Company Law

1

• Leeds Law School Company Law
  / Company Law Extended L7

• Lecture 4
• Company officers. Legally binding the company
•  

• Dr. Pavel Repyeuski
• P.Repyeuski_at_leedsbeckett.ac.uk

2
Company members and officers

• Shareholders/members
• Directors and the board
• Company secretary
• Auditors

3
COMPANY MEMBERS

• If limited by shares shareholders
• Articles of associationconstitutional role in
  the company
• Do not manage company day-by-day, but do
  determine directors powers
• Small closely-held private companies
  shareholders often are the directors
• Large public and listed companies

4
BECOMING A CO MEMBER in Co limited by shares

• A person becomes a member
• by subscribing for shares from the company on
  incorporation s 8(1) and s 16(5)
• by subscribing for and being allotted and issued
  with shares
• by acquiring shares from an existing member
  (transfer or transmission)
• A person ceases to be a member
• by selling or giving their shares away
• upon death (shares form part of estate)
• upon bankruptcy/winding up

5
STATUTORY POWERS OF COMPANY MEMBERS

• amend the Co constitution (s. 21(1))
• to reregister the company (ltd to plc (ss. 90 and
  97))
• to remove the directors (s. 168)
• to approve the directors service contracts (for
  more than 2 years (s. 188(2))
• to approve substantial property transactions (s.
  190(1)) and loans (s. 197) between the Co and a
  D
• to ratify a directors breaches of duty (s. 239)

6
STATUTORY POWERS OF COMPANY MEMBERS

• to approve appointment of the Co auditor (s.
  489(4))
• to authorise the board to allot shares (s. 551)
• to reduce share capital (s. 641(1))
• to authorise the company to purchase its own
  shares (ss. 694, 701)
• to wind up the Co (s.84(1) IA1986
• Note Management power will revert to the members
  in circumstances where the board is unable to
  act.

7
POWERS OF THE BOARD

• Art 3 MoA all powers of the Co, unless
  restricted by the Articles
• Directors a Cos agents
• Collective nature of the powers
• Directors can delegate powers
• Shareholders may chose to authorise directors
  acting outside of their authority

8
COMPANY DIRECTORS

• In the Companies Acts director includes any
  person occupying the position of director by
  whatever name called s 250
• officers of the company
• not necessarily employees
• executive/non-executive
• Directors can be of many different types and names

9
DIRECTOR TYPES

• De jure officially appointed in accordance with
  the Articles
• De facto not legally appointed (or appointment
  is defective), but who opted in, assumed
  responsibility directors
• Shadow directors s.251 CA2006 a person in
  accordance with whose directions or instructions
  the directors of the company are accustomed
  toact

10
Executive and non-executive directors

• Executive directors who have executive powers in
  a Co (and, likely, a service contract)
• Non-executive (NEDs) no employmentcontract and
  no executive management responsibilities.
  Appointed for their specific skills/expertise,
  there to challenge the exec directors

11
UK Corp Governance Code 2018

• NEDs should constructively challenge and help
  develop proposals on strategy
• scrutinise the performance of management
• At least 1 NED should be appointed an
  appropriate combination of exec and NEDs
  meetings with CEO
• Any Co within the FTSE 350 at least 50 of the
  board excluding the chairman should be
  independent NED

12
Directors numbers

• private company must have at least one director
  s 154(1)
• public company must have at least two directors
  s 154(2)
• at least one director must be a natural person
  s 155
• must be at least 16 years old s 157 not
  bankrupt or disqualified.

13
Directors appointment and removal

• Appointment
• on incorporation, named in the statement of
  proposed officers and deemed appointed on
  incorporation - s12 and s 16(6)
• as provided for in the articles, eg see Art 17
  by shareholders (OR) and by directors
• Removal
• s 168 CA2006 by ordinary resolution, subject to
  special notice (28 days)
• any other means provided for in the articles, eg
  see Art 18 MoA bankruptcy, mental incapacity,
  being restricted by law...
• Note if FTSE 350annual election by shareholders

14
CDDA 1986

• The court may disqualify from being a director
  for up to 15 years for
• s. 2 convicted of an indictable offence in
  connection with Co management
• s. 3 persistent non filing of accounts 3)
• fraudulent or wrongful trading as per ss. 213-214
  IA 1986
• s 5 person appointed as an administrative
  receiver of the Co
• Breach of competition law, other reasons.

15
DIRECTOR REMUNERATION

• Appointment as a director does not guarantee
  remuneration
• But can have service contract with a Co, or
  provided for by the Articles/members
• Can be employees of the Co or independent
  contractors
• s.188 CA 2006 any service contracts over 2 years
  to be approved by members.
• Large and medium-sized Co should publicly
  disclose director remuneration

16
The Company Secretary

• ss. 270-280 CA2006a chief administrative company
  officer with a number of statutory duties and
  responsibilities
• Mandatory for plc, optional for ltd directors
  have a duty to appoint
• The secretary must be qualified

17
COMPANY AUDITOR

• s. 475 CA 2006 Cos accounts to be audited
  annually (unless exempt). An independent report
  as to whether Cos
• annual accounts have been properly prepared
• accounts give a true and fair view of the
  companys state of affairs and the profit or loss
  
• the info given in the strategic report and the
  directors report is consistent with the accounts
  and the directors remuneration report has been
  prepared in accordance with the Act (ss.
  495-497).

