Thor plc is a Public Limited registered company as per the provisions of Companies Act 1985, listed in London Stock Exchange. A public limited company must have at least two directors to manage the business affairs of the company apart from a qualified company secretary. Further public limited companies are also permitted to offer shares to the public to raise funds by way of public offer of shares to a minimum value of £50,000.
Thor plc is a commercial catering company which has both shares and debentures to its credit. A public limited company is governed by its Memorandum and Articles of Association which details the entire internal and external boundaries of a director beyond which a director cannot act in any manner. Chapter 2 Section 171-177 of Companies Act 2006 provide about scope and nature of general duties of a director.
Some of the important general duties are :
Duty to act within powers and in accordance with the company’s constitution (M&A) and exercise powers dutifully.(Sec.171)
Section 172 states that a director must promote and work to the success of a company in bona fide and in good conduct for any long term decisions, in the interests of company employees, fostering the business relationship with business suppliers, customers and others, consider the company’s operations, its impacts on environment and community. A director must have interest to maintain the reputation of the company.
Section 173 states that a director has the power to exercise independent judgment which is in accordance with the provisions and compliance of legal provisions enabled by Companies Act 2006 and authorized by Company’s constitution and which is not restricted and in contradiction with the agreement entered into between the director and the company.
Section 174 states that a director must exercise reasonable care, skill and diligence.
Section 175 provides that a director is in a position to always avoid a conflict of interest.
Section 176 provides that a director must not accept any benefits from third parties. Third parties means a person other than the company, a person acting on behalf of a company, an associate body or a body corporate.
Section 177 provides that a director can always declare interest in a proposed transaction or arrangement. The proposed interest must be disclosed or declared either in a meeting with other directors, by a notice to other directors in accordance with Section 184 (notice in writing) or Section 185 (general notice).
A director need not disclose interest in case the director is of the opinion that
(a) the proposed interest for a transaction may give rise to a conflict of interest.
(b) To an extent, if other directors are aware of transaction.
( c) The proposal need to be considered in a meeting of directors or by a committee of directors appointed for this purpose under company’s constitution.
Section 178 deals with civil consequences of breach of general duties by a director.
Companies Act 1985 imposes a statutory prohibition that it is a criminal offence if a director without the prior permission of the Board, considers an option to sell or buy shares or debentures. Insider trading is a criminal offence under Financial Services Act 1986 as per sections 61-62A when a private investor or person suffers a loss from breach of statutory duty which is caused by a director.
Under Criminal Justice Act 1993 Part V, if a person knowingly commits insider trading, it will be considered as offence if,
buy or sell shares is performed in a regulated market, where there is intermediary professional.
Encourages another person to deal with such proposals of insider trading.
Disclosure of information to persons who are outside of office, employment or profession.
All the above offences are penalized either with fine or imprisonment of up to seven years.
Mary in the capacity of a director, is entitled to sell Thor Plc shares which are held by Mary in the position of a director only after the prior intimation to the Board and after a resolution has been passed to that extent that certain number of shares held by Mary, the director of Thor plc can be sold.
Mary has committed a serious offence by neither intimating the Board about selling of shares, nor took the consent of the Board in which case, Mary has invited penalties under Companies Act 2006.
Further, Mary has also encouraged another shareholder Graham to sell shares by revealing the confidential business information about the company which is also another serious offence which was not supposed to be performed by a director who is in the Board of a company.
Mary as director has violated all the legal rules of Companies Act 2006 and has violated the rules of Thor plc.
In view of the above, Mary is either required to pay a penalty or seek assistance from a legal practitioner
2(a) In October 2008, certain of the codified directors’ duties come into force. Explain briefly the relevant fiduciary duties which will be applicable prior to that date Directors have the major decision making power in a company. No other position in a company is greater than the position of a director. The duties of directors are designed in a way that companies’ interests are protected, shareholders interests are protected in order to make corporate business as transparent and efficient.
There are many rules, statutory duties and fiduciary duties for a director’s position which have to be fulfilled in accordance with Companies Act 1985 and as amended by Companies Act 1989. The government is of the opinion that codification of directors’ duties which are included in the Companies Act 2006, which was granted permission from Royal Assent on 8th November, 2006, ensures the law to be consistent and also enables directors to not to breach any duty that is written in law.
Prior to the codification of directors’ duties, the fiduciary duties were prevalent which are briefly explained as below. Further fiduciary duties are of two categories. (1) Duty to act in good faith in the interest of the company and not for any collateral purpose. (2) Duty to not to permit conflict of personal interest with that of duties to be discharged as director of a company. Fiduciary duties can never be breached by a director wherein case, the director would be held responsible for any loss suffered thereof. Any profit or loss that is made from the discharge of duties by a director, must be disclosed to the company in all respects.
