entitled him to remuneration. The articles required the claimant to gain qualifying shares within two months of his appointment as managing director. The claimant never acquired such shares and so after two months the claimant was not a director and had no contract with the company. Nevertheless the claimant did considerable work for the company and claimed to be entitled to be paid on a quantum meruit for this work. Held . The claimant was entitled to be paid on a quantum meruit because he had worked for the company without a binding contract. 22

23. 5. POWERS OF DIRECTOR The powers of the directors will be contained in the company’s articles of association . The directors are statutorily bound to exercise powers only for purpose for which they are conferred . 23

24. Example: Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] Article 96 of the company stated that ‘The management of the business and the control of the company shall be vested in the directors, who … may exercise all such powers and do all such acts and things as may be exercised or done by the company …’ This article went on to state that the directors would not be able to do an act which was in contravention of an extraordinary resolution passed by the members. At a general meeting an ordinary resolution was passed, ordering the directors to sell the company’s assets to another company which had been recently formed with the purpose of acquiring these assets. The directors did not think that it would be in the best interests of the company to do this, and so they refused to do it. Held . The directors were within their rights. Whether or not to sell was a question for them and not for the shareholders. 24

25. Members can change the power of director by the way pass a special resolution to change the articles . But these changes would only apply in the future . The articles cannot be changed retrospectively. Although the directors have the power to manage the company, there are numerous powers which can only be exercised by means of the members of the company passing a resolution. 25

26. 6. DIRECTOR AS AGENT The directors are the agents of the company. 26

27. Director’s Authority 27

28. Actual authority Actual authority will be conferred by agreement between the director, or the BOD, and the company. The company’s constitution sets out the powers of the directors and the directors agree that they shall be able to exercise these powers, thereby acquiring actual authority to do so. 28

29. Apparent authority Apparent authority is the power of an agent to act on behalf of a principal, even though not expressly or impliedly granted. This power arises only if a third party reasonably infers, from the principal's conduct, that the principal granted such power to the agent.  The idea of apparent authority  protects third parties who would otherwise incur losses  if the agent's signature did not bind the principal after reasonable observers thought that it would. Typically, if an agent has apparent authority, the agent's principal will be held liable for the actions of the agent which are within the scope of the apparent authority. 29

30. Example: Freeman and Lockyer v Buckhurst Park Properties [1964] Facts One director of a Buckhurst, its agent, commissioned Freeman and Lockyer as architects for their Buckhurst Park Estate project. Buckhurst later refused to pay their invoices, saying that the director was not authorised to enter into the transaction which commissioned the architects Issue: The director had acted as the managing director of Buckhurst. The director did not have actual authority; the articles of association prohibited the director’s action, requiring all four directors to agree on such actions being taken. Was the company bound to pay? Decision: Yes. The director had apparent authority and bound the company. 30

31. Ultra vires transaction If a director acts for a purpose outside the company’s objects clause the contract is said to be “ultra vires”. If this contract causes loss to the company the director who made the contract is personally liable to reimburse the company for the money lost. A company may ratify ultra vires contract . If such a ratification is effective, retrospective, the members can excuse the director from making this payment . 31

32. In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution. Section 40.1 (Company Act 2006) 32

33. Example: TCB Ltd v Gray [1986] A company issued a debenture to a bank in respect of a loan made by the bank. A solicitor signed the debenture, as agent for one of the directors, having been given power to do this by a power of attorney. Issuing the debenture would have been within the power of the board of directors. One of the company’s articles required that debentures should be signed by a director. The company later claimed that the debenture was invalid as it had not been properly entered into. Held . The debenture was valid under Section 35.1 [S40.1-CA2006]. The section protected the bank not only against lack of authority but also against improper procedure having been followed. 33

