"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.
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.
(1) Undischarged bankrupts;
(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.