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Company Law: Corporate Management
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- Company Law
- Institution
- Kings College London (KCL)
Comprehensive notes on Company Law in the UK: Corporate Management.
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Company LawRevision Notes
CORPORATE MANAGEMENT
__________________________________________________________________________________________
APPOINTMENT OF DIRECTORS
Purpose of directors
A ‘company cannot act in its own person … it can act only through directors’: despite having separate
legal personality Ferguson v Wilson [1866].
Requirements to qualify as a director
! Note: Beyond laying down these basic requirements, the Act does not attribute specific functions to company
directors, nor does it lay down the structure and form of corporate management more generally. This is left to the
Articles of Association.
(i) Definition: CA 2006 does not provide an exhaustive definition of the term ‘director’ beyond stating in s.
250 that the term ‘includes any person occupying the position of director, by whatever name called’.
(ii) Minimum number of directors: Under CA 2006, s. 154, private companies must have a minimum of one
director and for public companies, there must be two.
(iii) A minimum of one of the directors must be a natural person: This is per CA 2006, s. 155 (inserted
through the Small Persons Enterprises Act 2015). Therefore, one cannot have corporate directors (i.e. a
company or an LLP appointed as a director) only in a private company; however, in PLCs, since there is a
minimum of 2 directors, there can be a corporate director and a natural person.
(iv) Minimum age of a director: Under CA 2006, s. 157, the minimum age for natural person company directors
is 16 years. There is no upper limit. However, an appointment can be made below the minimum age
provided it does not take effect until the person attains the age of 16 (s. 157(2)).
! Note: One needs to read (iv) as a requirement because apart from considerations like bankruptcy and
disqualification from holding a position. But, there are no other skills that a director is expected to have statutorily.
(v) A director should not be a bankrupt: The common law prevents bankrupts from serving as company
directors: one will also find this in statutes through directors losing their position/directorship (i.e. s. 11 of the
Company Director’s Disqualification Act 1986).
Process of appointment
First directors are appointed under CA 2006, s 9: When you set up a company, the promoters will
oftentimes take up the position of a directors/if they had suitable candidates in mind, they would appoint
them instead – no nomination. However, first directors may ask to be resigned 6/3 months after
incorporation, following which successors will be chosen through a GM (election).
Successors are elected by s/holders at general meeting (GM):
(i) Nomination: Shareholders are nominated by BOD. In a PLC, they are often nominated by the nominations
committee (helmed by the BOD).
(ii) Appointment: Under Model Art 17 (private companies) and Art 20 (public companies), s/holders in GM
have power to appoint directors by ordinary resolution – simple majority in favour by those entitled to vote.
(iii) Rotations: For private companies, there is no provision in Model Articles for rotation of directors. Indeed,
named directors might be appointed on a permanent basis: e.g. Lee v Lee’s Air Farming Ltd [1961]. By
contrast, for PLCs, Model Art 21 provides for rotation.
Re HR Harmer Ltd [1959]: The power of the majority to appoint directors must ‘be exercised for the benefit
of the company as a whole and not to secure some ulterior advantage’.
Note: Table A 1985 applies to companies that have not adopted the 2008 model articles under CA 2006; i.e.
companies that were incorporated before 1 Oct 2009 use Table A unless they adopt other articles. Therefore,
note that where only Table A is mentioned, such measure only applies to ‘old companies’ – unless it is specified
in the articles of companies incorporated since 1 Oct 2009.
,Company Law
Revision Notes
Cases involving directors who are not appointed properly
Despite these criteria regarding appointments, board decisions are effective even where there has been
a defective appointment: CA 2006, s 161 (a cure).
Caveat: But s 161 only applies where there has been a purported appointment (where there has been
some effort to make an effective, and there is a defect). Otherwise a situation where one is actually not
a director, rather a de facto or shadow director may arise.
Þ Morris v Kanssen [1946]: An example is where a person with no real connection is pretending to be a
director. Lord Simonds, in this case, through this example drew the distinction between a defective appointment
and no appointment at all.
The provision does not protect outsiders who know of the defect or who have been put on
inquiry: Re New Cedos Engineering Co Ltd [1994]. However, note s. 40, CA 2006 which applies in
protection of third parties who are dealing with the company
Categories of directors
Statutory: Generally, CA 2006 provisions apply to ‘directors’, there is no categorisation. But, the Act
does now recognise distinction between various kinds of director (s 170(5) and 251) like that of shadow
directors in applying director’s duties.