34. 7. DUTIES OF DIRECTOR 34

35. 7.1. Fiduciary duties 35

36. Regal (Hastings) Ltd v Gulliver [1942] Facts Regal (Hastings) Ltd (Regal) owned a cinema. Regal took out leases on two more cinemas, through a new subsidiary (Hastings Amalgamated Cinemas Ltd), in order to create a viable sale package. The landlord wanted personal guarantees from the directors. The directors refused to do so.  The landlord then offered to up the share capital to £5,000. Regal itself put in £2,000, but could not any afford more (though it could have got a loan). 4 directors each put in £500. Mr Gulliver, Regal’s chairman, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. The directors sold the business and made a profit of nearly £3 per share. Shortly after, the buyers brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. The directors had not gained fully informed consent from the shareholders. Issues: Had the directors breached their fiduciary duties to Regal? Held The House of Lords held that the directors had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. The House of Lords held that the directors therefore had to account for their profits to the company. 36

37. Note The company may also require ‘the director in breach’ to account for any money or benefit received. The ‘directors in breach’ are regarded as holding any profits made in constructive trust for the company, so company can recover it. A contract which does benefit a director, in breach of his fiduciary duties, is voidable at the company’s option, but only if the other party to the contract either knew or should have known that the director acted in breach of a fiduciary duty. 37

38. Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1985] Mr Shenkman (S) a director of Rolled Steel, owned 51% of the shares in the company. S was also a director of Scottish Steel in which he owned all the issued shares. Scottish Steel owed money to British Steel Company (BSC) and S personally guaranteed the loan. When BSC wanted additional security, S caused Rolled Steel to give this guarantee, even though doing so was of no benefit to Rolled Steel. The company was empowered to grant guarantees under its articles but approval of the deal was irregular because S's personal interest meant his vote should not have counted for the quorum at the meeting approving the guarantee. The shareholders knew of the irregularity, and so did British Steel. Rolled Steel Products wanted to get out of the guarantee, and was arguing it was unenforceable either because it was ultra vires, or because the guarantee had been created without proper authority. Held. S and BSC both knew that the contract was of no benefit to Rolled Steel, and that it had therefore been given for an improper purpose. So BSC could not claim on the loan. 38

39. 7.2. Non-fiduciary duties 39

40. Care and skill The common law standard expected of the director is that of a reasonably diligent person who has both: the general knowledge, skill and experience which could be objectively expected of such a director and the skill, knowledge and experience which the director in question actually has. A director is not expected to give continuous attention to the company’s affairs. He/she is entitled to trust that an official to whom duties have been delegated is exercising those duties properly. 40

41. Re Cardiff Savings Bank, Marquis of Bute’s Case (1892) Facts The  Marquess of Bute  as an infant of six months was installed in 1848 on the  board of directors  as "President" of the Cardiff Savings Bank, in effect inheriting the office from his father. The company was plunged into insolvency in 1886 when Lord Bute was 38 years old. He had been to a board meeting when he was 21, in 1868, and apparently signed the minutes. But he was generally ignorant of the company's affairs. The company went insolvent because the directors defrauded the company of large sums of money. The liquidator wanted Lord Bute to make a contribution for the losses. Judgment Stirling J held that the duty owed by Lord Bute was essentially to be determined by the knowledge and capability of the director himself. Lord Bute was not liable because he was entitled to rely on the other directors to have done their own jobs and there was no extra duty on him to oversee that. 41

42. Duties to employees The directors should have regard to the interests of the company’s employees as well as to the interests of the members. But if there is any conflict between the interests of the company and the interests of the employees the directors must put the company’s interests first. 42

43. Duties to Creditors At common law the directors of an insolvent company must have regard to the interests of the company’s creditors and can become liable to the creditors for failure to safeguard their interests. If a company becomes insolvent, insolvency procedures allow the assets of the company to be controlled by the creditors rather than by the directors. The liquidator will be able to prohibit the directors from acting in certain ways. If the directors ignore these instructions they can become personally liable. Directors don’t have to engage in wrongful or fraudulent trading. 43

44. 7.3. Effects of breach of duty In so far as directors exceed limitations on their powers that flow from the memorandum, they are in breach of their duty. The company may be able to sue them for breach of duty. Even if the directors do exceed their powers or use them irregularly or negligently, the share holders may still ratify their acts at a general meeting, as long as the directors did not act fraudulently, illegally or in bad faith. The court can grant relief to a director in breach of his duty if the director ‘acted honestly and reasonably and ought fairly to be excused’. 44

