2018 Zone A Question #5
Astralzone Ltd has four directors, Beatrice, Clarissa, Delia and Earnest. Geraldine owns 51% of
the company’s shares. In December 2017, the board awards Beatrice a five-year employment
contract. In January 2018, Geraldine discovers this. Geraldine also decides that Beatrice is not
working hard enough, and passes a resolution at a shareholders’ meeting to remove Beatrice as
a director. The board agrees to pay Beatrice £300,000 for the premature termination of her
five-year contract.In February 2018,
Clarissa is given a car by John, one of Astralzone’s suppliers. John tells Clarissa the gift is to
thank Clarissa for having persuaded the board of Astralzone to award John a lucrative contract
In March 2018, Delia decides she is going to set up her own business, in competition with
Astralzone. She approaches customers of Astralzone and tells them of her plans. She does not
tell the whole boardof her plans, but does tell Clarissa. Clarissa takes no action.
In April 2018, the directors decide to sell a building owned by Astralzone, to Francis, Earnest’s
son. The price is £101,000. It appears the building was worth far more than that. Advise
Geraldine whether Astralzone could take any action in respect ofthe foregoing events
The question requires a discussion on the rights and liabilities that Astralzone may have with
respect to each of its directors. The majority Shareholder Geraldine (51%) is to be advised
whilst looking at each director separately;
Beatrice:
The circumstances of Beatrice illustrate two possible issues;
firstly with regards to termination of her 5 year service contract after just 1 month by the
majority shareholder Geraldine -- secondly the heavy payment of £300,000 for premature
termination by board.
The Law requires a director service contract (S.227) of more than 2 years to have
Shareholder approval in order to prevent entrenchment (s.188 and s.189) (UK Safety Group
v Heane). The FACT DON’T SHOW SHARHOLDER APPROVAL any such information,
presuming that a Shareholder APPROVA NOT PRESENT was not given, the contract would
be considered invalid. Presuming that a Shareholder APPROVAL GIVEN has been given
(S.168), S.188 holds that a Service contract can be terminated upon reasonable notice
(Bushell v Faith).
Service contracts are governed by S.227 of CA 2006. Geraldine is advised that what she
would want to do may have the following consequences; The board usually gives long
, service contracts because the longer the duration of contract, the more the damages will
be awarded
in case of pre mature termination to get rid of directors and so upon premature
termination, even though the law is complied with since S.168 holds that Shareholders
have power to remove directors by passing an ordinary resolution for whatever reason
they want, there would still be breach (Southern Foundries).
As a result, the director would be entitled to damages for premature termination. It is
arguable that the payment of compensation was approved because they failed to appreciate
that the contract was terminable on reasonable notice and warded her more compensation
than she was entitled to (£300,000).
This decision to pay an excessive amount may equate to breach of director duties and the rest
of board could have possibly acted in breach of their director duties (S.174), exercise of
reasonable care, skill and diligence. A mistake can be attributed to them for being negligent
with the term given (5 years) and then awarding such high compensation.
In case this was done maliciously and they had knowledge, S.172 will apply (duty to
promote success of Company) (Re Smith v Fawcett). It will be assessed whether she acted
in good faith in paying such excessive payment for premature termination on working for
only one month and was this in the best interest for the Company’s success (S.215-220
CA2006)
. S.217 holds that proposed payments in terms of termination must be disclosed and
approved by Shareholders however there is no need for approval in case of payments being
made in good faith. To assess whether the payment was made in good faith, four
conditions must be satisfied; there must be existing legal obligation, damages, settlement
and permission. There was a legal obligation since premature termination and there seems
to be no suggestion of malice or bad faith.
Delia
Setting up another business, she might be contravening S.175; duty to avoid conflicts of interest
(Real Hastings) ( DIRECTOR ACTING IN GOOD FAUITH BUT HELD LAIBLE( ( PESO _. Boardman v
Phipps holds that possibility of conflict is sufficient grounds for breach (1). Lord Herschell in
Brzay v Ford held; “…a person in a fiduciary posis8tion…is not allowed to put himself in a
position where his interest and duty conflict.”Courts hold that once a director has decided to
set up an independent business which is in cmpetition directly (Cook v Deeks,, D WERE