In practice: But in practice, we have executive directors, non-executive directors, de facto etc.
Formally appointed: These directors are also known as de jure directors and are divided into
executive directors and non-executive directors. Details of such directors appear in Companies Register
to ensure the legality of their appointment is not contested.
EXECUTIVE DIRECTORS (ED) NON-EXECUTIVE DIRECTORS
Full-time officers with service contracts Externals who have part-time
appointments and get paid according to
the number of sittings/type of supervision.
Senior executives of the company whom
mostly perform a management function. Bring outside experience/objectivity, and
will be more objective in reviewing
The most senior would be appointed as management – like monitoring the
CEO (or managing director). performance of ED.
They derive their power from articles of Non-execs today perform key roles in
association, which in effect is the public companies (including listed
constitution of the company. companies). They are usually placed in
certain committees (remuneration,
nomination, audits committees).
Not formally appointed:
Importance of identification: These are rare in public companies, but they might exist for a number of
reasons. It is important to identify the role that these persons play, in part because:
(i) they owe ordinary duties to companies under CA 2006,
(ii) they are subject to liabilities under Insolvency Act 1986, and
Note: Table A 1985 applies to companies that have not adopted the 2008 model articles under CA 2006; i.e.
companies that were incorporated before 1 Oct 2009 use Table A unless they adopt other articles. Therefore,
note that where only Table A is mentioned, such measure only applies to ‘old companies’ – unless it is specified
in the articles of companies incorporated since 1 Oct 2009.
, Company Law
Revision Notes
(iii) are subject to the Company Directors Disqualification Act 1986.
! Note: Even though the law has tried to catch all types of directors, and apply duties to them, it has not been
possible because to do so at all times as it will result in an unfair application of the law. Therefore, statutory
duties apply to shadow directors only to the extent capable of so applying: CA 2006, s 170(5).
There are two categories of non-formally appointed directors which have caused problems.
! Note: For exam purposes, if the question states that this is a director who was not formally appointed without
mentioning any defect in appointment, look to whether it is a shadow or a de facto director.
DE FACTO DIRECTORS SHADOW DIRECTORS
who try to avoid public
ROLE Not formally/validly appointed, but
acknowledgement of their role in the
undertake functions of a director in an
company management – e.g. because they
open way (Re Kayteck International plc
have been banned as company directors.
(1999) [CA])
Þ Re Hydrodan (Corby) Ltd [1994]: Millett J thought that the categories of de facto and shadow directors were
mutually exclusive.
! Note: The distinction between to two is not as clear, despite the above decisions noting that there are no
overlap – courts are not willing to find these distinctions in all cases.
(i) DE FACTO DIRECTOR
Criteria: There is no satisfactory test to determine what makes a de facto director – but there are case
law which have tried to look at the certain factors.
Þ Re Hydrodan (Corby) Ltd (1994): Millett J in defining a de facto director, stressed the necessity of the
person in question being ‘held out’ as a director by the company. He went on to state that:
“To establish that a person was a de facto director of a company it is necessary to plead and prove that he
undertook functions in relation to the company which could properly be discharged only by a director. It is not
sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in
relation to its business which can properly be performed by a manager below board level.”
! Note: Lloyd J criticised the ‘holding out’ requirement in Re Richborough [1996] – but preferred and
emphasised the latter part of the formulation on functions performed by the individual concerned.
Secretary of State for Trade and Industry v Tjolle [1998]: Jacob J noted that it is difficult to frame a decisive
test. He stressed that the nature of the exercise was necessarily fact intensive and was a question of degree.
Although Jacob J doubted whether ‘holding out’ in itself was decisive, it would certainly be a factor in
the court’s determination.
Other factors to be taken into account include whether the person in question was in a position to commit
the company to major obligations on the basis of access to management accounts, whether he used the
title of director, and whether or not he took part in management decisions at boardroom level albeit, as is
the case with most boards of directors, he may have lacked equal power.
Jacob J concluded by noting that one asks: “was this individual part of the corporate governing structure?”.
! Note: This approach was approved by the CA in Re Kaytech International plc [1999].
(APPROACH FOLLOWED BY THE CASE BELOW)
Note: Table A 1985 applies to companies that have not adopted the 2008 model articles under CA 2006; i.e.
companies that were incorporated before 1 Oct 2009 use Table A unless they adopt other articles. Therefore,
note that where only Table A is mentioned, such measure only applies to ‘old companies’ – unless it is specified
in the articles of companies incorporated since 1 Oct 2009.
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