45. Example: Bamford v Bamford [1970] The company was in danger of being taken over. To avoid this the directors issued an extra 500.000 shares to a business which distributed the company’s products. This might have been contrary to the articles. (This point was never decided.) The shareholders approved the issue of the shares by passing an ordinary resolution at a general meeting. Held. Even if the directors had irregularly exercised their powers, the ratification by the shareholders made the contract a good one, and absolved the directors from all liability. 45

46. Example: Re D’Jan of London Ltd (1993) Fact: D, a director of the company, signed an insurance proposal form without reading it. The form was filled in by D’s broker. An answer given to one of the questions on the form was incorrect and the insurance company rightly repudiated liability for a fire at the company’s premises in which stock worth some £174,000 was lost. The company became insolvent and the liquidator brought this action alleging D was negligent. Decision: In failing to read the form D was negligent. However, he had acted honestly and ought therefore to be partly relieved from liability. In addition, owning 99 shares was relevant to the court’s exercise of discretion to relieve directors for breaches of duty under s.727 CA 1985 (s.1157 CA 2006) because it ‘may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else’s.’ 46

47. Exercise Take an example about Apparent authority of director? 47

48. II. THE COMPANY SECRETARY Every public company must have a company secretary, but private company are not to do so. The secretary is an employee of the company . The articles of a company usually provide that the company secretary is appointed, and can be removed, by the directors. The articles will also usually provide that the directors fix the secretary’s conditions of employment and the length of time for which he is to hold office. 48

49. The secretary’s duties Look after the administration of the company. The secretary owes the company fiduciary duties which are similar to the fiduciary duties owed by the directors. A few of the secretary’s duties, such as the duty to submit the annual return, are imposed by statute. The company secretary has a limited power to bind the company, but only as regards the type of administrative contracts which a company secretary could be expected to make. He cannot borrow money on the company’s behalf, nor sue on the company’s behalf, without authority. 49

50. Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] Fact: Fidelis’ company secretary, Mr Bayne, hired cars from Panorama Development's business, Belgravia Executive Car Rental. Bayne used the Fidelis' paper and represented that he wished to hire a number of Rolls-Royce's and Jaguars for the business while his managing director was away. He was lying and he used them himself. Bayne was prosecuted and imprisoned, but Belgravia had outstanding £570 for the hired cars. Fidelis claimed that it was not bound to the hire contracts, because Bayne never had the authority to enter them. Held. The company was liable. Bayne, as company secretary, had apparent authority to hire the cars on behalf of the company. Lord Denning MR: ‘A company secretary … is no longer a mere clerk. He regularly makes representations on behalf of the company and enters into contracts on its behalf which come within the day to day running of the company’s business. So much so that he may be regarded as held out as having the authority to do such things on behalf of the company. He is certainly entitled to sign contracts connected with the administrative side of the company’s affairs, such as employing staff, and ordering cars, and so forth.’ 50

51. Qualifications The secretary of public company must satisfies at least one of the following qualification requirements: Be a member of any of the following bodies: the Institute of Chartered Accountants in England and Wales (ICAEW) the Institute of Chartered Accountants of Scotland (ICAS) Association of Chartered Certified Accountants (ACCA) the Institute of Chartered Accountants in Ireland (ICAI) the Institute of Chartered Secretaries and Administrators (ICSA) the Chartered Institute of Management Accountants (CIMA) or the Chartered Institute of Public Finance and Accounting (CIPFA) Have held the office of company secretary of a public company for at least 3 out of the 5 years immediately before their appointment as secretary Be a barrister, advocate or solicitor called or admitted in any part of the UK Be a person who by virtue of their holding or having held any other position or their being a member of any other body, appears to the directors to be capable of discharging the functions of the secretary of the company.  51

52. III. THE AUDITOR Every company must appoint auditors except companies which are dormant and private companies which are exempt from the audit requirement. The first auditors may be appointed by the directors of the company before the first general meeting of the company and such auditors will then hold office until the conclusion of that meeting. The auditor is appointed by the members of the company and reports to the members. Officers and employees of the company are prohibited from being appointed as the company auditor or as the auditor of a parent or subsidiary company on the grounds of lack of independence. The business partners and employees of officers and employees of the company are also banned 52