Directors owe duties to the company only and not to individual members. A director must disclose any interest in a proposed contract or a contract in a meeting of the directors of the company. Director’s service contract must be kept available for inspection by the members. Service contracts for more than five years must be approved in a general meeting. Further a director must notify the company about any personal interest in shares of the company. Personal liability for a director is more when a director is participating directly or indirectly in fraudulent trading in the event of a company being liquidated or wrongful trading when a company is being declared as an insolvent and the court holds director as liable.
When a company is in insolvent liquidation, the directors of the company are not eligible to incorporate another company in the same name or similar to the existing name for a term of five years. In case if a director is floating another company with the similar name, director becomes personally liable for the debts of such new company.
Further an officer or director who signs cheques or orders for goods on behalf of the company is also held personally liable for all the transactions of the company, when the name of company does not appear on cheques or order documents. Company records have to be kept at the registered office for inspection of company law officials or such other authorized persons as per Companies Act 2006.
Fiduciary duties of a director are of equal source of personal liability as that of general duties of a director. All fiduciary duties are self-explanatory whereas all general duties are specific and task-oriented for each director. Breach of director’s duties result in either as offence, personal liability or termination of directorship as per the provisions of Companies Act 2006.
There are totally four directors in Edu-con Ltd who are managing the business affairs of the company. The constitution of Edu-con Ltd is governed by its Memorandum and Articles of Association of the company which details the powers and duties of directors of Edu-con Ltd and further statutory laws and provisions of Companies Act 2006 apply to Edu-con Ltd for both filing the required statutory documents and for detailing the duties of directors of Edu-con Ltd., All the four directors of Edu-con Ltd for responsible for execution of general duties as well fiduciary duties of the company. Part 10 Chapter 1 Section 154 – 169 of Companies Act 2006 details about appointment and removal of directors. Chapter 2 of Part 10 Section 170 – 177 of Companies Act 2006 details about general duties of directors.
Section 252 of the Companies Act 2006 details about persons connected with a director. Section 253 of the Companies Act 2006 details about members of director’s family. Section 254 states about a body corporate with which the director is connected. Vera
Freet lives with her partner, Bertram Boss who owns a business by name “Bell Agentis”. Vera Freet did not disclose partner Bertram Boss in any Board meeting and neither while selling the land adjacent to “Bell Agentis” for value £350,000 to Edu-con Ltd., whereas it is important for a director to disclose about family members and also about any interest in business proposal that is related to the business management of Edu-con Ltd.,
Wilson Rabbit who is another director of Edu-con Ltd., has earned a commission of £900 for awarding a printing contract to Bees Books Ltd., In this aspect, Companies Act 1985 states that disclosure of transactions that are within a sum of £1000 in a financial year need not be disclosed by a director as long as it is a secret commission in terms of monetary benefit earned by a director. It is also important that the acts of directors are within the purview of Articles of Edu-con Ltd., and considered not as an offence. However it is important that the Board must be notified about the paying of commission by Bees Books Ltd., to the director even though it is a small amount, for all good purposes and to keep the transparency of the transactions.
According to the EU Directive when a company is taken over by another company, existing board or change in board effects the value of the company. In the present case, Edu-con Ltd has been taken over by another company, and subsequently there is also a change in the board members which means the existing four directors of Edu-con Ltd no longer carry the position of director.
Any transactions that are still in term period do not hold good when a director ceases as board member which is relevant in the case of Wilson Rabbit who has been receiving commission from Bees Books Ltd for printing contract. Similarly the land that is acquired from Bell-Agentis can also be reconsidered whether it should be retained by the new board members. The new board has every right and authorized to write-off all the transactions that were exercised by previous board basing on the interest of the new board and for making the business good.
Companies Act 2006 is yet to come into force effectively by the end of the year 2008 as there are many changes in Company Reform Bill to bring order to all the existing UK companies and for all the new companies that are being incorporated. However it is important to always refer Companies Act 1985 as well Companies Act 2006 for deriving the maximum benefits in the matters related to directorships and financial related matters.
Companies Act, 2006
Reviewed 14 April 2008
Company Law guide
Companies Act 2006 and duties of directors
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Companies Act, 2006
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Explanatory Notes to Limited Liability Partnerships Act 2000 Chapter 12
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Partnership Act, 1890
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UK Government’s new Company Law Reform Bill
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