LG538 Law Corporate Governance – Directors’ Duties

Corporate Governance Corporate Governance refers to the system by which companies are directed and controlled. The Board of Directors is responsible for the governance of the company. Over the last decade a number of reports have been commissioned into the subject of corporate governance and as a result a number of codes of best practice have emerged. The purpose of these codes of best practice is to increase transparency and accountability in the manner in which companies are governed. These codes of best practice extend beyond the legal requirements set out in the Companies Acts.

Company Director S.2(1) of the Companies Act 1963 defines a director as: –“including any person occupying the position of director by whatsoever name called.” Main function is to manage company on behalf of its members. The articles of association set out the powers & functions of directors. A company director may also act as company secretary. No formal qualifications are required for a person to become a company director. A director does not need to be a member of the company unless otherwise stipulated in the articles of association.

What is a Company Director? A company is owned by its members (shareholders). Every company is required to have a minimum of 2 directors. Directors are usually appointed by the members of the company but can be appointed by the other directors where the articles of association allow. Directors of a company are known collectively as the ‘board of directors’.

Number of Company Directorships A person may not at any particular time be a director or shadow director of more than 25 companies (s.45 of No.2 Act of 1999). This limit does not apply to: –Public companies; –Companies with no resident Irish directors, that have a real & continuous link with economic activity carried on in the State; –Banking companies; –Directorship of 20 specific type of companies, ranging from those companies which are member firms of Stock Exchange to Trade Union companies.

Removal of Companies from Register The registrar can strike a company off the register on the grounds that the company no longer carries on business if the records of the registrar of companies show that the company appears not to have any directors – s.48 of the No.2 CA A company may now be struck off the register for failure to file an annual return for one year – s.46 of the No. 2 CA of 1999.

Types of Company Director Shadow director (s.27 CAA 1990) – any person, other than a professional adviser, with whose instructions the directors of a company normally comply with. Alternate director – the Table A standard form articles of association provides for a person to be nominated by a director to act in their absence. De facto directors – a person who has not been validly appointed or who is disqualified but who in effect occupies the position of, and acts as if he were, a director. Executive directors – involved in the daily management of the company. Non-executive directors – not involved in daily management of company; appointed from outside the company to bring an independent voice to the Board. Life director (private companies only)

Status of Company Director All directors are office holders. Office tenure is regulated by statute. A director has the protection of the constitutional requirements of natural & procedural justice. Some directors are employees. A director who is removed from office has two potential actions – common law & statutory.

Eligibility No formal qualifications necessary to become a company director but the following are not eligible to be a company director: –Undischarged bankrupts –Bodies corporate –Auditor of the company or its holding company –Court-prohibited directors. Courts may restrict a person who is a director of an insolvent company from being a director of another company for 5 years – s.150 CA 1990.

Restriction & Disqualification of Directors Directors will be restricted when they are prohibited from acting as directors for five years, except: –(a) where they can satisfy the court that their actions were honest and responsible; –(b) the company which they wish to direct has a nominal value of allotted share capital of at least €317,435 or in the case of a private company €63,487 fully paid up in cash.

Disqualification of Directors Disqualification can occur where a person has done one of the following: 1.In criminal proceedings, has been convicted on indictment of any indictable offence in relation to a company or one involving fraud or dishonesty; or in civil proceedings; 2.Has been guilty of any fraud in relation to a company its members or creditors, while acting as promoter, auditor, officer, receiver, liquidator or examiner of the company; 3.Has been guilty of any breach of duty while acting as promoter, auditor, officer, receiver, liquidator or examiner of the company; 4.A person has been declared personally liable for a company’s debts because of fraudulent or reckless trading;

Disqualification of Directors 5.a person’s conduct while acting as promoter, auditor, officer, receiver, liquidator or examiner of the company makes him/her unfit to be concerned in the management of a company; 6.In consequence of an inspector’s report under the Acts a person is similarly unfit or 7.A person has been persistently in default in making returns, giving notices or filing documents with the Registrar. A person is conclusively presumed to have been persistently in default for this purpose if found guilty of 3 or more such defaults.

Disqualification of Directors In Re Squash (Ireland) Ltd. [2001] Duignan v Carway [2000] Fennell v. Frost [2003] Re Gasco Ltd. (In Liquidation) [2001] Conroy v Corneill [2003] In the Matter of Colm O’Neill Engineering Services (in Voluntary Liquidation) [2004]

Appointment of Directors First directors named prior to formation of company in form submitted to Companies Registration Office. The Articles of Association provide how directors are to be appointed. Usually the general meeting votes on the appointment of directors. If this is done, the appointment of each director must be voted on individually: s. 181 CA 63.

Removal of Directors A director may be removed by ordinary resolution under s.182 CA 63. Extended notice (28 days) required. Though a director for life would appear to be unable to removed, if he/she breaches his/her duty to the company, the court may hold that this breach of duty is a termination by him/her of the contract, and will allow the company to remove the director in question. If the director in question is named in the articles as a director for life, the article must be changed hence a special resolution will be necessary. Where a person ceases to be a director of a company, and the company fails to notify the registrar of companies that the person is no longer a director, the person may send a notice to the company requiring them to notify the registrar of companies within 21 days.

Directors’ Duties Fiduciary duties. Statutory duties. (possibly) a common law duty of competence.

Fiduciary Duties Directors owe a number of fiduciary duties. They must: –Exercise their powers in good faith in the best interests of the company; –Retain their freedom of action & not limit their discretion by agreeing to vote as some other party may direct; –Avoid conflicts of duty & personal interest; –Avoid personal gain from the position of director without the consent of the company.

Statutory Duties Loans to directors. Interests in contracts – s.29 CA Interests in shares – s.30 CA 1990; s.53 CA Obligation to keep accounts & report. Duty to act “honestly and responsibly” arising on an insolvent winding up – Kavanagh v Delaney [2004]

Common Law Duty of Skill & Care Standard of care set out in Re City Equitable Ltd [1925]: –Duty of skill & care is a subjective test, based on the knowledge & experience of a particular director; –Directors can delegate or leave the routine business of the company to the management; –A director’s duty of care to the company is owed at board meetings only. A director need only attend meetings ‘regularly’.

Common Law Duty of Skill & Care –A director should take such care in the performance of his duties as an ordinary person might take on his own behalf; –A director must exercise his powers honestly, in good faith & in the best interests of the company. Very few cases of directors breaching their common law duties, suggesting that these are easily fulfilled. This led to an increase in statutory duties since the 1990s.

Release of Directors from Liability S. 200 CA 63 provides that any provision in the articles of association of a co. which exempts any officer or auditor from liability arising out of any negligence, default, breach of duty or breach of trust shall be void. However a company may indemnify any officer or auditor from liability in defending proceedings in which judgment is given in his favour or for which he is acquitted. This section has been altered by s. 56 of the 2003 Act which came into effect on 6 April The law now permits the company to obtain negligence insurance in respect of directors.

Directors & Company Accounts under the 2003 Act The IAASA has the power to examine the accounts of all public companies and private companies whose balance sheet total exceeds €25,000,000 and whose turnover exceeds €50,000,000 to establish whether they are in compliance with the Companies Acts. Directors’ compliance statement. Exemption from the requirement to prepare a Directors compliance statement.