53. Auditor’s duties The auditor has two duties, to audit the accounts and to report to the members regarding the accounts. Auditing of the accounts involves carrying out a series of checks and tests to see that they are fair and accurate. The second duty means that the auditor must certify that in his opinion the books give a true and fair reflection of the company’s financial position and have been properly prepared in accordance. The report is not made to the members directly, but can be delivered to the company secretary. It must, however, be available for inspection by any member. If the directors’ report seems at odds with the annual accounts this must be stated in the auditor’s report. 53

54. IV. COMPANY REGISTERS A company is obliged to keep certain registers and documents at its registered office. Most of these registers can be inspected by members of the public, although some can only be inspected by company members . 54

55. The registers and documents must be kept at the registered office of a company, and can be inspected by a member of the public (i) The register of directors and secretaries. (ii) The register of members. (iii) The register of directors’ interests. (iv) The register of charges at its registered office. (v) A copy of every contract under which a public company bought its own shares must be held at the registered office for ten years after the contract was performed or should have been performed. (vi) A company does not need to hold a register of debenture holders. However, if such a register is kept, it must be kept at the registered office or the place of business of a business which makes up the company’s registers. (vii) A public company must keep a register of people who control more than 3 per cent of the voting rights of its shares at the same place as the register of directors’ interests is kept. 55

56. Only members of the company have the right to inspect the following documents: (i) A copy of every contract under which a private company buys its own shares. A copy of the contract must be kept at the registered office for ten years after the purchase. (ii) A copy of the contract of service of every director or shadow director, either with the company or with one of its subsidiaries. (iii) The minutes of any general meeting must be kept at the registered office. There is no fee for inspection. (iv) The records of written resolutions of a private company which were agreed as if they were resolutions at a general meeting must be kept at the registered office.There is no fee for inspection. 56

57. V. THE ANNUAL RETURN Every company must submit an annual return to Companies House. This gives basic information about the company on a particular date, its return date, every year. 57

58. The following information must be given in the annual return: (i) The address of the registered office. (ii) Whether the company is public or private; whether it is limited by shares, limited by guarantee or unlimited; its principal business activities; and whether it is exempted from using the word limited in its name. (iii) The name and address of the company secretary. (iv) The names and addresses of the directors and shadow directors; their nationalities; dates of birth; usual business occupations; and details of other directorships held within the past five years. (v) Notice of any elective resolutions which have been made to dispense with the requirement to hold an annual general meeting or to lay accounts before the members at a general meeting of the company. (vi) The number and nominal value of the company’s issued shares. (vii) The names and addresses of every member, showing the number and class of shares which he holds, and the names and addresses of every person who has ceased to be a member since the last annual return. (viii) If either the register of members or the register of debenture holders is not kept at the company’s registered office, the address of the place where these registers are kept. 58

59. VI. ACCOUNTS AND ACCOUNTING RECORDS Companies are under a duty to keep accounting records, and to prepare annual accounts. 59

60. 1. Accounting records Every company must keep accounting records for inspection by the officers of the company. These are not the same as the accounts, but are the documents which enable the accounts to be prepared. (Ledger, order forms, cash books, receipts etc.) They must show with reasonable accuracy the financial position of the company at any particular moment. They should be sufficiently detailed to enable the directors to ensure that any balance sheet or profit and loss account prepared gives a true and fair view of the company’s affairs. The accounting records must have day to day entries of all money spent or received, with details of the transactions, and a record of assets and liabilities. 60

61. In UK A public company must hold such records for six years, a private company for three years. Officers in default of the requirement to keep accounting records can be imprisoned for up to two years andor fined. Members of the company do not have a right to inspect the accounting records, unless they are given such a right by the articles of association or by the directors 61

62. 2. The annual accounts A company’s accounts consist of a balance sheet, a profit and loss account, the directors’ report and the auditor’s report. 62

63. 63