18
EXCEMPTIONS FROM AUDIT

• s.480 Dormant companiesno significant accounting
  transactions
• ss. 477 and 382 Small companies an Ltd
  satisfies at least 2 of the following criteria
• not more than 10.2 million annual turnover
• not more than 5.1 million balance sheet total,
  and
• no more than 50 employees.

19
Auditors appointment and removal

• Appointment
• For each financial year by directors
• In Ltd, subsequent appointments can be done by
  ordinary resolution
• Appointment for 10 years maximum (unless extended
  to 20 years ss. 485 A and Bneed to have a
  selection process
• Removal
• s. 510 Ordinary resolution, special notice,
  Registrar to be notified within 14 days
• Auditor may be removed by Financial Reporting
  Council through the court
• Auditor may also resign/term ends (FRC to be
  notified)

20
AUDITOR LIABILITY

• Governed by contract (between company and
  auditor) and tort law (negligence)
• To third parties see Caparo IndustriesLtd v
  Dickman 1990 2 AC 605 (HL) as an example
• Criminal liability s.507 CA2006knowingly or
  recklessly false reporting or omitting

21
CORPORATE GOVERNANCE

• Board structures and shareholder engagement
• Separation of ownership and control in the
  company
• Agency problem between shareholders and directors

22
COMPANYS DECISION-MAKING

• Board meetings
• General meetings
• Company officers (directors)
• Company employees / agents
• Note Decision-maker must have proper authority

23
AGENTS BEYOND AUTHORITY

• Common law rule the principal (company) is not
  bound by the actions of the agent acting beyond
  actual authority
• EXCEPT
• Apparent authority
• Ratification
• Indoor management rule (Turquands case)
• s.40 CA2006

24
Doctrine of ultra vires abolished

• Previously the Memorandum would contain an object
  clause, and any acts outside that object were
  void (ultra vires)
• Now s31(1) unless Co restricts the objects, the
  objects are unrestricted.
• Also s.39 (1) The validity of an act done by a
  company shall not be called into question on the
  ground of lack of capacity by reason of anything
  in the companys constitution.

25
AUTHORITY

• Actual
• express (evidenced in employment contract, etc)
• Implied (from agents positionscope of
  jobvarious positions imply various authority)
• Ostensible (apparent) as appears to 3rd parties
  (i.e. even when not expressly authorised)
• Note Ostensible authority can coincide with the
  actual one

26
Hely-Hutchinson 1968 1 QB 549

• MD acted independently, not always informing the
  board.
• Defendant Co, while merging with HH, was
  guaranteed by MD the indemnity against certain
  losses without proper authority
• Lord Denning
• Authority is expressed when given by express
  words (passing the resolution). It is implied
  when inferred from the conduct of the parties and
  circumstances of the case (appointment of the MD)

27
Freeman and Lockyer v Buckhurst 1964 2QB 480

• K and H, Co, to buy/sell real estate
• H was mostly away, thus K was in day-to-day
  management.
• After sale of one property failed, K decided to
  develop it, employing the P
• Co refused to pay the P as K had no authority

28
DECISION

• Court of Appeals the authority was apparent.
• 4 conditions
• Representation of the authority was made to
  contractor
• By person who had actual authority to run the
  business
• The contractor relied on representation and was
  induced into the contract
• Co acted within its objects (no longer relevant)

29
INDOOR MANAGEMENT RULE

• 3rd parties, dealing with the company are
  entitled to assume that
• The acts within the Co are valid
• Co has complied with any required internal
  procedures / other rules

30
RBB v Turquand (1856) 6 EB 327

• Director borrowed money without the resolution
  (exceeded powers)
• Court of Exchequer the Co is bound
• Directors have power and authority to bind the
  Co, subject to the resolution
• As long as the document appears legitimately
  done, the 3rd party presumes all such formalities
  have been observed

31
LIMITATIONS OF TURQUAND

1. The rule does not apply if the 3rd party was
   acting in bad faith or knew the Co did not follow
   the procedures
2. Insiders (directors, etc.) cannot rely on the
   rule irrespective of the knowledge / faith

32
Rolled Steel Products v British Steel Corp 1986
Ch246

• Co A gave security guarantees over its property
  to Co B, did not follow the procedures
• Shareholders of both A and B were aware of the
  irregularity of the transaction
• CA Transaction was unenforceable and one could
  not rely on Turquands, as all knew about non due
  process

33
s40(1) CA2006

• In favour of a person dealing with a Co in good
  faith, the power of the directors to bind the
  Coshall be deemed to be free of any limitation
  under Cos constitution
• i.e. 3rd party can enforce the contract with the
  Co even if it was unconstitutional

34
DEFINITION OF GOOD FAITH

• Barclays Bank 1984 BCLC 1
• a person acts in good faith if he acts genuinely
  and honestly in the circumstances of the case
• But no need to show reasonability of the act